Chapter One

Management Accounting

Course Content
1.

Introduction
Accounting

2.

Functions of Management

3.
Significance of Management Accounting
Accounting

4.

Limitations of Management

5.

Difference Between Mgt., Fin., Cost Acc.

6.

Mgt. Decision Making process

7.

Features of Management Accounting.

Course Outcomes

This chapter deals with the theoretical framework of management accounting. After reading and
understanding the contents of this chapter, working through all the worked examples and
Practice Questions, you should be able to:
To explain the concept of management accounting.
Identify the characteristics of management accounting.
Explain basic management decision-making processes.
Explain the significance of management accounting to organizations.
Identity the limitations of management accounting.
Explain the difference between management accounting.

Identify and explain the appropriate costs suitable for decision-making

1.0:

Introduction

The nascence of accounting systems in business set-ups has always provided useful information
for the decision-making needs of investors, lenders, owners, managers, shareholders and others
both inside and outside the company. However, the needs of internal users and external users
often differ, apparently, the various forms of accounting (financial, cost and management
accounting) tends to satisfy the needs of various users. Financial accounting tends to collect
economic data, which is classified, summarized and communicated to interested parties to aid
them in making informed decisions within a certain period of time. Information derived from
financial accounting attempts to communicate vital information for both internal and external
users, however, management accounting and cost accounting provides vital and timely
information for internal users in their quest to decision making purposes.
Overtime, quantifying managerial decisions in contemporary corporate governance has become a
necessary phenomenon among corporate managers giving rise to most of these managers
requiring the use of management accountants in their various organizations. The practice of
management accounting enables practitioners to equip themselves with apt managerial skills to
make informed qualitative and quantitative decisions. The causal relationship between the
functional framework and translations decision making processes into achieving the strategic and
operational plans of organizations always requires the application of accounting/costing
techniques.
Past organizational practices makes it rare to find organizations creating a separate division for
management accountants, however, recent revolution and growing functions in contemporary
governance of organizations has necessitated the adaptation and application of accounting and
costing techniques in managerial decision-making. This paradigm shift from the traditional
application of absolute accounting tools in just providing information using heuristic activities
has culminated into a general acceptance of management accounting framework to the latter.
1.1 Evolution of Accounting Systems and Information
Accounting has always been the language of businesses and, by extension, the language of all
financial transactions. In the same way that our senses are needed to translate information about
our surroundings into something understood by our brains, accountants are needed to translate

the complexities of finance into summary numbers that the public can understand. Consciously
and unconsciously, we all employ the principles of accounting in our daily activities. This
phenomenon metamorphosed into the postulation of the book-keeping framework apparently; the
emergence of book-keeping provided mechanisms to record all financial transactions of
businesses into ledgers through the application of doubled entry system. Improvement in the
business environment resulted in increase of the volume of transactions thereby requiring and
making the work of accounting inevitable in any business set-up. In their attempt to attract more
capital to expand their operations, companies began to publish their financials in the form of a
balance sheet, income statement and cash flow statement making the accounting profession more
relevant in the business environment. This also led to the formation of various accounting bodies
such as the institute of chartered accountants (ICAEW), Certified public accountants (CPA),
Institute of chartered accountants Ghana (ICAG) et al. to regulate accounting practices. These
accounting bodies steadily developed only one facet of the accounting discipline thus financial
accounting (which only focused on historical events) due to the nature of running businesses.
Overtime, the insurgence of agency theory and corporate competition in the business
environment requires that managers do not only report on the performance of the business but
also provide both qualitative and quantitative information for decision-making. The sudden
change in the business environment resulted in the postulation of management accounting
theories purposely to detailed cost analysis for planning and controlling the operations of the
business.
The American Accounting Association defines accounting as the process of identifying,
measuring and communicating economic information to permit informed judgments and
decisions by users of information and is decoupled into financial accounting, cost accounting and
management accounting. These are illustrated on the diagram below.
Exhibit 1.1

