The financial impact of recommendations, decisions and judgments on managerial accounting is its financial outcomes. The outcomes from decisions are apparent but aggregated in the Statement of Financial Position (Balance Sheet), the Income (Profit and Loss) Statement,1 the Statement of Cash Flows, and the Statement of Changes in Equity. The names used depend upon the jurisdiction.
However, the Income (Profit and Loss) Statement in its classified (or multi-step) form2 for internal use, is the focus of most managerial accountant’s activities, so it is used as the focus for this discussion of decisions. Since the Profit and Loss (Income) Statement is produced for each period, the traditional time horizons of short term and long term are used. This is set out in Table 7-1, which uses the format of a fully classified (or multi-step) Income (Profit and Loss) Statement, that is, it provides subtotals to make it easier for readers. To avoid the table becoming unwieldy, only major decisions are included, earlier decisions in it are not repeated horizontally or vertically, and headings are used to show aggregate or roll-up decisions and information. Information is the essential input to most decisions, so the likely information sought or available is also identified. The examples of financial and qualitative information are drawn from the discussion in Chapter 4 on information.
Inspecting Table 7-1 results in two observations. In the multi-step income statement, the impact of decisions can be judged at four critical stages: gross profit, operating profit, pretax profit and after tax. Second, there is overlap between decisions and information. On the decision side, some are interdependent and may form a phased sequence. For example, changing to a sustainable package may affect delivery arrangements and warranty coverage. Also, new decisions may reverse or override existing decisions. For example, the failure of the growth strategy may result in retrenchments. On the information-side, some information accompanying an earlier decision may require updating. For example, the current contractual arrangements with suppliers that provide for volume discount.
Equally, some information may require drill-down to determine the contributing factors. For example, whether changes to operating expenses are due to revenue or cost of goods sold, or both. Also, some information may be fragmented and require assembly or calculation to be usable. For example, total cost of advertising and branding across traditional and social media. Finally, an assessment of the deficiencies of available information may require problem solving or creativity by the managerial accountant.
Table 7-1 Short‒ and long‒term decisions and information using the format or a fully classified Profit and Loss (Income) Statement for internal use.
Section if Fully Classified
Decision Subject Matter
Examples of Information
Short Term Long Term
Operating revenue Sales
revenue
Products/services Forecast sales Pricing
product/service Profit margin Order size Territories occupied
Credit terms offered
Doubtful debts follow‒up
Market share Growth
(projected and actual)
New
products/services Price inflation or deflation
Trends with sales Channels to market
Return on capital invested
Bad debt
List prices
Costs of obtaining sales Variances
Economic, political and social environment
Demand
Competitor intelligence Product margin
Profit margin or compared with the amount of money invested by calculating return on capital employed
Billing
Cost of goods sold3
Raw materials Production schedule Capacity Productivity Cost behavior Overheads
Inventory stock level
Inventory turnover Inventory unsaleable Warranty coverage Guarantee
provided and accepted
Innovation of
product or
process Product mix Preferred suppliers
Discounts and rebates for volume purchases Inventory
replenishment Inventory storage Supplier selection Interest rate and amount
Volume
Product/service mix
Outsource/In‒
house supply Risk
Costs of purchasing Carrying costs Cost of quality
Cost of returns and write downs
Portfolio of products or services
Availability of products or services
Quality standards Industry reputation
Frequency and effect of returns and write downs
Gross profit Budgeted and actual Forecast and trends History and forecast Gross margin
Operating expenses
Total cost of expenses (actual) Proportion to sales
Trend
Reasons for incurring and changes
Expected rate of growth
Relationship to given estimated sales volume
Cash flow
requirements
Total expenses: Year‒to‒
date, year‒on‒year, seasonal/monthly
Control and compliance with policies and processes
Selling expenses
