Management accounting is concerned with the provision of information to people within the organisation to help them make better decisions and improve the efficiency and effectiveness of existing operations. Decision-making is about the future and involves a choice between alternative courses of action, of which one choice may simply be the status quo. To reach a decision we must concentrate on relevant information about costs and revenue, rather than past data, unless these are used as a guide to future.
Any sunk costs are ignored as irrelevant. When making decision within existing capacity limits we are trying to insure that resources are used to the best advantage. The assumption is usually made that only variable costs need to be taken into account because, by defination, fixed costs will remain constant whatever action is taken. As said in the statement decisions are made on the basis of a number of factors. Some of these factors are the time factor, qualitative factor, judgemental factor and financial factor.
Some of the factors affecting the decision may not be expressed in monetary value and these are known as qualitative factor. For example, the cost of manufacturing a component internally may be more expensive than purchasing from an outside supplier. However the decision to purchase from an outsider supplier could result in the closing down of the company's facilities for manufacturing the component. The effect of such a decision might lead to redundancies and a decline in the employees' morale, which could affect future output.
The company will be totally dependent on its suppliers, if the suppliers are not able to meet the requirements then the goodwill of the company will be affected and it may lead to decline in future sales. It may not be possible to quantify in monetary terms the effect of decline in employee's morale or loss of customer goodwill, but the accountant in such circumstances should present the relevant quantifiable financial information and draw attention to those qualitative items that may have an impact on future profitability.
If possible the qualitative factor should be expressed in quantitative non-financial terms. For example, the increase in percentage of on time deliveries from a new production process, the reduction in customer waiting time for a decision to invest in additional cash dispensing machines and the reduction in the number of units of defective output delivered to customer arising from an investment in quality inspection are all examples of qualitative factors that can be expressed in non-financial numerical terms.
Sometimes the managers make decision keeping in mind the profit they will gain from that decision. The basic aim is to maximise the profit. For a better financial outcome they may take special pricing decisions related to pricing decisions outside the main market. Typically it involves one time order only or orders at price below the prevailing market price. If we take the previous example into consideration in which the managers has to decide whether he should buy the stuff or manufacture them, the wise decision for increasing the profit will be purchasing from supplier.
While taking the decision an accountant is aware of all the issues relating to a decision and ascertain full details of the changes that will result, and then proceed to select the relevant financial information to present to management. Judgemental factor of decision-making is used when objectives are clear but the outputs are easily measurable, the activity is not repetitive and the effects of interventions are unknown.
When these circumstances prevail, decision makers within the organisations need to make subjective judgements about the effect of intervention and output produced. Vickers (1965) referred to such judgemental as 'reality judgemental '. As can be seen, judgemental control depends on the knowledge of decision makers. This type of control maybe relevant to some activities within non-financial commercial organizations, like government agencies, schools etc.
For instance, an objective of a hospital may be unanimously agreed to be the provisions of god quality patient care. In these cases it is difficult to measure the output. Hence managers have to take great care while taking judgemental decisions about the outputs produced. Subjective judgements about the inputs required, output produced and the effects of intervention will continue to play the major role in such organisations.