Decision Making Using Managerial Accounting - Essay Example

and Section # of DECISION MAKING USING MANAGERIAL ACCOUNTING Accounting information allows us to conduct a fundamental analysis regarding the health of the entity, it is vital for the any manager to understand the intricacies of the accounting information for proper decision making. Accounting information provides you knowledge regarding the economic stability of the organization. However, the usefulness of such information is subject to some variables. The accounting information that is being extracted and analyzed should be done on a timely basis and only relevant variables should be taken into account. Every situation demands the analysis of a different area of economics of a business. The measurement unit that is used should be stable throughout the analysis; by this it means that all the financial information should be provided consistently in the same measurement unit. Also, the costs of producing that accounting information should be less than the benefits that it is providing for the user. It should be cost effective in order to provide an over advantage to the user of the information (Helmkamp, 1990). Decision Making models are models which are used to make good judgment; a decision may be irrational, made on the spur of the moment, or involve fundamental analysis of all the important variables that are mentioned and may affect the outcome. A decision is taken when you decide upon an alternative and act on it, rejecting all other alternatives that are provided. There are various types of decision making models, bounded by their limitations. There are basically two major types of models of decision making; the rational model of decision making and the Simon’s normative model (Bell, 1988). The rational model dwells around its four step structured sequence. The first step in the structured sequence is identification of the problem at hand. Generation of alternatives comes in next in the decision making processes. Then, based on the analysis or intuition, the best alternative should be selected. After selection, proper implementation and evaluation of the results to see if the solution was implemented in the right manner is the last step in the rational decision making model. The biggest limitation of this model, in this world, is that it assumes that the world in free from politics, is reasonable and is rational. However, in reality, there are various factors that are influencing and guiding our decision making in daily life even if we follow the rational model. It also requires a great deal of information and consumes a lot of time, when compared to intuitive decision making (Bell, 1988). Simon’s normative model belongs to the other end of the continuum of decision making models. This model believes on the premise that decision making is not rational is bounded by our limited ability to process information, using our rule of thumbs and schemas to make decision and satisficing- reaching a satisfactory end because managers are time bound, have limited information processing capability (Bell, 1988). Subjective Expected Utility model has been considered as the most important individual decision making theory today. This model combines two important things; a personal utility function as well as a personal probability distribution. According to this theory, the decision that you will chose will be the one whose subjective utility will be higher. This theory assumes that all decision making is rational and involves the rational theory as discussed above. This is the biggest limitation of the model. Another limitation is bounded rationality; people have limited decision making power and they do not make completely rational decisions (Bell, 1988). When it comes to group decision making models, the organization is considered as a group of individual stakeholders which have their own personal utilities at stake and the decision is taken accordingly. There may exist a conflict of interest between two stakeholders where one wants the organization to enter into the development of unethical products where the other believes in sustainable development and ethical processes. Another example would be the principle-agent conflict. This issue arises when there is another person acting on behalf of the interest. The person’s interest will be in conflict with that of the principal’s interest. This often happens in organizations where the management’s interest is at conflict with that of the stakeholders. Therefore, to minimize this difference, employees are provided with stakes in the organization to align the goals. In order to reach the corporate goal without any conflict of interest, one can also delegate responsibility throughout the organization and decision making can take place at different levels of the organization e.g., divisional decision making in a centralized organization. The role of managerial accounting is to provide help to the people or organizations in order to make sound decision making. Managers, when faced with the decision making, should take care that they are considering only the relevant information that the accounting information is giving. Only the relevant information should be taken into account. The decision should be related to the decision-makers objectives and should only provide the information in such a form that it is understandable by the decision maker. Managerial accounting helps managers with all these aspects of decision making (Keiso, 2009). The main aim of the managerial accounting is to provide assistance to the decision makers at individual and corporate level. At the individual level, the goal is to provide the relevant person with the timely and pertinent information that helps in taking the decision. At the same time, on the corporate level, managerial accounting assists the decision maker in the same way but it also alleviate the principle-agent conflict (Helmkamp, 1990). CONCLUSION “If accounting is to provide useful information for decision making, it should recognize the constraints under which the users of information actually operate, and provide information accordingly”. I believe that managerial accounting plays a vital role in the decision making process in any organization. It does provide the managers and relevant people with the necessary and well timed information that assists them in taking the best possible decision at times when other physical and mental barriers are a strong hindrance to them. They are limited by cognitive ability, clutter and limited resources and power and hence, only need the relevant information to process. BIBLIOGRAPHY Helmkamp, J. G. (1990) Managerial Accounting. Indiana University. Wiley Weygandt, J. J. Kimmel, P. D. Keiso, D. E. (2009) Managerial Accounting: Tools for Business Decision Making. Wiley Bell, D. E., Raiffa, H. & Tversky, A. (1988). Descriptive, normative, and prescriptive interactions in decision making. Cambridge UK. Cambridge University Press. Read More