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Relevant costing, worked through a make-or-buy decision
Good decisions use only the costs that actually change. Relevant costing is how you find them, and it is where careful candidates pull ahead. Here it is worked through a make-or-buy decision.
Updated September 2026 · 7 min read
The hardest part of a decision question is not the arithmetic; it is knowing which numbers to use. Relevant costing is the discipline of including only the costs and revenues that actually change as a result of the decision, and ignoring everything else. Get that judgement right and the maths is easy. Let us work a make-or-buy decision through.
What makes a cost relevant
A relevant cost is a future, incremental cash flow that differs between the options. That rules out two things students often wrongly include: sunk costs (already spent, so unchangeable) and committed or unavoidable costs (going to be incurred whatever you decide). Absorbed fixed overhead is the classic trap: it is shared out across units for the accounts, but if it will be incurred anyway, it is not relevant to the decision.
The scenario
Ferndale Cycles makes a gear hub in-house, and a supplier has offered to sell it the same component for £20 a unit. Should Ferndale keep making it, or buy it in? The current cost of making one hub is:
Compare only what changes
The full cost of £23 tempts you to buy, because £20 looks cheaper. That is the trap. The £6 of fixed overhead is absorbed into the unit for the accounts, but it is a shared cost the business will carry whether or not it makes this hub. It is not saved by buying, so it is not relevant. The cost that actually disappears if Ferndale stops making the hub is only the variable cost:
Relevant cost to make = £8 + £7 + £2 = £17 a unit.
Making costs £17 of relevant cost against £20 to buy, so Ferndale should keep making the hub and save £3 a unit, even though the full cost of £23 made buying look cheaper. The decision hinges entirely on excluding the £6 of unavoidable fixed overhead. Two provisos: if some of that fixed cost could actually be avoided by buying, include the avoidable part; and if the factory is at full capacity, add the opportunity cost of the space the hub uses.
Where this comes up in ACCA
Relevant costing runs through the decision-making section of Performance Management (PM), in make-or-buy, special-order, shutdown and further-processing questions. It is a favourite because it tests judgement, not just calculation. The same thinking underpins the appraisal work in FM too.
The best way to build the judgement is to work decisions, not read about them. The free ACCA PM course on Clevernest teaches relevant costing inside a real business, with hands-on exercises as you go.
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Frequently asked questions
What is a relevant cost?
A relevant cost is a future, incremental cash flow that differs between the options in a decision. Costs that are already spent (sunk) or will be incurred whatever you decide (committed or unavoidable) are not relevant and should be excluded.
Why is absorbed fixed overhead usually not relevant?
Because it is a shared cost the business carries anyway; absorbing it into a unit is an accounting exercise, not a cash flow caused by the decision. Unless a specific fixed cost can actually be avoided by choosing one option, it is excluded from the decision.
How do you make a make-or-buy decision?
Compare the relevant cost of making (usually the variable costs saved if you stop) with the buy-in price. In our example making costs £17 of relevant cost against a £20 buy-in price, so making is cheaper by £3 a unit, assuming spare capacity and unavoidable fixed overhead.
What is an opportunity cost in relevant costing?
It is the value of the next best use of a resource that is given up. If a factory is at full capacity, making one product means not making another, so the contribution lost from that alternative is a relevant cost of the decision.
Where is relevant costing tested in ACCA?
Mainly in Performance Management (PM), across make-or-buy, special-order, shutdown and further-processing decisions, where it tests judgement about which costs matter. The same principles support investment appraisal in Financial Management.