Strategic Business Leader · Cost and management accounting

Relevant Costing and Decision-Making for ACCA Strategic Business Leader

Updated 11 October 2026 · Fact-checked

Relevant costing means using only future, incremental cash flows that change because of a decision. Ignore sunk costs, committed costs, and non-cash items. Include opportunity costs. Then apply break-even or limiting factor analysis, and add non-financial factors before you recommend an option.

Understand Relevant Costing and Decision-Making

A relevant cost is a future cash flow that will change as a direct result of a decision. If the cash flow will be the same whichever option you choose, it is not relevant. This one test solves most questions.

Three things are never relevant: sunk costs (already spent), committed costs (you must pay them anyway) and non-cash items such as depreciation. Allocated fixed overheads are also ignored unless the decision causes them to rise or fall.

An opportunity cost is the benefit you give up by using a resource in one way rather than the next best way. It is relevant. For materials already in stock, the relevant cost depends on what else you could do with them. If you would need to buy them again, use replacement cost. If you would never use them again, use the higher of resale value and the value in the next best use. For labour, if staff are idle, the extra cost is nil. If they are fully used, the cost is their pay plus the contribution lost elsewhere.

CVP (cost-volume-profit) analysis uses contribution, which is selling price less variable cost per unit. Break-even is the volume where total contribution equals fixed costs. The margin of safety shows how far sales can fall before you make a loss. When one resource is short, you rank products by contribution per unit of the scarce resource, not by contribution per unit of product.

In SBL, the numbers are only part of the answer. You are expected to advise a board. Link the figures to strategy, risk, ethics, reputation, staff, suppliers and quality. A choice that looks cheapest on paper may be wrong for the business.

Key rules to remember

Relevant cost test: Relevant = future + cash + incremental (differs between options); Exclude sunk costs, committed costs, depreciation and unchanged overheads.
Contribution per unit: Selling price per unit − variable cost per unit; Variable cost includes direct materials, direct labour if truly variable, and variable overheads.
Break-even point (units): Fixed costs ÷ contribution per unit; Use the weighted average contribution for a multi-product mix with a fixed sales mix.
Break-even point (sales value): Fixed costs ÷ contribution to sales ratio; Contribution to sales ratio = contribution ÷ selling price.
Target profit volume: (Fixed costs + target profit) ÷ contribution per unit; Useful for what-if questions.
Margin of safety: (Budgeted sales − break-even sales) ÷ budgeted sales; Can be shown in units, value or as a percentage.
Limiting factor ranking: Contribution per unit ÷ units of scarce resource per unit; Rank products highest first and allocate the scarce resource in that order, up to demand.
Make or buy: Compare relevant cost of making with the buy-in price; Make cost uses only avoidable costs. Buy if the buy-in price is lower, subject to non-financial factors.
Relevant cost of materials: Replacement cost if the material is regularly used; otherwise higher of resale value and alternative-use value; Materials with no other use and no resale value cost nil.

How to solve Relevant Costing and Decision-Making questions

Use this order for any relevant costing or short-term decision question. Show it clearly, because markers give credit for method.

1Read the requirement and list the options, including the option of doing nothing.
2Go through each cost and revenue and ask: is it future, cash and different between options? Cross out sunk costs, committed costs, depreciation and unchanged overheads.
3Value each resource at its opportunity cost: replacement cost, resale value, next best use, or lost contribution for scarce labour.
4Check for a limiting factor. If one resource is short, rank by contribution per unit of that resource and allocate in order.
5Calculate the result for each option, such as incremental profit, break-even volume or margin of safety. Show workings in a clear table-like list.
6State assumptions, for example that costs behave linearly and the sales mix stays constant.
7Add non-financial factors: quality, reliability of supply, staff morale, ethics, reputation and long-term strategy.
8Give a clear recommendation tied to the scenario, and say what would change it.

Quickest way: Incremental cash flow shortcut

When to use it: Use this when time is short and the question asks you to accept or reject an order, or to compare make and buy.

Write two columns: cash in and cash out if you go ahead, compared with not going ahead.
List only the differences. Skip anything that is the same in both cases.
For each resource, ask: do I have to buy more, or do I give up something else? That is the cost.
Net the two columns to find the incremental gain or loss.
Add one or two non-financial points and a one-line recommendation.

