The Role of Accounting Information in Strategic Decision Making (Session 1) Flashcards
Measuring, Monitoring, & Motivating Performance
1) Compare Actual Operating Results
- Specific performance objectives
- Progress toward long-term goals
2) Reward Employees
- Performance Evaluation
- Bonuses or other compensation
3) Report to Stakeholders
- Internal Reporting
- External Reporting
4) Provide Information for Evaluation of Organizational
- Vision
- Core Competencies
- Strategies
- Operating Plans
4 Levers of Control
1) Core Values (Belief Systems)
2) Risks to Be Avoided (Boundary Systems)
3) Strategic Uncertainties (Interactive Control Systems)
4) Preset Goals (Diagnostic Control Systems)
Belief Systems
Belief systems inspire and direct employees to take actions that are
consistent with the organizational vision
Belief Systems - Vision Statement
A vision statement is a theoretical description of what the organization
should become.
Belif Systems - Mission Statement
A mission statement is a high-level declaration of the organization’s purpose.
Belief Statement - Core Values
A core values statement is a summary of the beliefs that define the
organization’s culture
Boundary Systems
Boundary systems establish limits on individual behaviour. Common
boundary systems include codes of conduct and budgets, which limit
specific behaviours, and also include procedures for ensuring compliance.
Diagnostic Control Systems
- Managers establish preset goals that must be achieved for the
organization’s strategy to be successful - Diagnostic control systems measure, monitor, and motivate employees to
achieve preset goals.
Interactive Control Systems
- Interactive control systems are
recurring sets of information that
demand attention from managers at
many levels. - The information requires them to
communicate interactively and
stimulates debates about what the
information means, leading to new
insights about strategic challenges
and opportunities
Cost Accounting and Decision Making
- Cost accounting involves the process
of tracking, recording, analyzing, and
determining the cost of an
organization’s project, process, or
activity. - Cost accounting helps managers
understand the costs of operating a
business so that they can use the
information to make sound business
decisions, particularly to reduce the
company’s costs and to improve its
profitability and productivity.
Financial Accounting
The process of preparing and reporting financial information that is used most frequently by decision-makers outside the organization, such as shareholders and creditors
Management Accounting
The process of gathering, summarizing, and reporting financial and nonfinancial information used internally by managers to make decisions
Cost Accounting
Cost accounting includes both financial and non-financial information and is used for both financial and management accounting
Information Systems
Information gathered from inside the organization & outside of the organization –> Databases and software
Databases and Software acts as a resource for External Reporting and Internal Reporting
Relevant Information
- Relevant information helps decision-makers evaluate and choose among
alternative courses of action - Information is relevant if:
–> It concerns the future
–> It varies across the alternatives
Relevant Cash Flows
Relevant cash flows = incremental cash flows; that is, they occur under one
course of action or decision alternative but not under another.
o Such cash flows are also called avoidable cash flows because they are avoided if the course of action or decision alternative is not taken.
o They are relevant because they help managers distinguish among alternatives
What is the other name for relevant cash flows?
Avoidable Cash Flows
Why are relevant cash flows, relevant?
Because they help managers distinguish among alternatives
Irrelevant Cash Flows
- Irrelevant cash flows = unavoidable cash flows, occur regardless of which course
of action or decision alternative is chosen.
o They are irrelevant to a specific decision because they do not help managers
choose among alternatives
Business Risk
- Business risk is the possibility that an event could occur and interfere
with an organization’s ability to meet strategic goals or operating
plans.
What is Enterprise Risk Management (ERM)
Enterprise risk management (ERM) is a process that uses experts to
advise managers to continually identify, assess, mitigate, and
monitor relevant business risks in a comprehensive and integrated
way.
Biases
- Biases are systematic distortions in judgment
Information Bias
o Errors in judgment caused by data that are consistently
overestimated, underestimated, or misrepresented.
Cognitive bias:
o Errors in judgment caused by the way people’s minds process
information.
Predisposition Bias:
o Errors in judgment caused by preferences, attitudes, or emotions
that prevent objective analysis.
Higher-Quality Decision
- Decision quality refers to the
characteristics of a decision that affect
the likelihood of achieving a positive
outcome. - Uncertainty and bias reduce decision
quality. - On average, higher quality decisions
have more positive outcomes resulting
from better information as well as
better decision processes.
Path to Higher-Quality Management Decisions
Higher-Quality Information –> Higher-Quality Reports –> Higher-Quality Decisions