Facets of accounting
Accounting

Financial Accounting

Cost Accounting

Management Accounting

Unlike financial accounting, management accounting is future oriented with much emphasis on
the detailed analysis and application of costing techniques. The three accounting branches
provides reports to the stakeholders of organizations however, the magnitude of the information
depends on the parties to whom it is meant. Cost accounting information is often used by
management to provide management accounting information for planning and control and
basically a platform for providing information to internal users of accounting. Financial
accounting provides only financial information to both internal and external users.
An organizations accounting information is provided by an accounting information system
(AIS). The AIS is a system used to collect, store and process financial and accounting data that is
used by managers for decision-makers. It combines traditional accounting practices such as the
Generally Accepted Accounting Principles (GAAP) with modern information technology
resources. An organizations AIS is composed of six elements thus:
1. People - the system users.
2. Procedure and Instructions - methods for retrieving and processing data.
3. Data - information pertinent to the organization's business practices.
4. Software - computer programs used to process data.
5. Information Technology Infrastructure - hardware used to operate the system.
6. Internal Controls - security measures to protect sensitive data.
Over the past years, AIS was predominantly a manual related system but has now been
developed into electronic system due to the revolution of businesses practices. Traditionally, IAS
was simply a transaction processing system that captures financial transactions such as sales,
expenses, total cost, total cost of assets expressed in monetary terms (in terms of cedis). In
essence, an organizations accounting information systems provides financial/monetary
information (income statement, statement of financial position, gross profit margin etc.), nonmonetary quantitative information such as sales returns, percentage of defects, number of
customer complaints, warranty claims, budgeted hours etc. and qualitative information/nonfinancial information such as customer satisfaction, employee satisfaction, product or service
quality. Financial accounting information only covers the financial information provided by the
AIS whereas management accounting information encompasses financial information and also

provides quantitative and qualitative information. A typical accounting information system is

illustrated in exhibit 1.2 below.
Exhibit 1.2

Accounting information system

Human and logistical composition

People

Procedure

Data

Software

IT

Internal control

Information provided

Traditional Accounting
Information

1.3

Balance sheet
Income statement
Cash flow statement
Gross profit margin
Operating expenses

Non-monetary
quantitative data

Sales returns
Percentage of defects
Number of customers
complaints
Warranty claims
Units in inventory
Budgeted hours

Qualitative information/
Non-financial information

Customer
satisfaction
Employee
satisfaction
Product or service
quality

Users of Financial information and their expectations

Many people and organizations have interest in knowing the operations and activities of
businesses and such people are the users of accounting information provided by a specific
organization. Such users have diverse motives and expectation for using the accounting
information of organizations. The main purpose of accounting information is to provide the
necessary information required by users to meet their expectation apparently; it is prudent

therefore to consider the needs of internal users and external users and the use to which they put
the information. Users of accounting information can be broadly divided into internal and
external users.
1.3.1 Internal users
These users comprises of individual employees, departments, teams, groups, top management,
board of directors as well as any other segment of that operates and requires vital information
within the organization. For instance managers (marketing, finance, production, HR, IT and
supervisors etc.) in every sector of an organization plan organize and control the activities of the
business will intend require information such as adequacy of cash, cost of producing a cost,
profitable production lines, employee motivation to run the organization. Management and
board of directors are the main parties to internal with their main interest connected to that of the
shareholders because they act as agents of the shareholders to oversee the companys operations
in order to create value and wealth for the company. They require accounting information to
analyze revenues and expenses which will provide information that is useful when plans are
formulated and decisions made. This often includes nonmonetary data (direct labor hours, units
to breakeven, etc.). This information is normally provided in cost reports, budgets, financial
statements and other internal documents.
1.3.2 External users
External users include shareholders, lenders, consumer groups, external auditors, customers,
financial institutions and government agencies. These users are those described to only own and
prospective owners of interest in a particular organization but do not operate within the
organization. It must however be noted that, the description to external users could often be
subjective because in some cases of sole proprietorship, the owner(s) is the manager and at the
same time the shareholder(s). External users often ask some of the following questions: is the
company earning satisfactory income? How does the company compare in size and profitability
with competitors? Will the company be able to settle their immediate and long-term obligations?
The information needs and questions of external users vary considerably. For instance Ghana
Revenue Authority (GRA) will be interested in knowing whether the company has complied
with all the tax laws whereas the supplier will only be interested in the liquidity of the company.
The following users are discussed thoroughly.

