Kwame Nkrumah University of

Science & Technology, Kumasi, Ghana

ACF 360
MANAGEMENT ACCOUNTING

LESSON 2
DECISION MAKING

AKUA PEPRAH –YEBOAH

 Background to decision making

Decision making pervades every aspect of an organization,

occurring at all levels and covering both the long and short term.
In most cases, a financial or quantitative analysis is required in
order that a rational decision will be made. It is the prime duty of
the management accountant to produce the relevant financial
information that is necessary to facilitate sound decision making.
Despite the reliance on the use of quantitative analysis for
decision making, ultimately, it is essential for managers to
consider other factors.

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 Background to decision making

Decision making is defined as…making choices between future,

uncertain alternatives.

It is important to note that all decision making relates to the

future and that a decision is a choice between alternatives in
pursuit of an objective.

Therefore, where no alternatives exist, no decision can be made

and nothing can be done new that will alter the past.

These fundamentals are important in determining which kind of

information management accountants present to management
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 DECISION MAKING PROCESS

The overall decision making process can be subdivided

into stages although in practice the division between
the stages may be blurred. The stages are:

Definition of objectives
Consideration of alternatives
Evaluation of alternatives in the light of objectives
Selection of the course of action

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 DEFINITION OF OBJECTIVES
The first stage of decision making is the explicit expression of the
organization. Usually, several objectives exists and it is essential
that these objectives compliment each other.

Research points to satisficing (acceptance of a satisfactory level

of achievement) as the usual approach adopted by organizations.
This is probably the acceptance of the practical difficulties of
information feedback, computation and forecasting in a typical
organization.

Wherever possible, the objectives should be quantified into an

objective function.
This enables the consideration of constraints that may limit the
ability of the organization to achieve the objectives.
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 CONSIDERATION OF ALTERNATIVES
The next stage is to outline the different alternative means of achieving the
objectives and making predictions about the outcome of each alternative.
There is the possibility that although the best choice will hopefully be made
from the selected set of alternatives, there exists some other alternative
which would better fulfil the organization’s objectives.
Attractive alternatives do not automatically submit themselves to the
decision process, they have to be continuously and actively sought out.
Therefore the organization needs to develop its data collection and analysis
capabilities in order to ensure that opportunity are not overlooked.
On occasion there may appear that only one option is available to the
organization, therefore an analysis is not necessary. However, there is
always the option to not do anything thus necessitating an evaluation of
both alternatives.
Ideally an exhaustive list of alternatives should be produced for evaluation,
however due to deficiencies and uncertainty, this is rarely the case.
Therefore the optimal decision is always optimal, given the parameters and
information available.
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 EVALUATION OF ALTERNATIVES
At this stage, the management accountant conducts a quantitative
comparison of the various alternatives to provide the decision maker with
the relevant and correctly specified financial basis for the ultimate decision.
To be successful, the management accountant must be totally familiar with
a range of concepts and techniques including the determinants of
economically relevant costs and revenues and a variety of quantitative
methods such as Cost-Volume-Profit analysis, linear programming and
resource allocation techniques.
Another critical consideration for decision making is risk and uncertainty.
Because all decision making is concerned with the future, uncertainty is
ever present and in general, it would be misleading to present information
for decision making purposes which ignore the possible consequences of
such matters as: competitors actions, inflation, imperfect forecasting,
interest and finance changes, new government legislation, possible
material/labour shortages, possible industrial disputes and all the factors
which contribute to uncertainty.

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 SELECTION OF THE COURSE OF ACTION
The process of selecting an alternative can either be Programmed or Non-
Programmed.
Programmed decision making: These are relatively structured decisions
within a clearly defined operational area. The decision rules are known and
generally there is a clear cut, single objective, Because of the nature of these
decisions they are the first to be incorporated into computer based
information systems because they can be made automatically, given normal
circumstances. For example, a decision to replenish stock at a particular re-
order level.
Non-Programmed: These are decisions for which decision rules and
procedures cannot or have not yet been devised. Generally, they involve non
repetitive circumstances and may include a number of external and internal
factors many of which have a substantial degree of uncertainty. As a
consequence, there is the necessity to supply a variety of information tailored
to the particular situation rather than the narrower, restricted range of
information suitable for programmed decisions.
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 SCOPE OF DECISION MAKING COMPONENT OF THE
COURSE

The first part of the course will focus on decision

making and will cover three main areas:

Cost Volume Profit analysis

Relevant costing and
Decision making with risks and uncertainty

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THANK YOU

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