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 OBJECTIVE 1
Describe seven steps in the decision-making process and the managerial accountants role in
that process.

Clarify 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 companys most 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 be
clarified 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.

3Specify the criterion. 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.

3. Identify 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 model is 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. Collect 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 accountants most 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 Analysis

LEARNING 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
characteristics are 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 of
their 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 the London hub. In
making its decision, however, the companys managers will consider such qualitative issues as

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 14-1 depicts the seven steps in the decision process, and the relationship between
quantitative and qualitative analysis.

Exhibit 14-1 The Decision-Making Process

Obtaining 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 relevant if it is pertinent to 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.

Conversely, highly accurate but irrelevant data are of no value to a decision maker.
Suppose Worldwide Airways will continue its daily round-trip flight between New York and
London regardless of its decision about eliminating the London hub. Precise data about

fuel

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 relevant to each decision problem.
2. Provide accurate and timely data, keeping in mind the proper balance between these oftenconflicting criteria.