Shareholders & Potential Shareholders: Shareholders are the owners of organizations with a
primary motive of ensuring the general growth, profitability, liquidity and the capability of the
organization to operate into the foreseeable future. This group includes the investor and the
public at large as well as stock brokers and commentators who advise them. The shareholders
should be informed of the manner in which management has used their funds, which has been
invested in the business. The type of accounting information required by this users are gross
profit, cash flow, net income, assets and liabilities, earnings per share, etc. While this
information is primarily monetary, it may also include nonmonetary information (units in
inventory). This information is normally provided annual reports, financial statements and other
available documents.
Government Agencies: Government agencies often use accounting information to meet their
diverse needs. It must be noted that, the type of accounting information required by government
agencies varies from one agency to the other. For instance, the Ghana Revenue Authority will be
interested in the profitability of companies in order to determine and collect the appropriate tax
accruing to the state. Other agencies such as statistical, environmental, etc. may also solicit
different interest from accounting information provided by organizations. This information is
normally provided in the financial statements, tax returns and other reports.
Prospective employees: Employees and their trade union representatives use accounting
information to assess the potential of the business. Employees needs to make sure the company
can offer them safe employment and promotion through growth over a period of time. Their
main interest is the profits reported by company to reward their efforts, the liquidity of the
company settle their immediate salaries and the solvency of the company to mitigate any
misfortune in the future etc. This information is also provided in the financial statements, annual
reports; value added statements and other documents.
Lenders and Financial Institutions: These groups include financial institutions such as banks,
creditors, suppliers and non-banking institutions such as insurance companies which provide
funds to businesses in the long and short term periods. Their main interests ranges from the
profitability, liquidity, solvency and the general growth of the business they extend funds to in
the form of loans and goods.

The business contact Group: This group includes customers, competitors and others of the
business may use accounting data to assess the validity of the company if a long term contract is
to be placed. Competitors may also use the accounts for the purpose of comparison.
The general public: From time to time, the public may have an interest in the company e.g.
members of a local community where the company operates or environmental groups.
Normally, external users would receive limited financial information published by a company,
such as general-purpose financial statements. These statements have just enough information to
inform external users of the companys economic position. General-purpose statements are in
the area of financial accounting, which is the type of accounting aimed at supplying information
to users not directly affiliated with the target company.
1.4.0 Management functions and Accounting Information
Without accounting information, it will be a herculean task for managers to perform their
organizational functions. This information is required and applied at the key management
functions of planning, organizing, leading and controlling. In fact, the main segment of
accounting which provides information for decision decision-making within the organization is
management accounting.
According to the Chartered Institute of Management Accountants (CIMA), Management
accounting is "the process of identification, measurement, accumulation, analysis, preparation,
interpretation and communication of information used by management to plan, evaluate and
control within an entity and to assure appropriate use of and accountability for its Resource
(economics) resources. Management accounting also comprises the preparation of financial
reports for non-management groups such as shareholders, creditors, regulatory agencies and
tax authorities".
A study of the above definition clearly shows that management accounting or managerial
accounting is concerned with the provisions and use of accounting information by managers
within organizations, to provide them with the basis to make informed business decisions that
will allow them to be better equipped in their management and control functions. In contrast to
financial accountancy information, management accounting information is designed and

intended for use by managers within the organization, instead of being intended for use by
shareholders, creditors, and public regulators; usually confidential and used by management,
instead of publicly reported; forward-looking, instead of historical; computed by reference to the
needs of managers, often using management information systems, instead of by reference to
general financial accounting standards.
Accounting information is under normal circumstances applied in the decision-making processes
by managers in their daily managerial functions. This information is useful and applied at the
various stages of organizational management functions; thus, planning, organizing, direction and
control stages of management. It will be expedient to study role accounting information paly at
the various stages of management functions of organizations:
Planning Stage of Management. This stage of management involves the process of developing
the mission and objectives of the business and the necessary strategies to accomplish them. At
this stage, the organization decides on what to do, how to do it who to do it and when to do
it. For instance, one of the main objectives of the Institute of Professional Studies (IPS) is to
offer courses leading to the award of degrees, diplomas and certificates. To formulate the
necessary strategies to accomplish this objective, financial information such as the preparation of
budget will be needed. The budget will then quantify this decision by determining the amount
needed to mount these programs. It will further determine the capital expenditure required to be
incurred and the projected income to be derived from the organization of these programs.
Organizing Stage of Management. The next stage after planning is to establish the appropriate
structures required to accomplish the developed objectives. Organizing involves the
establishment of internal structures with the main focus being the establishment of divisions,
coordination, and control of task and the flow of information within the organization. It is in line
with these functions that managers delegate authority to a specific department. In the case of IPS,
the organizing functions will involve the establishment of faculties, departments and units. At
this stage, financial information such as costing methods to determine the appropriate salaries
and allowances, to motivate staffs in the various faculties and departments. The financial
information needed at this stage is akin to the information required for directing (motivational)
stage of the management functions.