Common mistakes in Relevant Costing and Decision-Making

Including depreciation or apportioned fixed overheads as relevant costs.
These appear in absorption costing figures, so they look like part of the product cost.
Fix: Ask if the cash will actually change. Depreciation is non-cash and general overheads usually stay the same, so leave them out.
Using the original purchase price of materials already in stock.
The book value is the number given most prominently in the question.
Fix: Original cost is sunk. Use replacement cost if the material is used regularly, otherwise the higher of resale value and alternative use value.
Ranking products by contribution per unit when a resource is limited.
The highest contribution per unit seems the best product.
Fix: Divide contribution by the units of scarce resource each product uses, then rank and allocate in that order.
Ignoring the opportunity cost of fully used labour.
Students treat wages as the only cost, or treat labour as free because it is already paid.
Fix: If staff are fully used, add the contribution lost from the work displaced. If staff are idle and paid anyway, the cost is nil.
Giving only a numerical answer in SBL.
Students treat it like a calculation paper.
Fix: Close every decision with non-financial factors and a clear recommendation applied to the scenario. This also earns professional skills marks.
Calculating break-even with the wrong fixed costs, such as including non-cash or already committed items without thought.
Students copy the total fixed cost without checking its nature.
Fix: State which fixed costs you include and why. For a cash break-even, remove non-cash items such as depreciation.

Worked examples

Example 1

A company makes a component for itself. Per unit: direct materials $12, direct labour $8 (employees are paid regardless and have spare capacity), variable overheads $5, and apportioned fixed overheads $10. An outside supplier offers the component at $24 per unit. The company needs 5,000 units. If it buys, $15,000 of fixed overheads that are specific to the component will be saved. Should it make or buy?

Show the solution

Identify the relevant make costs. Direct materials $12 per unit is relevant.
Direct labour is not relevant because staff are paid anyway and have spare capacity.
Variable overheads $5 per unit are relevant because they vary with production.
Apportioned fixed overheads of $10 per unit are not relevant, but the $15,000 specific saving is relevant if buying.
Relevant cost of making per unit = $12 + $5 = $17. For 5,000 units: $85,000.
Add the avoidable fixed overheads: $85,000 + $15,000 = $100,000 total relevant cost to make.
Cost to buy: 5,000 × $24 = $120,000.
Difference: buying costs $20,000 more than making.

Answer: Make the component. It is $20,000 cheaper on relevant costs ($100,000 against $120,000). Before deciding, consider supplier reliability, quality control and whether the spare labour capacity could be used elsewhere.

Example 2

A company makes two products with a limited supply of 2,400 machine hours. Product X: selling price $50, variable cost $30, 2 machine hours per unit, maximum demand 800 units. Product Y: selling price $42, variable cost $30, 1 machine hour per unit, maximum demand 1,000 units. Fixed costs are $20,000. Find the production plan that maximises profit and the resulting profit.

Show the solution

Contribution per unit: X = $50 − $30 = $20. Y = $42 − $30 = $12.
Contribution per machine hour: X = $20 ÷ 2 = $10. Y = $12 ÷ 1 = $12.
Rank by contribution per machine hour: Y first ($12), then X ($10).
Make Y up to maximum demand: 1,000 units use 1,000 hours.
Hours left: 2,400 − 1,000 = 1,400. Product X needs 2 hours per unit, so 1,400 ÷ 2 = 700 units, which is within the demand of 800.
Total contribution: Y = 1,000 × $12 = $12,000. X = 700 × $20 = $14,000. Total = $26,000.
Profit = $26,000 − $20,000 fixed costs = $6,000.

Answer: Produce 1,000 units of Y and 700 units of X. Total contribution is $26,000 and profit is $6,000.

Exam tips

Show the test for each cost in one short line, such as 'sunk, ignore' or 'opportunity cost, include'. Markers award marks for correct treatment, even if your arithmetic slips.
In SBL, numbers carry only part of the marks. Always add non-financial factors and a recommendation tied to the case details, such as the company's strategy, staff or brand.
State your assumptions, such as linear cost behaviour, a constant sales mix and no change in selling price. This shows scepticism and earns professional skills credit.
Use a clear layout in your answer, with headed lists for each option. This helps the marker follow your logic and supports the communication skills mark.
If the scenario hints at ethics, such as cutting a safe supplier to save cost, mention it. A decision that saves money but harms reputation or the public interest may be wrong.

Practice questions from Cost and management accounting

Relevant Costing and Decision-Making in other exams

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

Relevant Costing and Decision-Making: frequently asked questions

What is the difference between relevant cost and opportunity cost?

A relevant cost is any future, incremental cash flow affected by a decision. An opportunity cost is one kind of relevant cost: the benefit lost by using a resource in one way instead of the next best alternative.

How do I treat fixed costs in a make or buy decision?

Include only fixed costs that would actually be saved if you stopped making the item. Apportioned fixed overheads that continue either way are not relevant. Always state which fixed costs you treat as avoidable.

When should I use limiting factor analysis?

Use it when a single resource, such as machine hours, labour or materials, restricts output below demand. Rank products by contribution per unit of that resource and allocate it in order until it runs out or demand is met.

Does break-even analysis still matter in SBL?

Yes, but usually as a support for advice. You may need to calculate break-even or margin of safety and then discuss how reliable it is. Its limits include the assumptions of constant selling price, linear costs and a fixed sales mix.