Performance Management · Relevant cost analysis

Relevant Cost of Materials, Labour and Overheads in ACCA PM

Updated 11 October 2026 · Fact-checked

A relevant cost is a future, incremental cash flow that changes because of the decision. Value materials at replacement cost, resale value or opportunity cost. Value labour at wage cost plus any contribution lost. Include only overheads that actually change. Ignore sunk, committed and absorbed costs.

Understand Relevant Cost of Materials, Labour and Overheads

Relevant costing asks one question: what extra cash will the business pay or give up if it accepts this decision, compared with rejecting it? Only future, incremental cash flows count. Costs already spent (sunk costs) and costs the business must pay anyway (committed costs) do not change with the decision, so you ignore them.

The second idea is opportunity cost. If using a resource stops you using it elsewhere, the benefit you give up is a cost of the decision. This is how you value scarce materials and fully used labour.

For materials, the value depends on the situation. If you must buy more, the relevant cost is the current purchase price. If the material is already in stock, ask what happens if it is not used here. If it would be replaced for other work, the relevant cost is the replacement cost. If it has no other use, the relevant cost is the higher of its resale value and the cost saved by not disposing of it (disposal costs avoided). If it is scarce, use the better of the alternatives.

For labour, ask whether staff are fully used. If there is spare capacity and workers are paid anyway, the relevant cost is zero. If staff must be hired or paid overtime, the extra pay is relevant. If staff are fully used, moving them means lost output elsewhere, so the relevant cost is their wages plus the contribution lost (contribution calculated before deducting that labour cost).

For overheads, include only those that change because of the decision, such as extra power or a new supervisor. Absorbed fixed overheads are an accounting allocation and are not relevant. Present your answer as a list of relevant costs, with a short reason for each item, because the examiner awards marks for the reasoning.

Key rules to remember

Relevant cost of material to be bought: Quantity × current purchase price; Use this when the material is not in stock and must be bought.
Relevant cost of material in stock, regularly used: Quantity × current replacement cost; Using it here means you must buy more for the normal work.
Relevant cost of material in stock, no other use: Higher of (net resale value) and (cost saved by not disposing of it); If no alternative use exists and no sale is possible, the relevant cost is zero unless disposal costs are avoided.
Relevant cost of labour, spare capacity: ₹0 extra (if workers are paid anyway); Include any extra pay, such as overtime premium or hiring cost, if the decision triggers it.
Relevant cost of labour, full capacity: Wages paid + contribution lost elsewhere (measured after deducting the labour cost); This equals the contribution lost before labour cost, with no wages added. Never add wages to a contribution that is already before labour cost, or the wages are counted twice.
Relevant cost of overheads: Incremental cash overhead only; Ignore absorbed or apportioned fixed overheads that do not change.

How to solve Relevant Cost of Materials, Labour and Overheads questions

Use this approach for any one-off decision question. Work item by item and give a reason for each figure.

1List every cost and revenue in the question and cross out sunk and committed costs, depreciation and non-cash items.
2For each material, decide whether it is in stock or must be bought. Check whether stock would be replaced or has another use.
3For a material in stock with no other use, compare resale value with disposal cost avoided and take the better one.
4For labour, decide if staff have spare capacity or are fully used. Add wages and lost contribution only for fully used staff, and extra pay such as overtime premium if triggered.
5For overheads, include only extra cash costs caused by the decision. Ignore absorbed fixed overheads.
6Add revenue and relevant costs to find the net relevant benefit or cost, then state the decision.
7Write a one-line reason beside each figure and note any non-financial points.

Quickest way: Three-question check for each cost line

When to use it: Use this in Section B or C when the scenario has many cost items and time is short.

Ask: is it future and does it change because of the decision? If no, relevant cost is zero.
Ask: would I pay cash for it, or give up a benefit? Use buy price, replacement cost, or the best alternative use.
Ask: is the resource scarce or fully used? If yes, add contribution lost. If the contribution is given after labour cost, add the wages once. If it is given before labour cost, use it as it is and add no wages.
Total the relevant items and compare with the revenue.

