The application of relevant costing techniques for decision-making in local firms

Abstract

The relevant costs and benefits required for decision-making are those that will be affected by the decision. Costs and benefits that do not change by the decision taken are not relevant and need not be considered when making that decision. The relevant financial inputs for decision-making purposes are therefore future cash flows, which will differ between the various alternatives being considered. Therefore the relevant data must represent the future, change and the cash flow. There are various types of costs that one could come across with, amongst which are sunk, fixed and variable, differential, notional, opportunity and avoidable costs. Besides all these costs, one should also consider whether qualitative factors, such as employee morale, are relevant in a particular decision, since these should also be taken into account. The study intends to identify the application of and developments in relevant costing techniques in Malta. The study seeks to address the following key research objectives: • The application of relevant costing techniques when local firms are involved m different types of decisions • The different types of decisions they are usually involved in • Whether they apply the relevant costing concept to the full or partially, and whether they apply it in the right way • Whether they take into consideration qualitative factors. A combination of personal semi-structured interviews and a self-administered survey were used in this study. It was found that only 58% of the companies (including the ones interviewed) use Relevant costing techniques within their company, and the remaining companies that do not use it, have never even considered introducing such approach. Most of them decided even not to give a reason for this, whereas some responded that they did not have time to think about it. In spite of this, all were willing to try to introduce it in the future, appreciating its advantages. This study concludes that relevant costing still has to continue growing in Malta, since it has not yet fully developed. Financial controllers and accountants have as yet to try to promote this concept throughout the companies they work with. Promoting awareness of this concept is difficult since directors and managers are always busy doing other things, with little time allocated to accounting. The study also concludes that there are people who are willing to introduce the concept, if only they were given the chance. These opportunities will be created not just by increasing the technological level of local manufacturing processes but also by developing a more positive mentality towards the benefits from management accounting within the local business community.