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Role of Accounting Information in Decision Making Process
Accounting information plays an influential role in guiding decision making process in an organization. Our research shows that not all organizations would use accounting information in the same manner even though they might all utilize it for making better decisions. However some organizations might limit those decisions to the area of cost control while others would be comfortable using accounting information for making all kinds of strategic decisions from expansion, contraction to downsizing and technological overhaul.
Thus accounting information indeed has a significant place in the decision making process. However it all comes down to the level of trust that exists in a firm between accountants and senior management. The senior management must fully accept the information presented to them and also be able to rely on that in order for it to take it seriously and make decisions based on that information.
ROLE OF ACCOUNTING INFORMATION IN DECISION MAKING
Accounting information can have a significant bearing on decision making process. A decision requires choosing the right course of actions from among a list of possible options and alternatives. However this decision has to be guided by more than one thing such as accounting information, intuition, trends etc. The data and information available with accounting managers can be utilized to make important decisions such as expansion, downsizing, and recruitment and so on.
Management accounting plans an important role in guiding important decisions. It is defined as:
"[…] the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication...
Lack of information or faulty information can result in disastrous decisions which can lead to financial collapse as Young J. (1982) claims that, "The road to bankruptcy is paved with poor decisions." (p.39) Hence management would regularly consult accountants to stay in touch with financial performance of the company and to make sure they have the resources to fund any new decisions they might make. The information provided by management accountants acts as a bridge between actions in the pipeline and a company's strategic vision. This information is gathered through financial as well as non-financial tools which are designed to help an organization meets its targets and implement changes in its strategy.
For example if an airline finds out that it is not doing well due to rising costs of fuel, it will have its accountants present all the data to validate this suspicion. Once the data is presented, accountants explain how the airline is doing by showing costs, expenses and revenues over a certain period of time. This allows the management to see how it is doing and where it is losing money. Once it is identified that fuel prices are affecting a company's profitability, it will design its future actions based on this knowledge. The airline may decide to cut costs on maintenance or reduce its workforce or expand into other areas or take longer…
References
Emmanuel, C., Otley, D. And Merchant, K. (1990), Accounting for Management Control,
2nd edition, London: Chapman & Hall publishing
Horngren, C.T. Sundem, G.L. Stratton, W.O. (2002), Introduction to Management
Accounting, 12th edition, Englewood Cliffs, NJ: Prentice-Hall International
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