Term paper of Acconting For Managers

Topic:- State the role of accounting information in supporting decision making process in an organisation with suitable examples.

Submitted to: by: Ms. Haritika Arora MBA-IT

Submitted Harish Upmanyu B.TechRK27B1A16 Roll no. 16

3470070038

Acknowledgment
I would like to thank our teacher Ms. Haritika Arora for giving me the opportunity to show my creativity and skill through this term paper. I thank maam for helping me with my problems and in areas where I was lagging.

INTRODUCTION
A system of organizational control is intended to provide motivation for organizational members to take actions and make decisions consistent with the organizations objectives. Accounting theorists have long recognized that the accounting information system is an integral part of an organizations control system and that accounting information provides critical decision-influencing and decision-facilitating information for control (e.g., Baiman 1982; Birnberg et al. 1983; Merchant 1985a; Tiessen and Waterhouse 1983).1 As a result, a rich history of theoretical and empirical accounting research in organizational control processes has emerged. The objective of this chapter is to review and summarize behavioral accounting research in organizational control, evaluate its strengths and weaknesses, and suggest potential areas for additional research. Two conceptual frameworks have dominated behavioral accounting research in organizational control: behavioral theory and agency theory. Behavioral theory research has employed several conceptual frameworks adapted from organizational behavior and applied psychology (Parker et al. 1989; Welsch et al. 1988). The most prevalent has probably been expectancy theory, which relies on motivation to explain the behavioral effects of setting performance goals (Kren 1990; Ronen and Livingston 1975).2 Empirical evidence has generally

been based on mailed surveys and occasionally on field studies.

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.

Problem Analysis vs. Decision Making

It's important to differentiate between problem analysis and decision making. The concepts are completely separate from one another. Problem analysis must be done first, then the information gathered in that process may be used towards decision making.[4] Problem Analysis Analyze performance, what should the results be against what they actually are Problems are merely deviations from performance standards Problem must be precisely identified and described Problems are caused by some change from a distinctive feature Something can always be used to distinguish between what has and hasn't been effected by a cause Causes to problems can be deducted from relevant changes found in analyzing the problem Most likely cause to a problem is the one that exactly explains all the facts Decision Making Objectives must first be established Objectives must be classified and placed in order of importance Alternative actions must be developed

 The alternative must be evaluated against all the objectives The alternative that is able to achieve all the objectives is the tentative decision The tentative decision is evaluated for more possible consequences The decisive actions are taken, and additional actions are taken to prevent any adverse consequences from becoming problems and starting both systems (problem analysis and decision making) all over again

Everyday techniques
Some of the decision making techniques people use in everyday life include:

Pros and Cons: Listing the advantages and disadvantages of each option, popularized by Plato and Benjamin Franklin Simple Prioritization: Choosing the alternative with the highest probability-weighted utility for each alternative (see Decision Analysis) or derivative Possibilianism: Acting on choices so as not to preclude alternative understandings of equal probability, including active exploration of novel possibilities and emphasis on the necessity of holding multiple positions at once if there is no available data to privilege one over the others. Satisficing: Accepting the first option that seems like it might achieve the desired result Acquiesce to a person in authority or an "expert", just following orders Flipism: Flipping a coin, cutting a deck of playing cards, and other random or coincidence methods Prayer, tarot cards, astrology, augurs, revelation, or other forms of divination

Decision-Making Stages
Developed by B. Aubrey Fisher, there are four stages that should be involved in all group decision making. These stages, or sometimes called phases, are important for the decision-making process to begin Orientation stage- This phase is where members meet for the first time and start to get to know each other. Conflict stage- Once group members become familiar with each other, disputes, little fights and arguments occur. Group members eventually work it out. Emergence stage- The group begins to clear up ambigiuity in opinions is talked about.

Reinforcement stage- Members finally make a decision, while justifying themselves that it was the right decision.

A Systematic Approach to Decision Making

A logical and systematic decision-making process helps you address the critical elements that result in a good decision. By taking an organized approach, you're less likely to miss important factors, and you can build on the approach to make your decisions better and better. There are six steps to making an effective decision: 1. 2. 3. 4. 5. 6. Create a constructive environment. Generate good alternatives. Explore these alternatives. Choose the best alternative. Check your decision. Communicate your decision, and take action.

