Posted: May 25th, 2022

Accounting Information in Decision Making Process

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 of information that assists executives in fulfilling organizational objectives []a formal mechanism for gathering and communicating data for the ends of aiding and coordinating collective decisions in light of the overall goals or objectives of an organization.” (Macintosh, p.2)

Accountants are responsible for providing key information about company’s resources and financial health. 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 routes to compensate for the loss due to higher fuel prices.

Hence the role of financial and non-financial information presented by accountants has serious bearing on the decision making and thus we define accounting as “the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.” (Drury, p. 3)

Horngren, Sundem and Stratton (2002) explain that the primary objective of accounting information is to help in the decision making process because better knowledge of information gained from accounting tools leads to better strategic decisions. Accountants can thus influence decision making by providing valuable information so that management can take decisions which are in line with organization’s long-term objectives.

Emmanuel, Otley and Merchant (1990) claim that accounting information is primarily used to place controls where needed. In other words in order to plan effectively, an organization needs to see where more controls are needed. And hence they use accounting information to identify areas of trouble and place controls for better planning in future.

William J.B. Jr. argues that the role of accounting information is dependent on the availability of financial as well as non-accounting information and the weight that each set of information carries. For example if it appears that non-accounting information is more relevant to a certain plan or decision, then it will be used and accounting information may take a backseat. The proportion of accounting to non-accounting information determines the scope and magnitude of influence that such information can have on an organizational decision. (Qtd. Anderson (1978) p. 59)

The idea expressed by William Jr. is a vital one because many organizations seem to use financial information for cost controlling. Once a company feels that it is losing money in a certain area, it might decide to control costs in that area instead of using that information for making other decisions that can improve productivity and profitability.

This means that using variety of tools, accountants gather information which can guide the decision making process in an organization. However the way a company tries to use accounting information is unique to each organization. Some organizations would use the information to make better decisions with regard to all departments and areas. Some would only limit it to cost control decisions. But in every organization, it is immensely important to have trust between accountants and senior management because without trust, it wouldn’t be possible for management to completely depend on the information presented to them and similarly accountants may also fail to reveal the most accurate information.

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

Drury, C. (2000), Management & Cost Accounting, 5th edition, London: Thompson Business

Press

Anderson D. And Raun D. (1978) “Information Analysis in Management Accounting,” New

York: A Wiley/Hamilton Publication

Young, J.F. (1982), Decision-making for Small Business Management, 2nd edition, Florida,

Robert E. Krieger Publishing Company

Macintosh N.B. (1995), Management Accounting and Control Systems: An Organizational

and Behavioral Approach, 1st edition, Chichester: Wiley publications

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