Log in / Register

Home arrow Accounting arrow Introduction to Managerial Accounting
< Prev   CONTENTS   Next >

2.1. Decision Making

Decision Making

Some managers seem to have an intuitive sense of good decision making. The reality is that good decision making is rarely done by intuition. Consistently good decisions can only result from diligent accumulation and evaluation of information. This is where managerial accounting comes in - providing the information needed to fuel the decision making process. Managerial decisions can be categorized according to three interrelated business processes: planning, directing, and controlling. Correct execution of each of these activities culminates in the creation of business value. Conversely, failure to plan, direct, or control is a roadmap to business failure.

The central theme to focus on is this: (1) business value results from good management decisions,

(2) decisions must occur across a spectrum of activities (planning, directing, and controlling), and

(3) quality decision making can only consistently occur by reliance on information. Thus, I implore you to see the relevance of managerial accounting to your success as a business manager. Let's now take a closer look at the components of planning, directing, and controlling.

2.2. Planning


A business must plan for success. What does it mean to plan? It is about thinking ahead - to decide on a course of action to reach desired outcomes. Planning must occur at all levels. First, it occurs at the high level of setting strategy. It then moves to broad-based thought about how to establish an optimum "position" to maximize the potential for realization of goals. Finally, planning must be undertaken from the perspective of thoughtful consideration of financial realities/constraints and anticipated monetary outcomes (budgets).

You have perhaps undergone similar planning endeavors. For example, you decided that you desired more knowledge in business to improve your stake in life, you positioned yourself in a program of study, and you developed a model of costs (and future benefits). So, you are quite familiar with the notion of planning! But, you are an individual; you have easily captured and contained your plan within your own mind. A business organization is made up of many individuals. And, these individuals must be orchestrated to work together in harmony. They must share and understand the organizational plans. In short, "everyone needs to be on the same page."

2.3. Strategy

A business typically invests considerable time and money in developing its strategy. Employees, harried with day-to-day tasks, sometimes fail to see the need to take on strategic planning. It is difficult to see the linkage between strategic endeavors and the day-to-day corporate activities associated with delivering goods and services to customers. But, this strategic planning ultimately defines the organization. Specific strategy setting can take many forms, but generally, includes elements pertaining to the definition of core values, mission, and objectives.

Core Values - An entity should clearly consider and define the rules by which it will play. Core values can cover a broad spectrum involving concepts of fair play, human dignity, ethics, employment/promotion/ compensation, quality, customer service, environmental awareness, and so forth. If an organization does not cause its members to understand and focus on these important elements, it will soon find participants becoming solely "profit-centric." This behavior inevitably leads to a short term focus and potentially illegal practices that provide the seeds of self destruction. Remember that management is to build business value by making the right decisions; and, decisions about core values are essential.

Mission - Many companies attempt to prepare a pithy statement about their mission. For example:

"At IBM, we strive to lead in the creation, development and manufacture of the industry's most advanced information technologies, including computer systems, software, networking systems, storage devices and microelectronics. We translate these advanced technologies into value for our customers through our professional solutions and services businesses worldwide."

Such mission statements provide a snapshot of the organization and provide a focal point against which to match ideas and actions. They provide an important planning element because they define the organization's purpose and direction. Interestingly, some organizations have avoided "missioning," in fear that it will limit opportunity for expansive thinking. For example, General Electric specifically states that it does not have a mission statement, per se. Instead, its operating philosophy and business objectives are clearly articulated each year in the Letter to Shareowners, Employees and Customers.

In some sense, though, GE's logo reflects its mission: "imagination at work". Perhaps the subliminal mission is to pursue opportunity wherever it can be found. As a result, GE is one of the world's most diversified entities in terms of the range of products and services it offers.

Objectives - An organization must also consider its specific objectives. In the case of GE:

"Imagine, solve, build and lead - four bold verbs that express what it is to be part of GE. Their action-oriented nature says something about who we are - and should serve to energize ourselves and our teams around leading change and driving performance."

The objective of a business organization must include delivery of goods or services while providing a return (i.e., driving performance) for its investors. Without this objective, the organization serves no purpose and/or will cease to exist.

Overall, then, the strategic structure of an organization is established by how well it defines its values and purpose. But, how does the managerial accountant help in this process? At first glance, these strategic issues seem to be broad and without accounting context. But, information is needed about the "returns" that are being generated for investors; this accounting information is necessary to determine whether the profit objective is being achieved. Actually, though, managerial accounting goes much deeper. For example, how are core values policed? Consider that someone must monitor and provide information on environmental compliance. What is the most effective method for handling and properly disposing of hazardous waste? Are there alternative products that may cost more to acquire but cost less to dispose? What system must be established to record and track such material, etc.? All of these issues require "accountability." As another example, ethical codes likely deal with bidding procedures to obtain the best prices from capable suppliers.

What controls are needed to monitor the purchasing process, provide for the best prices, and audit the quality of procured goods? All of these issues quickly evolve into internal accounting tasks. And, the managerial accountant will be heavily involved in providing input on all phases of corporate strategy.

Found a mistake? Please highlight the word and press Shift + Enter  
< Prev   CONTENTS   Next >
Business & Finance
Computer Science
Language & Literature
Political science