John Wiley & Sons, 2005

Chapter 1: The Role of Accounting Information in Management Decision Making

Eldenburg & Wolcotts Cost Management, 1e Slide # 1
Cost Management
Measuring, Monitoring, and Motivating Performance

Prepared by
Gail Kaciuba
Midwestern State University
Chapter 1
The Role of Accounting Information in
Management Decision Making
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 2
Chapter 1: The Role of Accounting Information in
Management Decision Making
Learning objectives
Q1: What types of decisions do managers make for an
organization?
Q2: What is the role of accounting information in
management decision making?
Q3: How do uncertainties and biases affect the quality of
decisions?
Q4: How can managers make higher-quality decisions?
Q5: What information is relevant for decision making?
Q6: What is ethical decision making and why is it
important?
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 3
Q1: Organizational Vision and Core Competencies
The organizational vision is the core purpose and
ideology of the organization.
Determining the organizational vision precedes all
other management decision making.
Management must also isolate the organizations
core competencies its strengths relative to
competitors.
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 4
Q1: Organizational Vision and Core Competencies
Organizational
Vision
Core
Competencies
The organizational vision and the
core competencies are closely
related.
The organizations strengths
should help shape the vision.
The vision should help locate the
organizations strengths.
If you were starting an accounting practice, what would be your
organizational vision?
What do you think would be your core competencies?
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 5
Q1: Organizational Strategies
Organizational
Vision & Core
Competencies
OrganizationalS
trategies
Organizational strategies are the tactics
that managers use to work toward the
organizational vision while taking
advantage of the core competencies.
These strategies are long-term in nature.
Examples include organization structure,
financial structure, and long-term
resource allocation strategies.
If you were starting an accounting practice, what would be some of your
organizational strategies?
How do these work toward your organizational vision?
How do they take advantage of your core competencies?
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 6
Q1: Operating Plans
Organizational
Strategies
Operating
Plans
Operating plans are the short-term
implementations of the organizational
strategies.
Operating plans usually include
budgeted goals for revenues and
expenses.
Examples include schedules for
employees and procedures for daily
relationship management decisions
with suppliers.
If you were starting an accounting practice, what would be some of your
operating plans?
How do these relate to your organizational strategies?
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 7
Q1: Actual Operations
Operating
Plans
Actual
Operations
Actual operations are the actions
taken and the results achieved.
The organizations information
system measures the results of
actual operations.
Examples include number of units
sold, advertising expense, and the
wage expense for the period.
If you had an accounting practice, what would information would you
want to collect about the results of your actual operations?
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 8
Q2: Monitoring and Motivating Performance
Organizational
Vision & Core
Competencies
Actual
Operations
Managers use the results of actual
operations to monitor performance and
ensure that it is in line with the
organizational vision.
Managers may find that the results of
actual operations make them re-think the
organizational vision or their view of the
organizations core competencies.
If you had an accounting practice, can you think of an example of a
measure of actual operations and how you would use it to motivate
performance?
Can you think of an example of a measure of actual operations that
might make you redefine your organizational vision or your view of your
core competencies?
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 9
Q2: Financial, Managerial, and Cost Accounting
Financial accounting
prepares reports most
frequently used by decision
makers external to the
organization.
Managerial accounting
prepares reports most
frequently used by decision
makers internal to the
organization.
Cost accounting is a method for measuring the cost of a
project, process, or thing*. It includes both financial and
nonfinancial information and is used for both financial and
managerial accounting.
*This is the definition of cost accounting from the Institute of Management Accountants
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 10
Q2: Strategic Cost Management
and the Balanced Scorecard
Strategic cost management is an approach to
reducing costs while strengthening the
organizations strategic position.
The balanced scorecard can be used to formalize
strategic cost management efforts by detailing
financial and nonfinancial benchmarks for all
segments of the organization.
Examples of such benchmarks include:
Personnel can reduce costs by completing all hiring within 20
days of initial interview.
Production can reduce costs and improve quality if Engineering
can reduce the number of processes in the production process.
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 11
Q3: Uncertainties, Biases, and Decision Quality
Uncertainties are issues and information about
which there is doubt.
Biases are preconceived notions adopted without
careful thought.
Both uncertainty and bias reduce decision quality.
Decision quality refers to the characteristics of a
decision that affect the likelihood of achieving a
positive outcome.
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 12
Q3: Uncertainties and Biases in Information
Uncertainties come from many sources and can be
exogenous or endogenous.
Biases can come from many sources.
The future is always uncertain.
Managers may be uncertain that the right information
was captured in a report.
The decision maker may be biased towards or against a
particular alternative.
The methods used to collect information could have
introduced bias.
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 13
Q3: Uncertainties, Biases, and Decision Quality
Lori loves to sew and has always made her own clothes. People often
tell her that she is the best-dressed person theyve ever met. She can
design and sew a lovely outfit in under 2 days. She is considering
opening a store that could sell her home-made fashions. Then she could
combine her work with her hobby.
Can you identify some of the uncertainties Lori faces? Can you think of
any way she can reduce some of these uncertainties?
Can you identify any possible personal biases that Lori may have? How
could these affect her decision making process?
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 14
Q4: Characteristics of Higher-Quality Decisions
Higher quality decisions come from a
higher quality decision making process.
Such a process is thorough, unbiased,
focused, strategic, creative, and visionary.
This process requires reports that are
relevant, understandable, and available.
These reports must contain information
that is more certain, complete, relevant,
timely and valuable.
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 15
Q4: Steps for
Better Thinking
Source: (c) 2002. C. L. Lynch, S. K. Wolcott, and G. E. Huber, Steps for Better Thinking: A
Developmental Problem-Solving Process (August 5, 2002).
Steps for Better
Thinking is a
process to help
address open-
ended questions.
Open-ended
questions have no
single correct
solution; managers
must seek the best
solution.
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 16
Q4: Steps for Better Thinking Foundation (Knowing)
Foundation level skills include a knowledge of the
terminology and basic concepts that are relevant
to the decision at hand.
An individual with Foundation level skills can:
perform calculations to arrive at correct answer
define terms in his/her own words
describe a concept
list the elements contained in a concept or
process
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 17
Q4: Steps for Better Thinking - Identifying
Step 1 skills include the ability to identify relevant
information and uncertainties.
An individual with Step 1 skills can:
create a list of issues related to the decision
sort information that is relevant
identify the reasons for the underlying
uncertainties
perform research to obtain input into the
decision
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 18
Q4: Steps for Better Thinking - Exploring
Step 2 skills include the ability to explore
interpretations of the information and connections
between alternative solutions approaches.
An individual with Step 2 skills can:
recognize and control for his/her own biases
articulate assumptions and reasoning
associated with alternative points of view
organize information in meaningful ways to
encompass problem complexities
compare and contrast different approaches to
a problems solutions
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 19
Q4: Steps for Better Thinking - Prioritizing
Step 3 skills include the ability to prioritize
alternatives, come to a decision, and implement
the decision.
An individual with Step 3 skills can:
develop guidelines for prioritizing alternatives
prioritize alternatives after objective analysis
communicate findings in a manner appropriate
to the audience
describe how the solution or decision might
change if priorities change
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 20
Q4: Steps for Better Thinking - Envisioning
Step 4 skills include the ability to monitor the
decision and innovate new strategies to modify
the decision when circumstances change.
An individual with Step 4 skills can:
explain the limitations of the decision made
establish a plan for monitoring the performance
of the decision
explain how conditions may change in the
future and how this may change the decision