Controlling Stage of Management. This process involves the establishment of performance

standards based on the firm`s objectives by measuring and comparing actual performance with
planned objectives. At this stage budgetary control is needed as financial information to track the
financial performance of the organization.
In a nutshell, the role of management accounting information is to apply accounting techniques
in the management functions of organizations.

Management Functions

Planning

Organizing

Leading/directing

Controlling

Accounting
Information
required:

1.4.1 Features of Management Accounting.

The Following are the characteristic of management accounting
Futuristic approach; its more futuristic in nature. It answers the question what should be?
rather than what has happened? Plans are made for the future based on past experience.
Different tools like standard costing, budgetary controls etc. are used to give direct for the future.
A service function; the aim of management accounting is to provide management with the
necessary information. On the bases of the information provide by management accounting,
management determine plans and policies more intellectually both financially and nonfinancially are desired for the best purpose.

Selective in nature. Management accounting is concerned with selection of the best and the
most profitable alternative after analyzing thoroughly various alternatives, therefore management
accountants must be intelligent, innovative, and imaginative in the selection of alternatives.
Managerial accounting is extended beyond double entry accounting, any relevant data very
detailed pertaining to subunits of the business and standard is relevant to decision making.
Management accounting verification process has no independent audits.
1.4.2 The Role of Management Accountants
The Role of management accountants are:
i.

Management Support. Management Accountants support executive management

decisions by evaluating the company's investment decisions. Businesses choose
investments based on the future profitability of cash flows; these calculations are
prepared by the management accountant

and submitted to executive management.

Most investment decisions require large amounts of financial information so the best
decisions can be made. Most businesses accept investments with low risk and moderate
reward although a high-risk/high-reward investment may be considered.
ii.

Internal Controls. This role enables the management accountant to create and
implement the internal controls needed to protect a company's financial information.
Internal controls protect cash, fixed assets and the integrity of financial statements.

iii.

Financial Reporting. Management accountants work to ensures that companies have a

good understanding of their financial health, giving executive management the ability to
make informed decisions. Financial reporting also allows external stakeholders to review
the company based on financial information and deciding whether to invest money into
the company. Financial reporting leads to other business roles for management
accountants, including budgeting, forecasting and internal controls.

iv.

Preparation of Budgets. Management accountants prepare budgets for each department

and then add them together to create one companywide budget. Management Accountant
manages the budget and track expenses that are higher than the budgeted expense. Most
budgets are created on an annual basis; capital improvements are also included in the
budgeting process so businesses can plan on improving current facilities.

v.

Forecasting. Management accountants conduct a market analysis and determine where

the industry is in the business cycle. If the current industry is in a declining stage, then
management accountants will help produce information for executive managers to use
when finding new consumer markets. Forecasting also includes reviewing current
competitors and finding ways to take market share from those companies through
improved products and services.

1.4.3 Significance of Management Accounting

Management accounting aids management in several spectrum of decision-making in their
various organizations. The importance of management account has been enumerated and
explained below:
Providing information for decision-making and planning. Planning is an essential tool in every
manufacturing firm. An entity needs to plan the location of it plants, introduction of new product
lines and the strategies required to maintain the assets of the firm. Management accounting
therefore assists the firm to make cost- benefit analysis of each alternative and the best decision
taken. Management accounting would enable management to budget for the cost of establishing
a new plant and alternatives evaluated for the acquisition of the best plant. The budgets will also
include targets to be met in the manufacture of goods. Targets include production volume, sales
volume, profit, expenses, pilferage, losses and employee training. All these data will be
collected, analyzed and summarized for management use. Management accounting data on daily
sales report is therefore crucial in making decisions process.
Motivation of managers through budgeting. Management accounting through budgeting
motivates managers to direct their efforts toward achieving the organizational goals.
Organizations are able to achieve their goals if employees are well motivated. In a manufacturing
firm a budget indicates how resources are to be allocated and what activities are to be
emphasized. A well-motivated staff enhances performance and productivity. Employee
empowerment is the concept of encouraging and authorizing workers to take the initiative (for
instance, given incentives to develop new products) to improve operations, reduce costs, and
improve product quality and customer service.