Here are the steps in detail: Step 1: Create a constructive environment To create a constructive environment for successful decision making, make sure you do the following:

Establish the objective - Define what you want to achieve. Agree on the process - Know how the final decision will be made, including whether it will be an individual or a team-based decision. The Vroom-Yetton-Jago Model (member only) is a great tool for determining the most appropriate way of making the decision. Involve the right people - Stakeholder Analysis is important in making an effective decision, and you'll want to ensure that you've consulted stakeholders appropriately even if you're making an individual decision. Where a group process is appropriate, the decisionmaking group - typically a team of five to seven people - should have a good representation of stakeholders. Allow opinions to be heard - Encourage participants to contribute to the discussions, debates, and analysis without any fear of rejection from the group. This is one of the best ways to avoid groupthink (member only). The Stepladder Technique is a useful method for gradually introducing more and more people to the group discussion, and making sure everyone is heard. Also, recognize that the objective

is to make the best decision under the circumstances: it's not a game in which people are competing to have their own preferred alternatives adopted.

Make sure you're asking the right question - Ask yourself whether this is really the true issue. The 5 Whys technique is a classic tool that helps you identify the real underlying problem that you face. Use creativity tools from the start - The basis of creativity is thinking from a different perspective. Do this when you first set out the problem, and then continue it while generating alternatives. Our article Generating New Ideas will help you create new connections in your mind, break old thought patterns, and consider new perspectives.

Step 2: Generate Good Alternatives This step is still critical to making an effective decision. The more good options you consider, the more comprehensive your final decision will be. When you generate alternatives, you force yourself to dig deeper, and look at the problem from different angles. If you use the mindset there must be other solutions out there,' you're more likely to make the best decision possible. If you don't have reasonable alternatives, then there's really not much of a decision to make! Here's a summary of some of the key tools and techniques to help you and your team develop good alternatives.

Generating Ideas

Brainstorming is probably the most popular method of generating ideas. Another approach, Reverse Brainstorming, works similarly. However, it starts by asking people to brainstorm how to achieve the opposite outcome from the one wanted, and then reversing these actions. The Charette Procedure is a systematic process for gathering and developing ideas from very many stakeholders. Use the Crawford Slip Writing Technique (member only) to generate ideas from a large number of people. This is an extremely effective way to make sure that everyone's ideas are heard and given equal weight, irrespective of the person's position or power within the organization.

Considering Different Perspectives

The Reframing Matrix uses 4 Ps (product, planning, potential, and people) as the basis for gathering different perspectives. You can also ask outsiders to join the discussion, or ask existing participants to adopt different functional perspectives (for example, have a marketing person speak from the viewpoint of a financial manager). If you have very few options, or an unsatisfactory alternative, use a Concept Fan to take a step back from the problem, and approach it from a wider perspective. This often helps when the people involved in the decision are too close to the problem. Appreciative Inquiry forces you to look at the problem based on what's going right,' rather than what's going wrong.'

Organizing Ideas This is especially helpful when you have a large number of ideas. Sometimes separate ideas can be combined into one comprehensive alternative.

Use Affinity Diagrams to organize ideas into common themes and groupings.

Step 3: Explore the Alternatives When you're satisfied that you have a good selection of realistic alternatives, then you'll need to evaluate the feasibility, risks, and implications of each choice. Here, we discuss some of the most popular and effective analytical tools.

Risk In decision making, there's usually some degree of uncertainty, which inevitably leads to risk. By evaluating the risk involved with various options, you can determine whether the risk is manageable.

Risk Analysis helps you look at risks objectively. It uses a structured approach for assessing threats, and for evaluating the probability of events occurring - and what they might cost to manage.

Implications

Another way to look at your options is by considering the potential consequences of each.

Six Thinking Hats helps you evaluate the consequences of a decision by looking at the alternatives from six different perspectives. Impact Analysis (member only) is a useful technique for brainstorming the unexpected' consequences that may arise from a decision.

Validation Determine if resources are adequate, if the solution matches your objectives, and if the decision is likely to work in the long term.

Starbursting helps you think about the questions you should ask to evaluate an alternative properly. To assess pros and cons of each option, use Force Field Analysis, or use the Plus-Minus-Interesting approach. Cost-Benefit Analysis looks at the financial feasibility of an alternative. Our Bite-Sized Training session on Project Evaluation and Financial Forecasting (member only) helps you evaluate each alternative using the most popular financial evaluation techniques.

Step 4: Choose the Best Alternative After you have evaluated the alternatives, the next step is to choose between them. The choice may be obvious. However, if it isn't, these tools will help:

Grid Analysis, also known as a decision matrix, is a key tool for this type of evaluation. It's invaluable because it helps you bring disparate factors into your decision-making process in a reliable and rigorous way. Use Paired Comparison Analysis to determine the relative importance of various factors. This helps you compare unlike factors, and decide which ones should carry the most weight in your decision.

Decision Trees are also useful in choosing between options. These help you lay out the different options open to you, and bring the likelihood of project success or failure into the decision making process.

