RIJBFA Volume 1, Issue 4(April 2012) ISSN: 2277 – 100X

A Journal of Radix International Educational and

Research Consortium

RIJBFA
RADIX INTERNATIONAL JOURNAL OF
BANKING, FINANCE AND ACCOUNTING

DECISION MAKING AND THE ROLE OF MANAGEMENT ACCOUNTING

FUNCTION – A REVIEW OF EMPIRICAL LITERATURE

Fitsum Kidane (Phd. Research scholar), Lecturer in Accounting and Finance

College of Business and Economics

Mekelle University

Mekelle, Ethiopia

Abstract

This study examines decision making and the role of management accounting function
in a business organization. Using the review of literature, I identify management
accountants perform a wide variety of tasks. Only a part of management accounting
activity is directed at performance improvement. Some of the activities they perform
are related to the statutory reporting requirements of the organization. Some of these
are related to the operational requirements of the finance function itself such as
processing transactions receiving money and paying bills. Literature foresees new
management accounting techniques and changes in organizational and business
environments ha i g a huge i pact o a age e t accou ta ts’ roles, yet e pirical
evidence on fundamental shifts in these roles remains relatively scarce.

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 RIJBFA Volume 1, Issue 4(April 2012) ISSN: 2277 – 100X

KEYWORDS

Decision making, management accountant, management accounting

INTRODUCTION

Accounting can be defined as "the process of identifying, measuring and

communicating economic information to permit informed judgments and decisions by
users of the information" (Hogget and Edwards, 1987). The information in accounting
systems relates mainly to financial data about business transactions, which is
presented in monetary terms. In addition to presenting financial information about
past transactions, the accounting system enables to generate forecasts and
predictions as an aid to decision making.
Accounting is sometimes efe ed to as the la guage of usi ess . It offe s a ediu
through which the marketing, production, human resources and other impacts of a
decision may be reflected in monetary terms. This indicates the way in which most
companies use accounting and finance as an integrative function to show the
combined consequences of a proposed course of action on the firm's financial
situation.
The American Accounting Association formulated the definition of Accounting as the
process of identifying, measuring, and communicating economic information to permit
informed judgments and decisions by users of the information. Accounting is a
language that communicates economic information to people who have an interest in
an organization- managers, shareholders, potential investors, creditors, government
and the employees. The accounting literature identifies quite a number of specialized
fields of accounting. Among them, financial accounting is the original field of
accounting. Its main purpose is to record transaction details in monetary terms and

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 RIJBFA Volume 1, Issue 4(April 2012) ISSN: 2277 – 100X

prepare financial statements and reports in accordance with GAAP. The other part of
accounting, Management accounting provides necessary information to assist
management in decisions making and management control.

Management accounting provides necessary information to assist management in

decisions making and management control. The Chartered Institute of Management
Accountants (2001) describes Management Accounting as: - the application of
professional information in such a way as to assist the management in the formation
of policies and in the planning and control of the operations of the undertaking.
Management accounting has been considered as an integral part of the management
process, and management accountants have been visualized as important strategic
partners in an organization's management team. Hilton (1999) states that the
management team seeks to create value for the organization by managing resources,
activities, and people to achieve organizational goals effectively. To this end, managers
require information which is utilized in the decision making process and in controlling
operations. Management accounting thus serve management in providing the needed
data and information, including advice and recommendations. Although there is no
o o l a epted defi itio of a age e t a ou ta t , fo the pu poses of this
study, I use the term to refer to all people who report directly or indirectly to the
finance function of an enterprise.

OBJECTIVE OF THE STUDY

The main objective of the present study is to identify the types of managerial decisions
and the role of management accountant in decision-making process in a business
organization.

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 RIJBFA Volume 1, Issue 4(April 2012) ISSN: 2277 – 100X

RESEARCH METHODOLOGY

The source for the data is entirely from secondary sources i.e., from books, published
and unpublished journals, related websites in the internet, and other documents that
are related to the topic under study.

