Management accounting is a function with many different objectives. In a previous post, the importance of management accounting to a company was shown. Now, a more specific view on decision making is taken. Within their environment, companies are required to make decisions on a continuous base. Many of these require some quantitative fundament and this is exactly where management accounting for decision making comes in. Let’s have a look at some areas:
Relevant cost analysis
Relevant cost analysis is a short term orientated decision making technique that considers only incremental and avoidable costs of implementing a business decision. It does exclude costs that are not changed by the decision. A typical area of use is short time pricing decisions. This method suggests selling a product when its variable costs are covered whilst fixed costs are neglected.
Product cost analyses like activity based costing
Determining costs of a product in order to define a long term selling price is a key part of management accounting for decision making. Overhead costs are normally allocated to products on a certain basis, like machine hours. Activity based costing goes a step further to determine a product’s real costs. It defines activities and allocates costs to them. From there costs are assigned to only those products actually using the activities.
Make or buy analysis – an accounting for decision making classic
A make or buy decision is the process of figuring out whether to manufacture a product in-house or buy it from an external supplier. Two important factors are considered: Cost and availability. The cost of internal production is compared to the buy-in price including any transactional cost like quality control. Availability of internal production and external suppliers willing to enter an arrangement is the base criteria for a decision.
The continuous comparison between actual results and plans are a key task of management accounting for decision making. As a result of this work, decision makers and leaders receive a clear view of their current financial success and can take corrective action where needed. See also the article about key benefits of variance analysis for more information on this topic.
Comparing board expectations with a bottom up created budget shows possible gaps. These gaps can sometimes be closed by carefully reviewing the budget for a buffer. However, sometimes it also provides a base for a further discussion about additionally required initiatives in order to reach the top level goals.
Investing in resources to capitalise on them in the future is essential for a business. Management accountants support this process by calculating relevant investment figures like possible returns on investment, highest purchasing prices and so on. Based on this information management can then decide whether or not an investment should be made.
Companies are confronted with many decisions to make. Accounting for decision making is a valuable task ensuring the successful development of a company by providing solid financial information upon which management can reach decisions.