John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 21
Q5: What Information is Relevant
for Decision Making?
Information is relevant if:
it concerns the future, and
it varies across the alternatives.
Avoidable cash flows are future cash flows that
differ across the alternatives.
also called incremental cash flows
also called relevant cash flows
Unavoidable cash flows are non-incremental and
are therefore also called irrelevant cash flows.
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 22
Q5: What Information is Relevant
for Decision Making?
You have a small computer repair company and are deciding whether to
replace your old copy machine or repair it. In the list of information
below, identify which data are relevant to this decision and which are
irrelevant.
The purchase price of the copy machine was $1200.
The repair costs are $320.
The copy machine can make 20 copies per minute.
If you repair it, the machine will use less toner than it does now.
You make approximately 1000 copies per month.
The repair wont fix the broken stapler.
The repair carries a one-year warranty.
The copy machine was a gift from your spouse.
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 23
Q6: Components of Ethical Decision Making
Identify ethical problems as they arise.
Consider the well-being of others and society
when exploring alternatives.
Clarify and apply your ethical values when
choosing a course of action.
Continuously improve your personal ethics and
those of your organization.
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 24
Q6: The IMAs Code of Ethics
The Institute of Management Accountants (IMA)
has a Code of Ethics that states that IMA
members have a responsibility to:
maintain an appropriate level of professional competence
and perform their professional duties in accordance with
laws, regulations, and standards;
refrain from disclosing confidential information (unless
legally obligated), or using (or even appearing to use)
confidential information to illegal advantage;
avoid actual and apparent conflicts of interest; and
communicate information fairly and objectively, and disclose
all relevant information to decision makers.
John Wiley & Sons, 2005
Chapter 1: The Role of Accounting Information in Management Decision Making
Eldenburg & Wolcotts Cost Management, 1e Slide # 25
Q6: Ethical Decision Making
Suppose you work for the Lee K. Fawcett Plumbing Company as Mr.
Fawcetts administrative assistant. Recently Mr. Fawcett asked you to
type some financial statements from his hand-written notes so that he
can take them to the bank as part of a loan application.
This exercise seems odd to you because the companys CPA recently
delivered the monthly financial statements that she prepares.
While typing the financial statements you notice that the building the
company rents is listed as an asset. Also, you write checks each month
for the monthly payments on two car loans, and these are not listed as
liabilities.
Do you have an ethical dilemma? Discuss your approach to handling
this situation.