LITERATURE REVIEW

DECISION MAKING

Decision making is a fundamental part of management. Before discussing what

decision-making is, let us discuss what decision is, because decision-making is a
p o ess of de idi g. Colli s defi es de isio as the a t of aki g up o e s i d
by collecting, sharing and gathering significant ideas from different sources. Moreover,
Lo g a defi es that de isio as a hoi e o judg e t that ou ake afte a
pe iod of dis ussio o thought . Lo g a s defi itio is e lea ut it gi es ise to a
question on the definition of deciding or decision-making. In the end decision-making
is to make a choice or judgment about something, especially after a period of not
knowing what to do or in way that ends in disagreement (Alam, 2008).

Moreover, Fullan (1982) asserts that decision-making is the process of identifying and
choosing alternative courses of action in a manner appropriate to the demand of the
situation. The act of choosing implies that alternative courses of action must be
weighed and weeded by sharing. Fremount, et, al,. 1970 defined decision-making as
the o s ious and human process, involving both individual and social phenomenon
based upon factual and value premises, which concludes with a choice of one
behavioral activity from among one or more alternatives with the intention of moving

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 RIJBFA Volume 1, Issue 4(April 2012) ISSN: 2277 – 100X

toward some desired state of affai s . It ep ese ts a ou se of eha io o a tio

about what must or must not be done (Herbert, 1960). Decision making is the
selecting of action from among alternatives to achieve a specific objective or solve
specific problem (Donald, 1963). The art of decision-making provide us a variety of
approaches, methods and techniques helpful and useful for making high quality of
decision. A decision maker, as an individual, or as a member of formal organization
with his own philosophy and perception of the organization, selects for optimizing
values within the constraints imposed by the organization (Varshney, 1997).

Decision-making and its role in organizations can be viewed in a number of ways.

Kreitner (1999) believes good management can be defined in terms of good
oo di atio of a o ga izatio s e plo ees. Mulli s , Moo head a d G iffi
(2000) posit that decision making is one of the first and a crucial step in management.
Criteria of decision and its nature vary in terms of kinds and types. Decision-making is
the backbone of administrative functions. This is because decisions direct actions
(Marvin, cited in Igwe, 1995). Good and effective decisions can only be made when
right information is made available at the right time to the right recipient. Johnson,
Newell and Vergin (1972) stated that information for decision-making is dynamic;
therefore, it needs to be constantly up-dated. Decision-making, itself, is a dynamic
process (Harrison, 1995; Daft, 1983). Managers need continuous flow of information in
order to make appropriate decisions. Decision-making efficiency of managers can
therefore be greatly enhanced by the quality of information they are able to utilize in
decision-making.

Right decisions give direction for a right course of action. Daft (1983) stated that when
an organization is designed to provide correct information to managers, decision
processes work extremely well and tasks will be accomplished. However, when

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 RIJBFA Volume 1, Issue 4(April 2012) ISSN: 2277 – 100X

information is poorly designed, problem-solving and decision processes will be

ineffective and managers may not understand why.
An individual or multiple participants that are involved in decision-making can be
called decision makers. Individual decisions can be made by a computer or a single
person meanwhile the multi participant decision makers can be divided into unilateral
and negotiated decisions. In the first one, which is also called team decisions, one of
the participants has the power to decide. The others although, can highly influence
how the decision will look like. In negotiated decisions the participants share the
authority of making a decision. This type distinguishes between group decisions where
the participants have nearly equal authorities and discuss their different viewpoints in
various meeting and organization decisions. In the latter one the authority of making a
decision is unequally shared according to the organizations hierarchy and the
coordination between the decision participants is highly structured.

Classification of decisions

From the descriptive model of the basic features and assumptions of the management
accounting perspective of business, it is easy to recognize that decision-making is the
focal point of management accounting. The concept of decision-making is a complex
subject with a vast amount of management literature behind it. How businessmen
make decisions has been intensively studied. In management accounting, it is useful to
classify decisions as:

1. Strategic and tactical

2. Short-run and long-run

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 RIJBFA Volume 1, Issue 4(April 2012) ISSN: 2277 – 100X

Strategic and Tactical Decisions

In management accounting, the objective is not necessarily to make the best decision
but to make a good decision. Because of complex interacting relationships, it is very
difficult, even if possible, to determine the best decision. Management decision-
making is highly subjective.