Common mistakes in Relevant Cost of Materials, Labour and Overheads

Using the original cost of stock already held.
The book value is shown in the question and looks like the obvious figure.
Fix: Use replacement cost if the stock would be replaced, or the best of resale value and disposal cost saved if it has no other use.
Charging full labour cost when staff have spare capacity and are paid anyway.
Students treat wages as always being a cost of the job.
Fix: If there is no extra payment, the relevant labour cost is zero. Say so and state the reason.
Adding wages to a contribution that is already measured before deducting the labour cost.
Students mix up contribution measures and do not check which one the question gives.
Fix: Check the contribution figure first. If it is after labour cost, add the wages once. If it is before labour cost, it already includes the wages, so add nothing. Either way the total is the revenue lost on the other work.
Including absorbed fixed overheads.
The question gives an overhead absorption rate and it feels like it must be used.
Fix: Include only overheads that change. Mention that absorbed fixed overhead is not relevant.
Including depreciation or sunk costs such as past research.
These appear in the cost list for the project.
Fix: Cross out all non-cash and past costs at the start.
Giving figures with no explanation.
Students think the calculation alone earns the marks.
Fix: Write one short reason beside every item in a constructed response answer.

Worked examples

Example 1

A firm is pricing a one-off job needing 800 kg of Material X. The firm holds 500 kg bought at ₹40 per kg. It has no other use for this stock and could sell it at ₹30 per kg. The current purchase price is ₹55 per kg. Find the relevant cost of Material X.

Show the solution

Stock part: 500 kg has no other use, so use resale value. 500 × ₹30 = ₹15,000.
Balance to buy: 800 − 500 = 300 kg at current price ₹55. 300 × ₹55 = ₹16,500.
Total relevant cost = ₹15,000 + ₹16,500 = ₹31,500.
The original cost of ₹40 per kg is sunk and ignored.

Answer: The relevant cost of Material X is ₹31,500.

Example 2

A job needs 100 skilled hours at ₹300 per hour and 50 semi-skilled hours at ₹200 per hour. Skilled staff are fully used on product P, which earns contribution of ₹500 per skilled hour after deducting the ₹300 labour cost. Semi-skilled staff are idle and paid anyway. Variable overhead is ₹40 per skilled hour. Fixed overhead absorbed is ₹100 per skilled hour. Find the relevant cost of labour and overhead.

Show the solution

Skilled labour wages: 100 × ₹300 = ₹30,000.
Contribution lost on product P, measured after labour cost: 100 × ₹500 = ₹50,000.
Relevant cost of skilled labour = wages ₹30,000 + contribution lost after labour cost ₹50,000 = ₹80,000. That is ₹800 per hour (₹300 + ₹500) × 100 hours.
Check: ₹800 per hour is also the contribution lost before labour cost, so no separate wages are added on top. The result is the same ₹80,000.
Semi-skilled labour: spare capacity and paid anyway, so relevant cost = ₹0.
Variable overhead: 100 × ₹40 = ₹4,000 is incremental, so relevant.
Fixed overhead absorbed at ₹100 per hour is not relevant, so ₹0.
Total = ₹80,000 + ₹0 + ₹4,000 = ₹84,000.

Answer: The relevant cost of labour and overhead is ₹84,000 (skilled labour ₹80,000, semi-skilled ₹0, variable overhead ₹4,000).

Exam tips

Look for wording such as 'already in stock', 'spare capacity', 'paid anyway' and 'fully used'. These tell you which rule applies.
In constructed response answers, set out a table of items with a short reason for each. Marks are given for the reason as well as the figure.
In objective questions, work out the relevant cost quickly and check the options. A wrong answer scores zero, so check whether you used replacement cost instead of book value.
If stock is also needed for normal work, use replacement cost. If it has no other use, compare resale and disposal savings.
Always state whether the final figure supports accepting or rejecting the job and mention one non-financial factor.

Practice questions from Relevant cost analysis

Relevant Cost of Materials, Labour and Overheads in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Relevant Cost of Materials, Labour and Overheads: frequently asked questions

What is the relevant cost of materials already in inventory?

It depends on what else the stock could do. If it would be replaced for normal use, use replacement cost. If it has no other use, use the higher of its resale value and the disposal cost avoided. The original purchase price is never relevant on its own.

How do I calculate relevant cost of labour with spare capacity?

If workers are paid regardless and have idle time, the relevant cost is zero. Add only extra payments caused by the decision, such as overtime premium. State that the wages are paid anyway.

What is the relevant cost of labour at full capacity?

It is the wages paid plus the contribution lost by moving workers from other work, where that contribution is measured after deducting the labour cost. Equivalently, use the contribution before labour cost and add no wages. Adding wages to a contribution that is before labour cost counts them twice.

Are fixed overheads ever relevant?

Only if they change because of the decision, for example a new rent or an extra supervisor. Absorbed fixed overheads are an allocation and are not relevant.