Usefulness and limitations of accounting for decision making Essay

The intent of this essay is to critically analyze the utility and restrictions of accounting information for decision-making, sing restraints under which the users of accounting information really operate. However, a anterior treatment of subjective expected public-service corporation ( SEU ) theoretical account will be done to better understand the intent of Accounting and its merchandises, accounting information. Scope of treatment will be limited within the context of single and group decision-making. In the decision users of accounting information are identified and their restraints summarised. In decision accounting information user ‘s restraints are identified and their demands are summarised.

A sample of definitions in accounting text editions is supplied by Kieso and Weygaardt ( 1992.p.3 ) they identified three indispensable facets of accounting as:

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Accounting identifies, steps and communicates fiscal information

This information is about economic entities

To interested parties, being users of fiscal information ( Koornhof, 1998 )

Clearly the above mentioned facets positions accounting as more than merely a technique of mensurating informations. Accounting, if seen as a signifier of information system helps in pass oning information from beginning ( the comptrollers ) to receiving systems ( users ) . This accounting information is used in make up one’s minding among alternate class of actions, so a user can do an informed determination. In order for accounting information to be utile a figure of qualitative properties are identified by accounting literature. Hendriksen and Van Breda ( 1991, p.123? ? ) argues that qualitative properties of accounting information improves its utility in determination devising. These properties should be ; robust i.e. stand the trial of clip ; permeant i.e. applies to all accounting entities ; implementable i.e. capable of application and susceptible to nonsubjective confirmation.

In order to understand the determination doing process different theoretical accounts of determination devising have been suggested. A theoretical account by definition being a theoretical position of existent universe may non be perfect but it provide us a tool to better understand a complex state of affairs such as determination doing procedure of an person or a group. Simple theoretical account of determination devising as suggested by ( Arnold and Turley, 1996, p.29 ) consist of six-steps. It ‘s a rational determination procedure which means that it is based upon thought, comparing and measuring options.

The steps/stages

specify the state of affairs and the coveted result

research and place options

comparison and contrast each option and its effects

do a determination i.e. take an option

design and implement an action program

evaluate consequences

Accounting is concerned straight with phases 2, 4 and 6 – where quantitative information is required about public presentation presently expected and about future alternate classs of action ( Arnold and Turley, 1996, p.31 )

It can be argued that this theoretical account makes the determination devising procedure excessively simple and additive. Besides procedure can go a waste of clip, energy and money if there is excessively much attending to detail in researching options. Delay in determination devising may ensue in waste chances. Besides it may be hard for an single determination shaper to cognize when to travel on from one phase.

Another theoretical account that helps in understanding the determination devising procedure is called subjected expected public-service corporation ( SEU ) theoretical account which is based in a determination theory promoted by L. J. Savage in 1954. It is based on the basic premise that persons make rational picks in order to maximize their public-service corporation i.e. personal felicity. Its rational pick theoretical account based on how people should act if they are rational. The theoretical account makes some basic premise ; that information is available about all possible options ; that single determination shaper has sufficient mental capacity to measure all options including the capacity to do the necessary prognosiss about future result ; single determination shaper know and can rank order penchants i.e. ( logical order a & lt ; b & lt ; degree Celsius ) ; in conclusion that a determination shaper ever seek to maximize public-service corporation. These premise makes SEU theoretical account really demanding and therefore makes is hard to use the theoretical account in existent universe state of affairs ( Arnold and Turley, 1996, p.32 )

SEU theoretical account fails to give acknowledgment to the fact person ‘s principle may be limited by many other things such as environment, instruction, conceptual thought and possibly even limited mental capacity. Thus the impression of delimited reason with consequences from cognitive restrictions of their heads seems more appropriate description of single determination devising. ( Arnold and Turley, 1996, p.32 ) Decision-maker normally satisfice: instead than maximizing 1s public-service corporation. Decision shaper use “ position quo ” as an ground tackle to happen a “ good plenty ” solution. For illustration in finding of predetermined overhead rate a determination would be required to choose overhead cost driver. A determination shaper ‘s may hold his or her ain conceptual driven attack in doing this critical determination, while be constrained by clip force per unit area. It is impossible to supply accounting information to the determination shaper for all pros and cons of different overhead cost driver may hold. Furthermore, cost effectivity of roll uping such information might merely transcend its benefits.

Accountants need to take into consideration the impression of bounded reason while supplying information to the users of its information for assistance determination devising. Users of accounting information are bounded by many restraints in their determination devising procedure. Furthermore, these restraints differ between single and group determination doing procedure. In the book “ A Behavioural theory of the Firm ” it is argued by the writers that ends of an administration are a via media between members of alliance made up of the stakeholders. The result of determination devising is a via media or “ merchandise off ” between the involvements of the assorted stakeholder groups ( Cyert and March, 1992 ) . Accountants are faced with quandary originating due to the principal-agent job. Most corporations have follow principal-agent agreement. Principal i.e. stockholders engaging the agent i.e. direction to prosecute the involvements of the former. Constraints originating from struggle of involvements of different stakeholders.

In corporation determination procedure involves deputation of determination procedure. This in bend may take to suboptimization. It occurs when different fractional monetary units each effort to make a solution that is optimum for that unit, but that may non be optimal for the organisation as a whole ( Arnold and Turley, 1996, p.33 ) . Accountants need to maintain decision-usefulness of the information for different self-interested units yet restricting to accounting rules and organizational end. Recording and mensurating inter-divisional minutess e.g. , transfer pricing should be followed to stay by basic accounting rules and cut downing struggle of involvement between different sub-divisions within an administration, while still being true towards organizational end.

Role of managerial accounting is to happen a in-between way to maintain the accounting information relevant for single every bit good as group to help them in determination devising. Without over lading single or group decision-maker with excessively much or irrelevant information. Supplying information that is apprehensible by the single determination shaper and group as a whole. To adherse restraints of principal-agent job, comptrollers should stay managerial accounting patterns for information designed to decide principal-agent jobs.

To sum up, accounting and its merchandise, accounting information should be flexible. Since different users require different information to fulfill their demands and do rational determinations. These demands are really dynamic and altering invariably. Accounting information system should response to altering outlooks and demands of its users to ease in determination devising. Accounting ethos lies in being non-discriminatory and yet supplying its users them with the information to do sound judgement in short and long tally.

As Goethe said, “ Accounting is the fairest innovation of human head. ”


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