Whether a decision is good or acceptable depends on the goals and objectives of

management. Consequently, a prerequisite to decision-making is that management
has set the o ga izatio s goals a d o je ti es. Fo e a ple, a age e t ust
de ide st ategi o je ti es su h as the o pa s p odu t li e, p i i g st ateg , ualit
of product, willingness to assume risk, and profit objective.

In setting goals and objectives, it is useful to distinguish between strategic and tactical
decisions. Strategic decisions are broad-based, qualitative type of decisions which
include or reflect goals and objectives. Strategic decisions are non quantitative in
nature. Strategic decisions are based on the subjective thinking of management
concerning goals and objectives. A strategic decision is one which is made during a
current time but whose primary effect will be felt during some future time. Strategic
decisions affect organizational structure and objectives. Strategic decision cannot be
delegated lower than a particular level (March, 1988).

Tactical decisions are tactical in nature and called routine decision. They are important
repetitive need little thoughts with few alternatives. The decision are taken up by
middle and first line managers and do not involve any higher risk or uncertainty.
Tactical decisions support and compliment organizational strategy. The tactical
decision may be delegated to lower levels in the organization. Moreover, what might

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 RIJBFA Volume 1, Issue 4(April 2012) ISSN: 2277 – 100X

be strategies decision for one organization may be tactical decision for another?
(Prasad, 1997)

Tactical decisions are quantitative executable decisions which result directly from the
strategic decisions. The distinction between strategic and tactical is important in
management accounting because the techniques of management accounting pertain
primarily to tactical decisions. Management accounting does not typically provide
techniques for assisting in making strategic decisions.

Once a strategic decision has been made, then a specific management tool can be
used to aid in making the tactical decision. For example, if the strategic decision has
been made to avoid stock outs, then a safety stock model may be used to determine
the desired level of inventory.

The classification of decisions as strategic and tactical logically results in thinking about
decisions as qualitative and quantitative. In management accounting, the approach to
decision-making is basically quantitative. Management accounting deals with those
decisions that require quantitative data. In a technical sense, management accounting
consists of mathematical techniques or decision models that assist management in
making quantitative type decisions.

Short-run Versus Long-run Decision-making

As stated above, decisions can be grouped into short- and long-term decisions. It is
necessary to consider decisions from both perspectives. Drury (2000) defined the
short-term is usually as being one year or even less. In short-term decisions the

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 RIJBFA Volume 1, Issue 4(April 2012) ISSN: 2277 – 100X

importance of the time value of money is low. These decisions are mainly based on
toda s data. “ho t-term decisions can usually be changed easily as opposed to long
term ones. Operating activities encompass what managers must do to run the
business on a day-to-day basis. Operating decisions for manufacturing companies
include whether to accept special orders, 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 products to produce, and what price to
charge. Other operating decisions affecting all organizations include assigning tasks to
individual employees, whether to advertise, and whether to hire full-time employees
or to outsource.

Long-term decisions have effects on longer periods of time. Consequently, such

de isio s de a d a fi s esou es fo a lo ge episode of ti e. “u h de isio s a
influence future decisions and can have an impact on long-term potentials. Strategic
planning addresses long-term questions of how an organization positions and
distinguishes itself from competitors. 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. Strategic planning also involves the
determination of long-term performance and profitability measures, such as market
share, sales growth, and stock price.

MANAGEMENT ACCOUNTANT’S ROLE IN DECISION MAKING

The decision making process can be looked at as a group of people (decision makers,
agents, actors) trying to decide on the correct actions to achieve goals using

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information about the results of past actions. It is clear that management accountants
have - as they've always had - a significant contribution to make at each stage of the
decision-making process (see figure 1.1below). This is good news for financial
managers who have technical know-how, understand the business and use good
communication and influencing skills.

The decision-making process can be characterized by the following (Peter Simons,

2007):

 Decision-making is not the end of the process. It extends through to achieving

results and is a continuous process.
 Accountants contribute to the strategic planning and enterprise governance
framework (the CIMA Strategic Scorecard}, which articulates the business's
competitive position and objectives,
 Individuals' personal contexts and attitudes can impair decision-making, but
business partners can address this problem by championing evidence-based
decision-making.
 Business partners can help to "frame" a decision, provide management
information, and contribute insights and analyses alternatives to help the
decision maker.

