Accounting Information in Decision Making - Essay Example

? Accounting Information in Decision Making Task: Outline i. Introduction ii. Models of decision-making and their limitations(constraints) a. Individual: Subjective Expected Utility b. Group: Theory of the Firm iii. Role of managerial accounting in providing information to aid individual and group decision-making a. Individual Roles b. Group (corporate) iv. Conclusion Accounting Information in Decision Making Introduction Engaging accounting information is an idea of great magnitude in decision-making. Decisions adopted by a business defines it success. This sensitive endeavor demands critical attentions. Accounting provides facts essential for understanding the subject under question. Therefore, accounting enhances case examination, interpretation and communication of findings. Accounting information is thus, of considerable relevance because the information presents the actual state of the matter. In fact, they act as trial tests. The management can use earlier examples to develop concrete decisions. Virtually, the information presented has high reliability because they are mainly certifiable and impartial (Mansor, Tayles, & Pike 2012). Moreover, accounting information can provide progressive figure hence the team can perform a timeliness test to ascribe there validity. Accessing the very current information is important since timeliness of the information defines its dependability. Measurement unit used in presenting accounting information has substantial stability. The model commonly links the information with monetary units. Although monetary units experiences fluctuations due to environmental forces; the unit establishes a comparatively stable unit (Mansor, Tayles, & Pike 2012). Indeed sometimes, the change is negligible. Furthermore, accounting information provides just approximate schemes to decision makers. Cost effectiveness exerts constraints on accounting system elements. The practice need be invited only when gains associated with provision of financial information outweighs the cost. Although the practice is beneficial to an organization, a challenger can capitalize on the disclosed information to exert stern attacks. Models of decision-making and their limitations (constraints) Individual: Subjective Expected Utility Subjective Expected Utility (SEU) propagates a concept that individuals make choices which ought to exploit the value of their utility. The SEU theory presumes that actors make choices within limited constant options. The model further accounts that subsequent choices are subjective to each other. The scheme strongly defies the concept of actor’s rational choice. Therefore, the model treats human being as objects swayed by internal forces into following a certain route. This driving force is accountable for the decision made. However, assumptions presented by the models do not depict the situation in the ground. According to Machina 2005 (32), the decision-making environment is not necessary presented with limited choices. Importantly, sorting out options available for a certain case is virtually unpractical. Failing to account for individual’s rational thinking is the major limitation presented by this model. Bounded rationality defines actor’s cognitive limitations influenced by knowledge and examination ability. Studies have engaged effectual experiments challenging SEU theory under bounded rationality ideas. The SEU theory has failed to support its postulates in cases of downing one of its assumptions (Mansor, Tayles, & Pike 2012). Humanity is associated with bounded rationality hence concepts presented by the system are compromised. Group: Theory of the Firm This theory observes that no business exists in isolation. Any corporation exists in a multifaceted background of players and institutions. This entails supervisory and administration bureaus, input suppliers, customers and self-cultures. Therefore, the scheme asserts that these bodies lay special aspirations on firm’s activities hence any corporation has an obligation of identifying these roles and respond to them accordingly. Many organizations fail to embrace the idea cited by the theory due to constraints among stakeholders. Principle-agent is a common conflict; these emerge were auxiliary expertise hired by the company fails to embrace organization’s culture or values (Machina 2005). For instance, the management may legislate for the provision of good services to the clients to build firm’s image. However, agents working on personal gains or profit-based contractors may fail to follow firm’s policies. Additionally, clashes may emerge because of sub-optimization of corporate activities. This arises in entrustment of authority; few employees make decisions based on personal interests instead of prioritizing on firm’s values while others avail pitiable cooperation. Role of managerial accounting in providing information to aid individual and group Decision-making According to Hansen and Mowen (2006), Managerial Accounting entails the utilization of accounting concepts in determination of decisions that are imperative to the organization. The management accountant assesses the accounting information and from this data, he is able to communicate his assertions to the management team