This was the final ten mark question on the paper and it tested relevant costing within the context of preparing a cost estimate for a business which made sofas.

The calculations were not overly difficult and there were lots of good answers as far as the numbers were concerned.

The problem that arose was that it became clear that some candidates were not able to explain their reasons for using the figures they had selected and some didn’t even attempt to give explanations.

This was regrettable as presumably, if a candidate knows what numbers to use, they do understand relevant costing.

When asked for a brief explanation it is not enough, as regards the administration overheads, for example, to simply say that ‘these costs are not relevant.’

Instead, it is necessary to say that ‘these costs are not relevant as they represent an apportionment of general overheads and, since these costs will be incurred irrespective of whether this work goes ahead, they are not incremental.’

Also, some candidates also seem to be confused as to what the work ‘sunk’ means. In a relevant costing context, a sunk cost is one that has already been incurred.

That is not the same as saying that a cost is not incremental such as the administrative overheads. Many candidates said that these were ‘sunk’ but this was not the case as the money had not already been spent.

The administration overheads weren’t relevant as they were going to be incurred regardless and so were not specific to the decision being analysed.