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 RIJBFA Volume 1, Issue 4(April 2012) ISSN: 2277 – 100X

Figure 1.1: depicts the six steps in the decision process, and the relationship between
quantitative and qualitative analysis

1. Clarify the decision

problem

2. Specify the criterion

Management accountant
Quantitative 3. Identify the alternatives
Participates as part of
Analysis

Cross-functional

management team

4. Develop a decision model

Primarily the

Responsibility of the

5. Collect the data Managerial

Accountant

Qualitative
considerations

6. Make a decision

Source: Adapted from Hilton et al., 2008

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 RIJBFA Volume 1, Issue 4(April 2012) ISSN: 2277 – 100X

The a age ial a ou ta t s ole i the de isio -making process is to provide data
relevant to the decision. Managers can then use these data in preparing a quantitative
analysis of the decision. Qualitative factors are considered also in making the final
decision. In order to be relevant to a decision, a cost or benefit must: (1) bear on the
future, and (2) differ under the various decision alternatives.

Tasks of managerial accountants

In business organizations, accountants have remained to be primary providers of

financial data and analytical reports on which managers rely to pass decisions. The
paper by M. Newman, C. Smart and I. Vertinsky (1989) suggest that major tasks of
management accountants are score-keeping and maintenance of financial records for
internal and external users. However, in 1995 R. Kaplan identified new tasks and roles
for management accountants. Kaplan (1995) proposes that in the future management
accountants would be involved in formulating and implementing corporate strategy
and designing organizations management information systems. Similarly, Cooper
(1996a, 1996b) argues that management accountants need to develop skills in systems
design and implementation, change and strategy management as well as in cost
management.

The role of the Management Accountant in particular, has become more important,
not only in the corporate level, but also at the national level, and even more
importantly, at the international level. Management accountants have long played
multiple roles variably described as scorekeeping, attention-directing, and problem-
solving roles (Simon, Kozmetsky, Guetzkow & Tyndall, 1955). Whereas scorekeeping
and attention-directing roles typically focus on compliance reporting and control-type
issues respectively, the problem-solving role centers on providing business unit
managers with relevant information for decision making (Hopper, 1980). These roles
respectively match two commonly held images of the typical accountant: the bean

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 RIJBFA Volume 1, Issue 4(April 2012) ISSN: 2277 – 100X

counter and the business partner (Friedman & Lyne, 2001; Granlund & Lukka, 1998;
Vaivio, 2006; Vaivio & Kokko, 2006).

Two roles played by the management accountant are commonly highlighted: the role
of bookkeeper and the role of decision-making facilitator (Emsley, 2005; Hopper, 1980;
Indjejikian & Matejka, 2006; Sathe, 1978; 1982; 1983). Each of these roles may be
associated with both benefits and risks (Sathe, 1983). The bookkeeper management
a ou ta t ust e su e that the fi a ial data of a usi ess u it is fai a d that
i te al o t ol p a ti es o pl ith p o edu es a d the o pa s poli (Sathe,
1983: 31). The benefit tied to the bookkeeper is that this role ensures accurate
information and financial reporting about an entity and its activity (Maas & Matejka,
. The isk is that the ookkeepe a e see as a outside , the e aking
a efo e the fa t o t ol diffi ult to a hie e “athe, . The ole of aidi g
decision making makes mid-level operational managers the primary clients of
a age e t a ou ta ts. He e, the a ou ta t s ai task is to p o ide a age s
with data required for self-control (Hopper, 1980: 402). The benefit associated with
this style of management accounting function is its contribution to business decision
aki g G a lu d & Lukka, . Ho e e , the a age e t a ou ta t s
involvement can also stifle operational management initiative and creativity (Sathe,
1983).

In particular, it was speculated that management accountants would become full

members of management team and regain a central role in performance management
(Couto et al, 2005; IBM Business Consulting Services, 2004; Kaplan, 1995). In the wake
of the publication of the Johnson and Kaplan book, a number of new tools were
proposed including Strategic Cost Management, Activity Based Costing, EVA and the
Balanced Scorecard. However a strong argument can be made that changes in
management accounting practice so far have not been significant.