Total selling expenses (actual and budget)
Total selling expenses trend
Selling costs trend
Responses to competitor selling arrangements and performance
Ecommerce
Expenses by territory and organizational subunit (e.g., branch)
Variances (summary and detail)
Customer surveys
Competitor actions and their impact
Sales salaries and commissions
expense
Number of sales employees
Basis
(permanent, part‒
time/casual) Salary rates Expected performance Contractual
obligations for terminating
employees
Commission rates
Number of
employees on commission
Basis
(permanent, part‒
time/casual)
Sourcing in‒
house or
outsource
Employ family members
Salary increases including
increments
Staffing for expected growth or contraction
Profile of
knowledge, skills and abilities
Rate and
commission paid through brokers or associations Dependence of
sales on
commissions Likelihood of
Cost of working conditions
Costs revealed by benchmarks by external consultants
Conditions required by industrial awards
Job descriptions of knowledge, skills and abilities in sales
Costs of existing and competitor rates for new and incumbent sales employees
Existing and projected sales targets
Targets,
incentives &
rewards
new channels eliminating
commissions or requiring
commissions
Advertising expense
Expenditure
(actual and budget)
Frequency Placement Effectiveness
Product
placement and other promotions Sponsorship deals
(organization and individual
ambassador) Linkage to new products/
services
Costs of advertising,
promotion and
sponsorship
Customer perception of brand and products/
services
Advertising channels and schedules
Freight out expense
Number of
consignments Cost reduction opportunities Preferred suppliers
Customer returns
and non‒
deliveries
New forms of packaging and consignment
Connection with advertising
Costs of packaging and handling
Sustainability of methods of packaging
Adequacy of protection of the product, service and tools used
Sales premises rent
expense
Suitability of current location Rent or buy
Need for larger, different
premises
Market and
competitor rates Prestige from naming rights Demographic and socioeconomic factors affecting location
Cost of occupying premises
Cost of quitting premises Contact and arrangements for tenure
Depreciation sales equipment
expense
Purchase plan
Cash flow
benefits
Period purchased Eligible rate
Fixed asset capital budget for
new and
replacement items
Cash flow
(funded by
operations, other
income or
financed by loan)
Total cost of purchase over life
Period of purchase Eligible rate
Taxation rate
Available cash or loan to fund
Administrative expenses
Acceptability of total
administrative expenses actual and budget
Total
administrative expenses trend
Acceptability of administrative expenses trend Responses to competitor
administrative arrangements
Administrative expenses and variances
Competitor actions and their impact
Office salaries expense
Office staff salary rates
Number of office staff
Grades or levels of office staff
Market (industry) rates
Competitor rates Opportunities for elimination,
automation and outsourcing
Expenses including benefits and overheads Changing market and competitor rates
Costs and variances
Changing market and competitor rates
Job design changes
Utilities expense
Cost reduction opportunities from discounts and rebates
Changed work practices
Trend in expense Savings
negotiable with supplier
Savings from more efficient consumption
Contract arrangements, service charges, rates and period of commitment
Office
premises See, ‘Selling expenses’ See, ‘Selling expenses’ See, ‘Selling expenses’
expense Depreciation
on office equipment
expense
See, ‘Selling expenses’ See, ‘Selling expenses’
See, ‘Selling expenses’
Insurance expense
Preferred supplier
Type and extent of coverage and excess
Cost, discounts and rebates
Trends
Costs
Claims history Suppliers
Financial expenses
(For organizations not in the financial industry)
Interest expenses
Borrowing and repayment
conditions
Reductions in interest rate
Impact on profit Repayment of principal
Cash flow
Type of borrowings
(bonds, loans,
convertible debt or lines of credit)
Amount of principal Rates and term offered
Discount allowed
Cost
Reasons for allowance
Impact on profit
Discounts negotiated Terms of discount Life of discount
Profit before income tax
Profit amount Profit margin Profitability ratios
Forecasts, trends and targets
Competitor comparison
Organizational unit and segment reporting
Loan covenants
Income tax
expense Provisional tax
payable
Impact of tax losses
Acceptable tax
minimization advice
Profit after tax See ‘Profit’, above
See ‘Profit’,
above See ‘Profit’, above