Assisting managers in directing and controlling operational activities. Operational activities form
an integral part of the manufacturing process. The control function enables the operational
managers ensure that activities conform to set standards. Details reports of various kinds
prepared by the management accountant provide feedback as whether the set standards are being
met.
Controlling is very essential in inventory control, total quality management and benchmarking in
manufacturing firms. A performance report compares budgeted to actual results. In a
manufacturing firm performance reports will indicate where some parts of production activities
are not proceeding as planned so that corrective measures are instituted to reduce losses.
Measuring the performance of activities within the organization. Management accounting assists
management in measuring the performance of employees in executing organizational objectives.
Performance measurement is used as a basis for rewarding performance through positive
feedback, promotions and pay rise. Performance measure may be productivity per worker on
which compensation may be based. Management accounting also provides data about the
performance of the various sub units product lines, geographical units and divisions. These
measures are important in determining whether a particular process or subunit (e.g. Quality
Control Unit) in the firm is an economic viable unit.
Assessing the organizations competitive position. Management accounting plays a crucial role
in ensuring that an organization competes effectively and survives the competition in industries.
The financial strength of the organization must be prominent on the agenda of management.
Innovative measures must be instituted and operations streamlined. Competitive prices must be
adopted by the organization. Data on other competing products must be collected and carefully
analyzed before particular method of production (labour or machines), make or buy decisions,
inventory management and outsourcing. Management accounting provides the necessary data for
these very essential decisions to be made.

1.1.1 Difference between Management Accounting and Financial Accounting

Management accounting and financial accounting information provides accounting information
to interested parties however, each of these two courses provides specific accounting information
to its users and could differ from each other. The information provided by both course will
depend on the distinctive feature of the course. The following analysis distinguishes management
accounting information from financial accounting information:
Nature of information provided. Management accounting information is concerned with
providing future, current as well as past information to aid management in their decision making
processes whereas financial accounting information reports only historical transactions (thus
what has happened in the past in an organization).
Legislative requirement. Financial accounting information is a legal requirement by companies
to prepare financial statement to its shareholders and the general public however, management
accounting information is not a mandatory requirement by law to companies to prepare and
present to their respective shareholders.
Motive for preparation. Financial accounting information is normally prepared for all
stakeholders (shareholders, management, financial institutions, creditors etc.) whereas
management accounting is prepared for the consumption of only the management of the
company. In essence, management accounting information is prepared for internal use whereas
financial accounting information provides information for external parties of the company.
Frequency of record presentation. A detail set of financial accounting is published annually
and less detailed information is published semi-annually (report frequency), consequently
management accounting information reports on various activities and may be prepared at daily,
weekly, or monthly intervals.

Decision making. Management accounting relates to provision of appropriate information for

decision making, planning control and performance evaluation whereas financial accounting
information is mainly concerns with profits.
Type of statements prepared. Management accounting information provides managers with
budgets, monthly reports, detailed analysis of cost and pricing, investment decisions such as shut
down, appropriation of limited resource etc., however, financial accounting information provides
its users with the profit and loss account, balance sheet, income surplus and cash flow statement
which are all historical data.
1.1.2 Difference between Management Accounting and Cost Accounting
Information provided: Management accounting relates to provision of appropriate information
for decision making, planning control and performance evaluation whereas cost accounting is
concerned with cost accumulation for inventory valuation to meet the requirement of external
reporting and internal profit measurement.
Scope of information: The scope of management accounting is much wider; apparently, it
includes various system and methods along with cost accounting however, the scope of cost
accounting is limited to cost related facts only. In fact it is just a part of management accounting
Installation: Management accounting cannot be installed without a proper cost accounting
system. Cost accounting system can be installed without management accounting.

1.2.5 Relationship between Management Accountants and other Line Managers

Managers in all the functional areas of an organization require financial information to make
informed and effective decisions in their respective departments. These functional departments
include marketing, production, finance, human resource and information technology. Although,
these functional areas performs different tasks but may require management accounting
information to aid them in their respective decision making processes. It must be noted that
whereas other functional areas rely on accounting information to make decisions, managerial
accountants also rely on information provided by marketing, operations/production, human
resources and finance.