and initiate strategies that will enable the management determine the product design (Weygandt 2009). In addition, the management accounting is essential in establishing the marketing decisions of the corporation; furthermore, it focuses on the future. The strategies that management accounting illustrates have to encompass the capabilities of the corporation and the favorable options that are existent in the market. Individual Roles Hansen and Mowen (2006) suggest that Management accounting enables the managers to focus on relevant information that pertains to the costs and possible benefits of the venture that they wish to undertake. Unlike other management duties that will encompass numerous elements in the organization, this arrangement of accounting entails the determination of different costs, financial benefits, and their implication to the organization. In addition, management accounting is essential in identification of the relevant costs that are non-avoidable and critical to the attainment of the business objective (Weygandt 2009). These costs will not be inclusive of the sunk costs that are historical and not appropriate to the contemporary decisions. Management accounting entails the consideration of costs that are relative to the aims of the corporation. For example, if the managers wish to commence a store in a different locale the management accountant can consider analyzing the profit (Warren, Reeve & Duchac 2011). The managers can incorporate the utilization of relevant costs that will involve considering costs that are pertinent to the organizational targets. Management accountants ultimately focus on the costs and advantages of the business endeavor that the management wants to undertake. According to Warren, Reeve and Duchac (2011), management accounting fundamentally focuses on the pressing objectives of the management. The details that the management accountant will evaluate will be relative to the objective that the executives want to engage in. For example if the management aspires to open a sales enterprise in a certain locale, the management accountant will evaluate the costs of similar businesses in the region (Weygandt 2009). The information that the management accountant presents has to be pertinent to the impending endeavor of the management. Therefore, the expenses and earnings of the venture will be necessary in establishing the management decision on the potential venture. The data the management presents has to be comprehensive to the management. It should contain the various overheads and potential benefits that the corporation can attain. The presentation of the outlay of the process should highlight the relationship of the “cost- volume –profit” aspects of the business (Warren, Reeve & Duchac 2011). The information of the management accountant should explicitly explain to the managers the analysis of the issue on which the management is expected to formulate a decision. The management should be capable of relating the information to budgeted results. Group (corporate) Weygandt (2009) asserts that management accounting provides essential information to the business that enables it in assessing the best production models through the concept of “Activity Based Costing”. This approach examines the different production procedures that the corporation undertakes and determines the most preferable cost efficient alternative (Hansen & Mowen 2006). Management Accounting also estimates the actual budgets with the approximate budgets and determining if the variance of the two values will be detrimental to the prospects of the business. This method of accounting assists in planning for the future progress of the corporation through the formulation of prospective budgets. This data enables the formulation of decisions that the corporation will utilize in attaining its objectives (Weygandt 2009). Moreover, the management accountants provide mechanisms of controlling expenses of the organization in manufacturing activities. However, the estimation of these budgeted prices can be tiresome and is not accurate. Conclusion Information accounting is a fundamental undertaking in the determination of cost efficient alternatives that the business can adopt. This presents a comprehensive basis for evaluating the various activities that are essential to the business and their costs. Management accounting enables the management appropriately allocates funds since they have an outlook of the figures that are involved. Accounting is fundamental for the decision-making of any institution and hence has a significant impact on management. Reference List Hansen, D. R., Mowen, M. M., & Hansen, D 2006, Managerial accounting. Mason, OH, Thomson/South-Western. Machina, M 2005, "Expected utility / subjective probability analysis without the sure-thing principle or probabilistic sophistication", Economic Theory, vol. 26, no. 1, pp. 1-62. Mansor, N, Tayles, M, & Pike, R 2012, "Information Usefulness and Usage in Business Decision-Making: An Activity-Based Costing (ABC) Perspective", International Journal of Management, vol. 29, no. 1, pp. 19-32. Warren, C., Reeve, J., & Duchac, J 2011, Managerial Accounting. Southwestern Pub. Weygandt, J 2009, Managerial accounting: tools for business decision making. John Wiley & Sons. Read More