Chapter 1

The Role of Accounting Information

in Management Decision Making
Key Topics:
• Cost Versus Financial Accounting
• Management Decision Making
• Decision Quality
• Steps for Better Thinking
• Relevant Information
• Ethical Decision Making
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 Let’s Begin With a Story…

Motorola’s Iridium Project

Key Issues:
• Uncertainty
• Bias

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 What is Accounting?

An information system that:

• Measures and records transactions
• Aggregates information
• Communicates information to users through reports

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 Cost, Financial, and
Managerial Accounting
Cost accounting information is used for both
managerial and financial accounting reports
• Management accounting provides information
for internal decision makers
• Managers
• Other employees
• Financial accounting provides information for
external decision makers
• Investors (stockholders and creditors) and potential
investors
• Regulators
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• Other external decision makers
 Managerial Decision Making

EXHIBIT 1.1
Overview of Management
Decision Making

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 Higher Quality Decisions

EXHIBIT 1.9
Path to Higher-Quality
Management Decisions

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 Relevant Information
Information is relevant if it:
– Differs across the alternatives, and
– Is about expected future costs or
revenues
Relevant information can include:
– Quantitative data such as revenues and costs
– Qualitative (non-numerical) factors

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 Exercise: Relevant
Information

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 EXHIBIT 1.10
Steps for Better Thinking: A Decision-Making Process

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 Ethical decision making

EXHIBIT 1.11
Steps in Ethical Decision Making

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Exercise: Ethics and Relevant
Information

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 Codes Used in Textbook
Problems
Steps for Better Thinking
– Step 1, Step 2, Step 3, Step 4
– Tied to competencies called for by AICPA, IMA, and others
Content Knowledge (Foundation)
– 3 levels (see below)
Easier More Difficult

Recite Demonstrate Extend

 Recite definitions
 Replicate simple calc ulations provided in a
textbook
 Search for specif ic information in textbook
or following explicit directions for the
library/Internet
 Select correct multiple choice an swer
based on definitions or other information
taken directly from readings or class notes
 Provide definitions in own words
 Properly select and apply textbook
techniques to problems that are similar to
textbook examples
 Search for specif ic information using
simple techniques for the library/Internet
 Select correct multiple choice an swer
based on definitions or other statements
somewhat reworded from textbook
 Correctly apply definitions in new
situations
 Properly select and apply textbook
techniques to problems that vary
substantially from textbook exa mples
 Search for new types of relevant
information without specif ic instruction
 Select correct multiple choice an swer
based on adaptation/application of ideas
from textbook

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