In the case of marketing managers, they plan, initiate and identify the necessary mechanisms
required to meet, satisfy and retain the companys customers. Marketing managers are
responsible for planning and executing the conceptions, pricing, promotion, and distribution of
ideas, goods, services, organizations, and events to create and maintain relationships that satisfy
individual and organizational objectives (Boone & Kurts 1998, 9). In order to effectively
perform their duties in relation to establishing a reasonable selling of the products among many
others, marketing managers may require management accounting information to execute these
tasks. For instance, if they want to determine sales commission to be paid to sales
representatives, the marketing manager must know the company income and this can be derived
from management accounting information. In the same vein, information also flows from the
marketing department of a company to the accounting department. For example, the marketing
department will provide sales forecasts and estimates to managerial accountants for purposes of
budgeting.
The production or operational manager is responsible producing the companys products or
providing of services if the company operates in the service industry to its customers. In their
quest to also achieve this objective, they may need accounting information to make planning
decisions affecting how and when product and services are produced and provided. For instance,
they need to know the amount available cost of labor when making decisions to schedule
overtime to complete a production run.
Finance managers on the other hand, are responsible for managing the financial resources of the
organization by deciding on how to raise capital as well as where and when it (capital) is
invested. They are also concerned with making investment decisions such the purchase or leasing
of real assets (plants, equipments etc.). Finance managers needs accounting information like the
budget to determine whether the company has made any provision for acquisition of investment
properties among many others.
Human resource managers are managers who supervise, motivate and evaluate other
employees with the primary aim of effectively utilizing human resources to help the organization
achieve its goals. More specifically, human resource managers support other functions and
managers by recruiting and staffing, designing compensation and benefit packages, ensuring
safety and overall health of personnel, and providing training and development opportunities for

employees. These decisions require inputs from all other functional areas. For instance, if the
human resource manager wants to train employees to use new equipment, they may require an
analysis of the cost and benefits of the new program.
In a nutshell, the role of managers in organizations are inter-related with each other falling on the
other to perform their specific tasks however, almost all of them requires input from
management accountants to aid them in making informed decision.
1.3.0 Introduction to Decision Making
Effective decision making is critical in todays business environment such that, the viability of a
companys operations largely depends on the effective decisions made by management. In fact,
decision making is the ultimate responsibility of a companys management and such decisions
are aimed at identifying problems and providing the appropriate solutions to such problems in
the various functional areas thus production, marketing, finance, human resource and
information technology departments in the company. Although the problems and questions
facing these departmental managers may differ but the decision making process that they
follow is remarkably deemed uniform. For instance, in a well-structured company, the decision
making processes involved in acquiring motor vehicles will be the same as the decision to
acquire a computer just that such decisions may require different variables or factor to be
considered. Decision to acquire a motor vehicle may require variables such as cost, features,
color, and financing options to be considered whiles the decision to produce goods may require
different factors to be considered in decision.
Decision making is the process of identifying different courses of actions and selecting one
appropriate to a given situation. In fact, all decisions require the usage of good judgment
therefore; it is deemed that the quality of decisions depends on the quality of judgment.
Judgment in this context refers to the cognitive aspect of decision making process. Cognitively
it is required that decisions are made based on logical and critical thinking rather than just
making decisions on the spur of the moment.

1.4.1 Decision Making roles of Managers

The basic role of every manager is to plan and decide on the operational and controlling
activities of their respective organizations. It must be noted that at each stage of this function,
they are expected to make informed decisions to achieve the organizational objectives.
At the planning stage, both short term (operational) and long term (strategic) objectives and
goals of the organization are developed coupled with the identification of the needed resources to
achieve them. Operational planning involves the development of short term objectives and
goals (typically, those to be achieved in less than one year. Examples of operational planning for
the Institute of professional studies (IPS) include planning the markers, lecturers and other
teaching stuffs required for each program for the next academic year. Operational planning also
involves the determination of short term performance goals and objectives including meeting
customers service expectations, quotas, sales quotas, time budgets and so on. Strategic
planning on the other hand, addresses long term questions of how an organization positions
and distinguishes itself from competitors. For example IPSs strategy for training students in
both professional and academic courses is unique and different from all the universities in
Ghana. Long term decisions about where to locate plants and other facilities, whether to invest in
new state-of-the-art production equipment, and whether to introduce new products or services
and enter new markets are strategic planning decisions. It also involves the determination of long
term performance and profitability measures such as market share, sales growth and stock
price.
Operating activities encompass what managers must do to run the business on a day-to-day
basis. Operating decisions in manufacturing companies include whether to accept special offers,
how many parts or other raw materials to buy (or whether to make the parts internally), whether
to sell a product or process it further, whether to schedule overtime, which product to produce
and what price to charge.
Controlling activities involve the motivation and monitoring of employees and the evaluation of
people and other resources used in the organizations operations. Control decisions include
questions of how to evaluate performance, what measures to use, and what type of incentives to
implement.

