Lecture Cost management: Measuring, monitoring, and motivating performance (2e): Chapter 1 - Eldenburg, Wolcott’s

Chapter 1 - The role of accounting information in management decision making. The following will be discussed in this chapter: What is the process of strategic management and decision making? What types of control systems do managers use? What is the role of accounting information in strategic management?...

Decision Making

Learning objectives

Ø Q1 - What is the process of strategic management and decision making?

Ø Q2 - What types of control systems do managers use?

Ø Q3 - What is the role of accounting information in strategic management?

Ø Q4 - What information is relevant for decision making?

Ø Q5 - How does business risk affect management decision making?

Ø Q6 - How do biases affect management decision making?

Ø Q7 - How can managers make higher-quality decisions?

Ø Q8 - What is ethical decision making, and why is it important?

Q1 : Organizational Vision and Core Competencies

ideology of the organization.

• Determining the organizational vision precedes all other management decision making.

• Management must also isolate the organization’s

competitors.

Q1 : Organizational Strategies

Organizational Vision

& Core Competencies

Organizational Strategies

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?

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?

If you had an accounting practice, what would information would you

want to collect about the results of your actual operations?

Q1 : 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 organization’s 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?

• Diagnostic Control Systems

– Measure, monitor, and motivate employees against preset goals

• Interactive Control Systems

– Recurring information and reports to evaluate

performance and direct actions

Q3 : 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 includes both financial and nonfinancial information and is

used for both financial and managerial accounting

Q3 : Strategic Cost Management  and the Balanced Scorecard

reducing costs while strengthening the

organization’s strategic position.

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.

Q4 : What Information is Relevant

for Decision Making?

• Information is relevant if:

• Differs across the alternatives, and

• Is about the future.

• Relevant information can be quantitative or

qualitative

• Information is irrelevant if:

• Does not vary with the option chosen or action taken

Irrelevant information is NOT useful in

decision making!

Q4 : Relevant Cash Flows

differ across the alternatives.

• also called incremental cash flows

• also called avoidable cash flows

• non-incremental and unavoidable cash flows

• do not vary among alternatives

• Must look at the cash flow relevance to the

decision being made

• Electricity costs are relevant to the decision to open a business or not

• Electricity costs are not relevant in the decision to lease or buy a building

for your business

• 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 won’t fix the broken stapler.

• The repair carries a one-year warranty.

• The copy machine was a gift from your spouse.

Q4 : Relevance of Income Statement Information

• Income Statements include:

– Period costs

– Product costs (recorded as cost of goods sold)

• Many business decisions require the incremental cost to produce a unit

• Cost per unit on the income statement includes both fixed and variable costs

• Including fixed costs does not represent the true incremental cost of a unit

Q5 : Impact of Business Risk on Decision Making

and interfere with the organization’s strategic goals

• The existence of business risk can cloud

management’s decision making process

Q6 : Uncertainties, Biases, and Decision Quality

which there is doubt.

careful thought.

• Both uncertainty and bias reduce decision quality.

decision that affect the likelihood of achieving a positive outcome.

Q6 : 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 (predisposition bias)

• The methods used to collect information could have introduced bias

(information bias)

• The decision maker may exercise an error in judgment or processing

information (cognitive bias)

Q6:  Motorola’s Iridium Project

• How did uncertainties and bias effect Motorola’s decision making process?

Q6 : 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 they’ve 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?

Q7 : Characteristics of Higher­Quality 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

Q8 : Components of Ethical Decision Making

Q8 : The IMA’s 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.

Q8 : Ethical Decision Making

Suppose you work for the Lee K Fawcett Plumbing Company as Mr Fawcett’s 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 company’s 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

Appendix : Steps for Better Thinking – Foundation (Knowing)

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

Appendix : Steps for Better Thinking ­ Identifying

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

Appendix : Steps for Better Thinking ­ Exploring

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 problem’s solutions

Appendix : Steps for Better Thinking ­ Prioritizing

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

Appendix : Steps for Better Thinking ­ Envisioning

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