Step 5: Check Your Decision With all of the effort and hard work that goes into evaluating alternatives, and deciding the best way forward, it's easy to forget to sense check' your decisions. This is where you look at the decision you're about to make dispassionately, to make sure that your process has been thorough, and to ensure that common errors haven't crept into the decision-making process. After all, we can all now see the catastrophic consequences that overconfidence, groupthink, and other decision-making errors have wrought on the world economy. The first part of this is an intuitive step, which involves quietly and methodically testing the assumptions and the decisions you've made against your own experience, and thoroughly reviewing and exploring any doubts you might have. A second part involves using a technique like Blindspot Analysis (member only) to review whether common decision-making problems like overconfidence, escalating commitment, or groupthink (member only) may have undermined the decision-making process. A third part involves using a technique like the Ladder of Inference (member only) to check through the logical structure of the decision with a view to ensuring that a well-founded and consistent decision emerges at the end of the decision-making process. Step 6: Communicate Your Decision, and Move to Action! Once you've made your decision, it's important to explain it to those affected by it, and involved in implementing it. Talk about why you chose the alternative you did. The more information you provide about risks and projected benefits, the more likely people are to support the decision. And with respect to implementation of your decision, our articles on Project Management and Change Management (member only) will help you get this implementation off to a good start!

DECISION MAKING AND THE ROLE OF ACCOUNTING

The nature of decisions and the decision-making process
Decisions have to be made by all individuals every day. Decision making arises because of the need to choose between alternatives. Careful consideration must be given to all information available at the time because of the long-term consequences a decision made now will have. There are four main steps in the decision-making process: (1) Identify each situation in which a decision is needed and determine the goals we wish to achieve. (2) Identify the relevant information needed to determine possible available alternatives. (3) Identify and obtain information needed to assess the consequences or outcomes of the alternatives. (4) Choose a course of action which will achieve the goals established in step 1.

The wide range of economic decisions made in the marketplace

Usually, decision making involves the use of scarce economic resources which are traded in the marketplace at a price. However, many factors apart from the monetary impact, such as personal taste, social factors, environmental factors, religious and/or moral factors, and government policy, must be considered. Economic decisions usually involve an inwards or outwards flow of money or monetary equivalents. Economic decisions are made in many different markets, be they retail, wholesale, the stock market, local or international. Hence, if decision makers are to make informed decisions then some knowledge of accounting measurement systems, concepts and standards is desirable.

The nature of accounting and its main functions

Accounting is a service activity. It uses words and symbols to communicate financial information useful for decision making. As a profession,accounting has evolved in response to societys need for economic information to help people make economic decisions. Accounting is often called the language of business. To be effective, the recipient must understand the message that

the sender intends to convey. You must learn the meaning of the words and symbols used by accountants. Many people with little knowledge of accounting must interpret accounting data. Accounting has been defined as the process of identifying, measuring, recording and communicating economic information to permit informed judgements and economic decisions. The primary purpose of accounting is to help persons make economic decisions. In our society resources must be allocated among and within all kinds of entities. Accounting information provides the basis for making decisions about resource allocation. To be useful, data must be identified, measured, recorded, classified, summarised and communicated to potential users. These are the critical elements of accounting. Accounting information is financial information about economic activities. All economic entities (e.g. businesses, government agencies, families, charitable entities) need such information because it is used for making economic decisions about those entities. An economic event of an entity is referred to as a transaction. Transactions are of two types: external and internal. Computers have had a significant impact on the accounting process and hence the recording process is much more efficient and reliable.

The potential users of accounting information

The ultimate objective of accounting is to provide information in reports which can be used by internal and external decision makers. The preparation of this information for users (decision makers) outside the entity is called financial accounting. Such users might be investors, or creditors of the entity. The preparation of information for use by decision makers inside the entity to plan and control operations is called management accounting. Inside users means management. Management uses the same financial statements as outside decision makers, plus internal reports and summaries prepared specifically for it. Accounting reports can be special-purpose reports to meet the needs of a specific user group, or general-purpose reports for the general use of external users.

Using information to make simple economic decisions

Economic decisions are made every day. Take the example from the text. A business opportunity is identified which will satisfy the ambitions of the

entrepreneur. Some research reveals that there is an opening for such a business. Factors considered in the planning stage are investment needs, financing, estimates of operating costs and how much to charge for services, finally culminating in the decision to proceed with the business. There is the establishment of implicit goals, the collection of information about the proposed business, and consideration of future consequences. As the business proceeds, accounting information is needed to monitor how well the business actually performs in comparison with the estimates, how and when to replace assets, and how income tax and goods and services tax (GST) will impact on the business.

The role of accounting information in the decision-making process

Financial information is needed before any economic decision is made. Financial accounting information focuses on actual events. For the purpose of decision making, the past is used as a guide to future estimates of the consequences of different alternatives. The accountant can help significantly in the areas of budgeting, investigating, interpreting and communicating results for use by both internal and external decision makers.