What Is a Relevant Cost?

A relevant cost is a future, incremental cash flow that arises as a direct result of a decision. Only relevant costs should be included when appraising a decision — everything else is noise. Getting this right is the core skill in relevant costing, and it's where a lot of marks are won or lost.

The three tests of a relevant cost

• Future — it hasn't happened yet. Past costs are sunk and ignored.
• Incremental — it changes because of the decision. Costs that occur either way are irrelevant.
• Cash flow — it's an actual cash movement. Non-cash items like depreciation and apportioned overheads are excluded.

What is not a relevant cost?

Watch for these classic irrelevant items: sunk costs already incurred, committed costs you'll pay regardless, allocated or apportioned fixed overheads, and depreciation. A special case is opportunity cost — the benefit forgone from the next best use of a resource — which is relevant even though it isn't a book entry.

Relevant costing in ACCA PM

PM regularly tests relevant costing for materials, labour and machine time, including opportunity costs of scarce resources. The marks come from correctly classifying each item and justifying why it's relevant or not. Practising these and marking them against the official ACCA scheme with The 50% Club is the quickest way to sharpen the judgement that scores.