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The role of Management Accountant in a corporate world is closely involved in

supporting, planning, controlling, directing, communicating and coordinating with the
decision-making activities. Specifically, the role of management accountant in an
organization is to support the information needs of management. However, the type,
size, structure, and form of the organization can affect the complex role of
management accountant (Kariyawasam, 2009). Management accountants were not
participants in the decision-making process but provide the information that can highly
affect the decision within the organization because they are the keepers of financial
records.

The capacity for implementing change due to resource availability, supporting

investment in new technology, retaining and restructuring as part of adaptation of
new roles for the management accountant are part of the evolution (Cooper and Dart,
2009). The evolution of the role of a management accountant defines its broad and
deep responsibility. The accountant has the authority to tell the executives about the
information she or he gathered for over the years and expected to suggest ways to
improve the quality of the de isio “iegel a d “o e se , . The a ou ta ts
credentials and skills are needed for their own success as well as the organization. The
communication, oral, written, and presentation skills are highly appreciated by the
business leaders to help them understand the financial reports and react on it.
Accountants have the ability to work in different surroundings and with a team can
make them have a solid understanding about the corporate accounting. And
understanding the business transactions can make it easier for an accountant to
provide fruitful information (Siegel and Sorensen, 1999).

The a age s i Pie e s a d O Dea s su e e phasized also tea o k.

Management accountants should work as a member in the management team and be
considered by him/herself and other managers as business managers with special

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 RIJBFA Volume 1, Issue 4(April 2012) ISSN: 2277 – 100X

knowledge in accounting and finance. I additio , pie e a d O Dea suggest

that future management accountants need not only knowledge of accounting and
finance but also knowledge of the o pa s usi ess espe iall u de sta di g of
production and sales activities.

In his research, Leonard (1950) explains the extent to which cost analysis is a major
role of the management accountant. The management accountant devotes a large
share of his time in determining what cost should be at a given level of output and
then analyzing why, in fact, that target cost was not achieved. An effective cost control
program is usually built around the management accountant's reports and summaries
of operating data, and management's corrective action taken as a result of studying
these reports and summaries. Thus, cost control is the responsibility of both of the
management accountant and management. The management accountant is
responsible for the recording and reporting phase of cost control, while management
is responsible for taking corrective action (Crossman, 1953:25).

Accountants prepare and submit to management progress reports that summarize

activities to show how efficiently various divisions are performing. By comparing actual
results with the budget amounts, they identify areas of deviation where problems may
be developing. They then provide feed back or information about current performance
designed to encourage needed changes (Rayburn, 1993:4). In cost-benefit analysis
accountants undertake detailed analysis of the benefits and costs of alternative course
of actions. The manager then selects the optimal alternative that benefits his/her
organization. The alternative chosen depends on the manager's beliefs about the
future events, the accountant's forecasts or estimates, and the manager's feelings
about the various outcomes. In deciding what to forecast or estimate, Lere (1991)
considers two issues: identifying the forecasts and estimates that are relevant to the

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 RIJBFA Volume 1, Issue 4(April 2012) ISSN: 2277 – 100X

decision being made and selecting the forecasts and estimates that has potentially the
greatest benefit over the costs.

CONCLUSION

This paper has provided in depth insights into the decision making and role of
management accountant in a business organizations. The role of an accountant is
diverse and critical. They can affect the decisions that the business leaders are going to
create. They can also keep their eyes tracked in any changes that might happen while
the decision has bee i the p o ess of assi ilatio . A ou ta ts jo is oad a d
complex but still, those individuals can handle the presence of the pressure. The
change of their role in a management is another type of approach where they can
manage the challenges brought by the globalization and the change in the world of
business.

It has been established that the role of the management accountant in an organization
is to support the information needs of management. The type, size, structure and form
of ownership of the organization will influence the management role, and thus,
dete i e the o ple it of the a age e t a ou ta t s ole. “u h diffe e es i
size do not change the basic role of the management accountant, nor the basic work
which he or she does. However, the size of the organization may change the degree of
formality or sophistication with which the function is carried out, or the level of
resources devoted to management accounting. But, the management accounting
function remains essentially the same.

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