1.4.2 Managerial Decision-Making process

It is imperative for managements to outline and adopt the best decision-making process for their
respective organizations and it is from this background that Jackson and Sawyer (2001)
propounded a Decision Making Model as follows:
Step 1:
Definition of the Problem. When faced with a problem, the first step is to define it accurately.
Managers often act without clearly understanding of the real problem. As a matter of fact, many
bad decisions are made simply because the decision maker is trying to solve the wrong problem.
For example, a company experiencing a reduction in sales might erroneously define the problem
as low sales volume when the real problem is poor quality of the product sold. Problem
definition requires the cooperation of managers in all functional areas of an organization.
Another example of this stage of decision making is whether a company should continue using
an old vehicle or acquire a new one. A manager may decide to continue using the old vehicle by
considering the higher amount required to purchase a new one without considering the cost
incurred when the company continues to use the old car.
Step 2:
Identification of Objectives. The second step in the decision-making process is to identify the
objectives in finding a solution to the real problem. Objectives may be quantitative (to buy at the
best price or to increase net income), qualitative (to buy the highest quality component or to
increase customer satisfaction) or combination of the two. In the case of the manager caught
between deciding on whether to acquire a new vehicle or continue using the old one, it will be
expedient at this level to critically assess the cost of using the old vehicle and the cost of
replacing it. A replacement decision is therefore required by the manager to make this informed
decision.
Step 3:

Identification and Analysis of Available Options. The third step in decision-making process is
to identify the options available to achieve the stated objective and the need to analyze those
options. This step requires the consideration of relevant variables affecting the problem and
alternative courses of action. Most decisions require the decision maker to consider more than
one option and multiple variables. In particular, the company should consider one or more of the
following courses of actions:
i)

Developing new products for sales in existing markets;

ii)

Developing new products for new markets;

iii)

Developing new markets for existing products.

It must be noted that the variables for analysis should include both quantitative and qualitative
factors. The main focus here is to identify the variables that are relevant to a particular decision.
Relevant factors must differ between alternatives. In deciding between automobiles, if they all
have the same options at the same cost (air conditioning, AM/FM stereos, atc.) then those
options are not relevant to the decision.
Step 4: Selection of the Best Option. The forth step is to select the best option. However, the
model is completed by implementation, monitoring and periodic evaluation of the process.
1.4.3 Relevant cost in decision-making
The concept of relevance is eminent at the identification and analysis of available options in
the decision-making process. This stage is perhaps the most crucial and testing moment in the
sense that it considers the factors that a decision maker determines as relevant. In fact, relevance
factors are those that affect a particular decision. Therefore, they must be factors that differ
between alternatives. For instance, if the CEO of a company is to decide between computers and
they all have the same features (Pentium 4, webcam, internet access) at the same price, then
those features are not relevant for the decision, however if the cost of those features vary, then
the cost of the features is relevant because choosing one of the alternatives could be at the
expense of another. A relevant cost is therefore a cost that is incurred as a direct consequence of
a decision, thus only
costs that will differ under some or all of the available opportunities should be considered. For
instance, if a company is currently producing 1,000 units of goods for GH10,000 and has the

option of increasing their output from 1,000 units to 1,500 for GH15,000, then the relevant cost
of producing 1,500 units is the additional GH5,000 incurred. Another way to view relevant
costs is to identify those costs that are avoidable or can be eliminated by choosing one alternative
over another. It must also be noted that sunk costs (costs that have already been incurred) are not
relevant for decision making because they cannot be avoided. For instance, in your decision to
trade in your old vehicle, the amount that you paid for it may appear to be important. However,
because that cost is sunk, it cannot be avoided, is not relevant, and should not be considered in
your decision.
As you can deduce meaning from the above, although decision making managers requires
concise understanding of the cost component relevant for decision making. Other decision
making costs such as opportunity cost, discretionary cost, incremental cost to give relevance to
decision making.
Differential Cost: Differential costs are the differences in costs between two alternative courses
of action. If option A will cost GH400 and option B GH480, the differential cost is GH60,
with option B being more expensive.
Incremental Costs: These are relevant costs which are simply the additional costs incurred as a
result of a decision taking.
Opportunity Cost: An opportunity cost is the benefit forgone by choosing one opportunity
instead of the next best alternative and are relevant for decision making. Assuming a company
owns a building which has been fully depreciated in the books of accounts, yet it has a rental
value of GH10,000 per annum. Now if the company is considering the use of this building for a
special project, a charge in lieu of rent of GH10,000 (opportunity cost) should be charged.
Replacement Cost: This is a cost incurred to replace an existing asset. In simple words,
replacement cost is the current market cost of replacing an asset.
Conversion Cost: This term is used to denote the sum of direct Labor and overhead costs in the
production of a product. It is the total cost of converting a raw material into finished product.
Illustration:

