This document discusses relevance and materiality in determining which costs should be included as product costs. It states that a cost should be allocated as a product cost if it will influence decision-making about stock levels or selling prices. Additionally, a relevant cost must be material, or large enough, to influence these decisions. The document provides an example comparing two businesses, one that treats cartage inwards of $100 as a period cost and one that treats it as a product cost, demonstrating the impact this has on the resulting product cost and selling price.

1. 18.4 RELEVANCE AND
PRODUCT COSTING

2. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Relevance and the materiality test determine if a cost is a
Product Cost…
Relevance
A cost should be allocated as a
Product Cost if it will influence the
decision-making about stock
• Will allocating the cost better
help management identify its
actual cost of sales?
• Will allocating the cost help
management make a better
decision on how much to sell it
for?
Materiality
A relevant cost should only be
allocated as a Product Cost if it is
large enough (material) to influence
decision-making
• Include material costs that will
influence decision-making
• Exclude immaterial costs that
will not influence decision-
making
18.4 RELEVANCE AND PRODUCT
COSTING

3. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
Cartage inwards
$100 for 200 units
 Business A: applies a mark-up of 100%
and has the following costs…
18.4 RELEVANCE AND PRODUCT
COSTING
Purchase price
$20 per unit
Advertising
$1000 per month
Customs duty
$5 per unit
Other Expenses
Product Cost
Period Cost
Buying expenses
$400
Purchase price $20
Advertising $1000
Customs duty $5
Purchase price $20
Buying expenses $400
Cartage inwards $0.50
Customs duty $5
Purchase price $20
$25.50
Product Cost
x 100% mark-up
$51=
Selling
Price

4. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
Cartage inwards
$100 for 200 units
 Business B: applies a mark-up of 100%
and has the following costs…
18.4 RELEVANCE AND PRODUCT
COSTING
Purchase price
$20 per unit
Advertising
$1000 per month
Customs duty
$5 per unit
Other Expenses
Product Cost
Period Cost
Buying expenses
$400
Purchase price $20
Advertising $1000
Customs duty $5
Purchase price $20
Buying expenses $400
Cartage inwards $100
Buying expenses $400
$25
Product Cost
x 100% mark-up
$50=
Selling
Price

5. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
Cartage inwards
$100 for 200 units
A
B
18.4 RELEVANCE AND PRODUCT
COSTING
Cartage inwards
$100 for 200 units
Cartage inwards
$100 for 200 units
Period
Cost
Product
Cost
Customs duty $5
Purchase price $20
So far…
Product
Cost
Selling
Price
$25 $50
$25 $50
$0.50 $1
$0
$51
$50
Treated as…
Impact on
selling price…
Relevant? Material?

6. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
TASK
In-class Homework
SQ3 X
SQ4 X