Performance Management · Relevant cost analysis

Relevant Costs and Revenues in ACCA Performance Management

Updated 11 October 2026 · Fact-checked

A relevant cost or revenue is a future, incremental cash flow that changes because of a decision. To solve a question, list every cash flow, drop sunk, committed, non-cash and unchanged items, add opportunity costs, and compare the totals with and without the decision.

Understand Relevant Costs and Revenues

Every decision compares two futures: one where you act and one where you do not. A cost or revenue is relevant only if it differs between those two futures. If the figure is the same either way, it cannot help you choose.

Three tests sum it up. A relevant item must be future (it has not happened yet), incremental (it changes because of the decision) and a cash flow (it involves actual money in or out, or money forgone). An avoidable cost is one you can escape by not taking the decision. It is relevant. An incremental cost is the extra cost caused by the decision. Both ideas point the same way.

An opportunity cost is the benefit you give up by using a resource in one way rather than its best alternative. It is relevant even though no cash is paid out. For example, if you use stock that you could otherwise sell for ₹50,000, the cost of using it is ₹50,000, the sale value you lose.

Some items are not relevant. A sunk cost has already been spent, such as market research already paid for. A committed cost will be paid whatever you decide, such as a contract you cannot cancel. Non-cash items such as depreciation and notional charges do not involve cash. Absorbed (apportioned) fixed overheads do not change unless the decision itself causes extra spending. Also ignore general fixed costs that continue either way.

Finally, relevant costing is about cash and the decision, not accounting profit. Remember that qualitative factors, such as customer goodwill, staff morale and supplier relations, can still change the final decision even when the numbers favour one option.

Key rules to remember

Relevance test: Relevant = future + incremental + cash flow; If any one of the three is missing, leave the item out (opportunity costs count as cash forgone).
Relevant cost of a resource: Relevant cost = cash paid (extra) + opportunity cost; The opportunity cost is the best benefit lost by using the resource in this decision.
Relevant cost of materials already in stock: Higher of: resale value, or cost saved by using elsewhere (replacement cost if the material is regularly used and would be replaced); If the material has no other use and no resale value, the relevant cost is nil. If disposal would cost money, avoiding it is a saving.
Relevant cost of labour: Spare capacity: nil extra (unless paid extra). Fully used: wage cost + lost contribution; Contribution lost = sales less variable costs, including labour, on the work displaced.
Decision rule: Accept if relevant revenues > relevant costs; Equivalent to a positive incremental cash flow.

How to solve Relevant Costs and Revenues questions

Use this method for any relevant costing question, whether it is a one-off project, a special order or a choice between options.

1Read the decision and state the two alternatives, such as accept or reject.
2List every cost and revenue given in the question.
3Test each item: is it future, incremental and a cash flow? Remove sunk costs, committed costs, depreciation, notional costs and fixed costs that do not change.
4For each resource, ask whether it is bought new, taken from stock, or diverted from other use. Apply the matching rule (purchase price, replacement or resale value, or lost contribution).
5Add any opportunity costs and any extra costs caused by the decision, such as extra supervision or new fixed costs.
6Total the relevant revenues and costs and calculate the net incremental benefit.
7State the decision, then add short comments on qualitative factors and any assumptions you made.

Quickest way: Cross-out and re-price

When to use it: Use it in Section B or C when a table of costs is given and time is short.

Cross out every item that is past, committed, non-cash or unchanged.
Re-price each remaining item at what it will cost the business from now on: new cash, replacement cost, resale value or lost contribution.
Write one line per item with a short reason, such as 'sunk' or 'opportunity cost'.
Add the lines and compare with the revenue.
For multiple choice, check which option applies the rule you need; a wrong option is often the book value or the full absorbed cost.

Common mistakes in Relevant Costs and Revenues

Including sunk costs such as past research or money already spent.
The figure is in the question, so it feels as if it must be used.
Fix: Ask 'can the decision change this?' If the cash has already gone, exclude it.
Including depreciation or absorbed fixed overheads as a cost.
Students copy the full cost per unit from the cost card.
Fix: Use only variable costs and fixed costs that actually change because of the decision. Depreciation is non-cash.
Using the original purchase price of materials already in stock.
Historic cost appears on the stock record and looks reliable.
Fix: Use replacement cost if the material is used regularly and will be replaced, otherwise the higher of resale value and the value in its next best use.
Ignoring opportunity cost because no cash is paid.
Students think cost means payment.
Fix: If the resource has a better alternative use, include the benefit lost, for example the contribution forgone.
Charging labour at full wage cost when workers are idle and paid anyway.
The wage rate is given and it is easy to multiply hours by rate.
Fix: If there is spare capacity and wages are paid regardless, the relevant cost is nil. If labour is fully used, add the wage plus lost contribution.
Treating a committed cost as avoidable, or the reverse.
Students overlook contract wording, such as cancellation fees.
Fix: Include only what you can really avoid. If cancelling costs money, the avoided cost is the saving net of any penalty.

