The Managerial Accountant.docx 107

8/10/2019 The Managerial Accountant.docx 107

1/4

The Managerial Accountants Role in Decision Making

Managerial accountants are increasingly playing important roles as full-fledged members of

cross-functional management teams. These management teams face a broad array of decisions,

including production, marketing, financial, and other decisions. All managers and management

teams need information pertinent to their decisions. In support of the decision-making process,

managerial accountants play a specific role in providing relevant information. Thus, the

managerial accountant must have a good understanding of the decisions faced by managers

throughout the organization.Steps in the Decision-Making Process

Seven steps characterize the decision-making process:

1.LEARNING OBJECTIVE1

Describe seven steps in the decision-making process and the managerial accountants role in

that process.

Clar i fy the decision problem.Sometimes the decision to be made is clear. For example,

if a company receives a special order for its product at a price below the usual price, the

decision problem is to accept or reject the order. But the decision problem is seldom so clear

and unambiguous. Perhaps demand for a companysmost popular product is declining. What

exactly is causing this problem? Increasing competition? Declining quality control? A new

alternative product on the market? Before a decision can be made, the problem needs to beclarified and defined in more specific terms. Considerable managerial skill is required to

define a decision problem in terms that can be addressed effectively.

2. We are looked upon as more business advisors than just accountants, and that has a lot to do

with the additional analysis and the forward looking goals we are setting.

3Specif y the cri ter ion.Once a decision problem has been clarified, the manager should

specify the criterion upon which a decision will be made. Is the objective to maximize profit,

increase market share, minimize cost, or improve public service? Sometimes the objectives

are in conflict, as in a decision problem where production cost is to be minimized but product

quality must be maintained. In such cases, one objective is specified as the decision

criterionfor example, cost minimization. The other objective is established as a

constraintfor example, product quality must not be worse than one defective part in 1,000

manufactured units.


2/4

3. I denti fy the alternatives.A decision involves selecting between two or more alternatives. If a

machine breaks down, what are the alternative courses of action? The machine can be

repaired or replaced, or a replacement can be leased. But perhaps repair will turn out to be

more costly than replacement. Determining the possible alternatives is a critical step in the

decision process.

4. Develop a decision model.A decision modelis a simplified representation of the choice

problem. Unnecessary details are stripped away, and the most important elements of the

problem are highlighted. Thus, the decision model brings together the elements listed above:

the criterion, the constraints, and the alternatives.

5. Coll ect the data.Although the managerial accountant often is involved in steps 1 through

4, he or she is chiefly responsible for step 5. Selecting data pertinent to decisions is one of the

managerial accountantsmost important roles in an organization.6.

Select an alternative.Once the decision model is formulated and the pertinent

data are collected, the appropriate manager makes a decision.

7. Evaluate decision effectiveness.After a decision has been implemented, the results of

the decision are evaluated with the objective of improving future decisions.

8.

Quantitative versus Qualitative AnalysisLEARNING OBJECTIVE 2

Explain the relationship between quantitative and qualitative analyses in decision making.

Decision problems involving accounting data typically are specified in quantitative terms. The

criteria in such problems usually include objectives such as profit maximization or cost

minimization. When a manager makes a final decision, however, the qualitative characteristics of

the alternatives can be just as important as the quantitative measures. Qualitative

characteristicsare the factors in a decision problem that cannot be expressed effectively in

numerical terms. To illustrate, suppose Worldwide Airways top management is considering the

elimination of its hub operation in London. Airlines establish hubs at airports where many oftheir routes intersect. Hub operations include facilities for in-flight food preparation, aircraft

maintenance and storage, and administrative offices. A careful quantitative analysis indicates

that Worldwide Airways profit-maximizing alternative is to eliminate theLondon hub. In

making its decision, however, the companys managers will consider such qualitative issues as


3/4

the effect of the closing on its London employees and on the morale of its remaining employees

in the airlines Paris, Atlanta, and Tokyo hubs.

To clarify what is at stake in such qualitative analyses, quantitative analysis can allow the

decision maker to put a price on the sum total of the qualitative characteristics. For example,

suppose Worldwide Airways controller gives top management a quantitative analysis showing

that elimination of the London hub will increase annual profits by $2,000,000. However, the

qualitative considerations favor the option of continuing the London operation. How important

are these qualitative considerations to the top managers? If they decide to continue the London

operation, the qualitative considerations must be worth at least $2,000,000 to them. Weighing the

quantitative and qualitative considerations in making decisions is the essence of management.

The skill, experience, judgment, and ethical standards of managers all come to bear on such

difficult choices.Exhibit 14-1depicts the seven steps in the decision process, and the relationship between

quantitative and qualitative analysis.

Exhibit 14-1 The Decision-Making ProcessObtaining Information: Relevance, Accuracy, and Timeliness

What criteria should the managerial accountant use in designing the accounting information

system that supplies data for decision making? Three characteristics of information determine its

usefulness.

Relevance

Information is relevantif it ispertinentto a decision problem. Different decisions typically will

require different data. The primary theme of this chapter is how to decide what information is

relevant to various common decision problems.

Accuracy

Information that is pertinent to a decision problem also must be accurate,or it will be of

little use. This means the information must be precise. For example, the cost incurred by

Worldwide Airways to rent facilities at Londons Heathrow Airport is relevant to a

decision about eliminating the airlines London hub. However, if the rental cost data are

imprecise, due to incomplete or misplaced records, the usefulness of the information

will be diminished.
https://www.inkling.com/read/managerial-accounting-ronald-hilton-9th/chapter-14/exhibit-14-1https://www.inkling.com/read/managerial-accounting-ronald-hilton-9th/chapter-14/exhibit-14-1https://www.inkling.com/read/managerial-accounting-ronald-hilton-9th/chapter-14/exhibit-14-1https://www.inkling.com/read/managerial-accounting-ronald-hilton-9th/chapter-14/exhibit-14-1


4/4

Conversely, highly accurate but irrelevant data are of no value to a decision maker.

Suppose Worldwide Airways will continue its dailyround-trip flight between New York and

London regardless of its decision about eliminating the Londonhub. Precise data aboutfuel

consumption on the New YorkLondon route are irrelevant to the decision about closing down

the London hub.

Timeliness

Relevant and accurate data are of value only if they are timely,that is, available in time for a

decision. Thus, timeliness is the third important criterion for determining the usefulness of

information. Some situations involve a trade-off between the accuracy and the timeliness of

information. More accurate information may take longer to produce. Therefore, as accuracy

improves, timeliness suffers, and vice versa. For example, a company may test-market a

potential new product in a particular city. The longer the test-marketing program runs, the more

accurate will be the marketing data generated. However, a long wait for the accurate marketing

report may unduly delay managements decision to launch the new product nationally.

To summarize, the managerial accountants primary role in the decision-making process is

twofold:

1. Decide what information is relevantto each decision problem.

2. Provide accurateand timelydata, keeping in mind the proper balance between these often-

conflicting criteria.

The Managerial Accountant.docx 107

Documents

Transcript of The Managerial Accountant.docx 107