As a production manager of a manufacturing company, you have become aware of a new

machine that can reduce the cost of making a product by 30 percent. However, when you
approach your boss about buying the new equipment, he says you cant buy it until the old
equipment is fully depreciated in two years. Is the depreciation on the old machine a relevant
cost?
Answer: Depreciation on the old machine is sunk and therefore is not relevant.

1.5.0 Demerits of Management accounting:

Lack of thorough knowledge of disciplines: Management accountants require a thorough
knowledge of various disciplines such as statistics, psychology, sociology, economics,
accountancy, auditing etc. This is sometimes difficult to get such management accountants.
In practical life, management accounting is used in formulating strategies, enhancing optimal
use of resources and preparing budget statements but still it is not made to influence the
organization like bringing efficiency through its tools.
It is considered more as a method of management control through scrutiny and surveillance.
This limits the scope of management accounting.
Affected by human elements: since the users of management accounting information is a
human being personal biasness of human being in decision making and its execution is always
present.
Review Questions:
Question 1:
Accounting information systems generates both monetary and nonmonetary accounting
information. List three examples of each.
Question 2:

Is information produced by an accounting information system all quantitative? Why or why not?
Give examples.
Question 3:
Define quantitative and qualitative information and cite examples of each.
Question 4:
When buying a new car, give examples of quantitative and qualitative information you may
require. Will a car purchase decision include both types of information?
Question 5:
List the most common internal and external users of accounting information they might need.
Question 6:
Discuss how a financial report for an internal user might differ from a financial report prepared
for an external user.
Question 7:
Define strategic and operational planning.
Question 8:
How has the role of the managerial accountant changed over time? What do managerial
accountants do?
Question 9:
What type of accounting information do marking mangers, operations managers, finance
managers and human resource managers need to make better decisions?
Question 10: Applications of concepts
You are faced with the decision of choosing a new motor vehicle. You have narrowed your
option to four types of motor vehicles that fit your needs.

Price:
Options

Vehicle 1

Vehicle 2

GH8,000

GH12,000

Radio GH250

GH15,000

Vehicle 4
GH16,000

CDPlayerGH500

CD/CassetteGH750

GH1,200

GH1,250

GH1,200

Automatic Transmission GH1,000

GH1,200

GH1,250

GH1,500

Power Package

GH 850

GH1,250

GH500

Air

None

None

Cassette, GH350

Vehicle 3

Required:
1. Define as best you can the decision problem that you face in choosing the best motor
vehicle for you.
2. What would be your objectives in choosing a vehicle? Separate the objective into
qualitative and quantitative areas. In your specific situation, what would be your most
important objective and why?
3. Discuss what you consider to be the available options, in your decision to choose a new
vehicle. Discuss all relevant quantitative and qualitative variables affecting these options.
4. Which of the four vehicles is the best quantitative choice? Why?
5. List and discuss qualitative factors that may cause you or any other decision maker to
choose a vehicle that is not the best quantitative choice?
Question 11:
Mr. Kwabenya, a bachelor of administration in IPS, has to decide which course to enroll in
during vacation. A professional course he wants to pursue is being offered at a cost of GH800
plus examination fees of GH20 per level (25 levels total). His other choice is a writing
workshop with tuition of GH950. In addition to selecting a course, he needs a place to stay
during the vacation. Although he already paid GH500 for a dormitory room, Mr. Kwabenya has
decided he can no longer live on campus. There are two rooms available: a private residence that
would cost him GH900 and a semiprivate room that would cost GH600. He could sublet his
dormitory but feels he should keep it empty in case he changes his mind and returns to campus in
the next semester.

Required:
1. What other costs should he consider in making his decision?
2. What are some of the qualitative factors he might want to consider before he makes his
decision and why?
3. Discuss all relevant variables pertaining to this decision.
4. If he has a fixed amount of 2,000 to live on during the summer, how would this fact
affect his decision.