Worked examples

Example 1

A company is considering a one-off project that needs 2,000 kg of material X. The company holds 1,500 kg bought for ₹40 per kg. Its current replacement price is ₹46 per kg. It has no other use for the stock, but it could sell it for ₹30 per kg. The remaining 500 kg must be bought at ₹46 per kg. Calculate the relevant cost of material X.

Show the solution

The stock of 1,500 kg has no other use, so the choice is use or sell. Its relevant cost is the resale value of ₹30 per kg.
Relevant cost of stock = 1,500 × ₹30 = ₹45,000.
The extra 500 kg must be purchased at ₹46 per kg.
Relevant cost of purchase = 500 × ₹46 = ₹23,000.
Total = ₹45,000 + ₹23,000 = ₹68,000.
The original cost of ₹40 per kg is sunk and ignored.

Answer: The relevant cost of material X is ₹68,000.

Example 2

A firm is asked to make a special batch for a new customer who will pay ₹2,40,000. The batch needs 600 labour hours. The firm pays skilled workers ₹150 per hour. Workers have 200 spare hours, paid regardless. The other 400 hours would have to be taken from a product that earns a contribution of ₹100 per labour hour after paying labour at ₹150 per hour. Materials for the batch cost ₹60,000 in new cash. Fixed overheads absorbed to the batch are ₹30,000, but total fixed overheads will not change. Should the firm accept the order?

Show the solution

Spare hours: 200 hours are already paid, so the relevant cost is nil.
Hours taken from the other product: 400 hours. The wage is ₹150 per hour and the lost contribution is ₹100 per hour, both stated after labour cost is deducted.
Relevant cost per hour for diverted hours = ₹150 (wage) + ₹100 (contribution after labour) = ₹250. This is the contribution before labour is deducted, which is ₹250 per hour.
Relevant labour cost = 400 × ₹250 = ₹1,00,000.
Materials = ₹60,000 (new cash).
Absorbed fixed overheads of ₹30,000 are excluded because total fixed overheads do not change.
Total relevant costs = ₹1,00,000 + ₹60,000 = ₹1,60,000.
Net benefit = ₹2,40,000 − ₹1,60,000 = ₹80,000.

Answer: Accept the order. It gives a net benefit of ₹80,000, subject to qualitative factors such as the effect on the displaced product's customers.

Exam tips

Show a one-line reason beside every item you include or exclude. Markers award marks for the treatment, not only the total.
In objective questions the wrong options are often sunk costs, book values or absorbed overheads. Eliminate them first.
For labour, always check whether there is spare capacity. This is the most common trap in written questions.
State your assumptions when the question is unclear, such as whether stock will be replaced.
Finish with a decision and at least one qualitative point, because constructed response questions often ask for it.

Practice questions from Relevant cost analysis

Relevant Costs and Revenues in other exams

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

Relevant Costs and Revenues: frequently asked questions

What is the difference between sunk cost and opportunity cost in ACCA PM?

A sunk cost has already been incurred and cannot be changed, so it is not relevant. An opportunity cost is the benefit you give up by choosing one use of a resource over the next best use, so it is relevant. One looks back, the other looks forward.

Is depreciation ever a relevant cost?

No. Depreciation is a non-cash accounting charge that spreads past spending. The cash cost of an asset is relevant only when it is bought or sold in the future, for example the purchase price of a new machine or its sale proceeds.

Are fixed costs always irrelevant?

No. Fixed costs are relevant if the decision causes them to change, such as extra rent for a new site or a new supervisor's salary. Fixed costs that continue unchanged whatever you decide, and absorbed overheads, are irrelevant.

How do I find the relevant cost of materials already in stock?

Check how the material could otherwise be used. If it is used regularly, the relevant cost is its replacement cost. If it is not needed elsewhere, use the higher of resale value and the value of using it in another way. If it has neither, the cost is nil, unless disposal would cost money.