Eldenburg Wolcott - Chapters) (Download link at the end of this file)

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Chapter 1 The Role of Accounting Information in Management Decision Making

SOLUTIONS

Eldenburg & Wolcott 2e August 2010

LEARNING OBJECTIVES

Chapter 1 addresses the following questions:

Q1 What is the process of strategic management and decision making?Q2 What types of control systems do managers use?Q3 What is the role of accounting information in strategic management?Q4 What information is relevant for decision making?Q5 How does business risk affect management decision making?Q6 How do biases affect management decision making?Q7 How can managers make higher-quality decisions?Q8 What is ethical decision making, and why is it important?

These learning questions (Q1 through Q8) are cross-referenced in the textbook to individual exercises and problems.

COMPLEXITY SYMBOLS

The textbook uses a coding system to identify the complexity of individual requirements in the exercises and problems.

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Chapter 1: The Role of Accounting Information in Management Decision Making Page 1-2 Eldenburg & Wolcott 2e August 2010

QUESTIONS

1.1 Organizational vision is the core purpose of the organization and shapes the current organization and its future. Decisions about the organizational vision are important because they communicate to employees and other stakeholders the overall direction of operations. Core competencies are the strengths of the organization relative to competitors. The choice of core competencies that an organization focuses upon is important to the success of the organization because value is added by these competencies. To be successful, the vision should be guided by the basic strengths of the organization. Organizational strategies are developed around core competencies.These tactics are important because they guide the long-term decisions, such as product lines that will be offered. Operating plans put into action the organizational strategies in the short term. These plans guide employees in their day to day operations.

1.2 Once operating plans are in place, organizations need to know whether the plans are being met or need to be changed to take advantage of new opportunities. To do this, actual performance needs to be measured and compared to the plans (i.e., monitored, often using diagnostic control systems and interactive control systems). To help managers move toward the organizational goals, incentives such as performance-based bonuses are offered (i.e., motivating) and beliefs systems. In addition, boundary systems are used to discourage undesirable behavior.

1.3 See Exhibit 1.3 for a list of possible internal and external reports. Students may have thought of other reports as well. Following are examples of internal reports. Capital budgets support organizational strategies, the master budget supports operating plans, and variance reports (actual versus planned performance) help organizations monitor and motivate performance if they are tied to compensation contracts.

Financial statements are external reports that provide creditors and shareholders information about current and past operations. Tax returns are reports prepared for the government and determine the amount of taxes due. Suppliers need reports about inventory levels to keep an organization’s inventory levels up to date.

1.4 The type of information needed depends on the type of decision. For product-related decisions, managers may need information about competitors’ prices and quality of products. For employee-related decisions, managers may need to know the amount of experience employees have or estimate costs to hire them or lay them off, using information about length of service from human resources. If managers are developing a new good or service, they need information from suppliers about the cost of resources.Students may have thought of other types of decisions and information needed for them.

1.5 Cash flows that vary with the available alternatives for a decision are relevant because they relate directly to each separate decision that could be made. Summing these relevant cash flows provides quantitative information about the relevant costs and benefits for each alternative. However, some cash flows will not change, regardless of the decision 3 / 4

Chapter 1: The Role of Accounting Information in Management Decision Making Page 1-3 Eldenburg & Wolcott 2e August 2010 made. These are irrelevant cash flows because they remain the same under all courses of action and have no influence on the decision.

1.6 Business risk is the possibility that an event could occur that would interfere with an organization’s ability to meet strategic goals or operating plans. Decision makers may develop an estimate about the cost or effectiveness of a course of action, but they cannot know for certain that their estimates will hold in the future because of the possibility of unforeseen events. Business risks and other uncertainties reduce the quality of decisions.To consider business risk, managers may identify worst-case scenarios, and develop several plans to help reduce failure in these circumstances. See Exhibit 1.5 for examples of business risks.

1.7 Biases are systematic distortion in judgment that leads to poor decisions. Three general types of bias affect business decision making: information bias, cognitive bias, and predisposition bias. Cognitive biases are errors in judgment caused by the way peoples’ minds process information. Information biases are errors in judgment caused by data that are consistently overestimated, underestimated, or misrepresented. Predisposition biases are errors in judgment caused by preferences, attitudes, or emotions that prevent objective analysis and cause decision makers to adopt preconceived notions without careful thought, ignore weaknesses in their preferred course of action, and give too little attention to alternatives.

In Chapter 1, Motorola’s managers were biased toward developing a global cellular phone network and did not gather enough information about cost or about customer preferences, such as the size and style of phones. Poorer quality decisions result when managers fail to recognize and control for biases because important information is often overlooked or distorted information influences decisions.

1.8 Higher quality decisions are made by using higher quality information, that is, information that has few uncertainties and is relevant, complete, as certain as possible, and timely. This information needs to be prepared in reports that are easy to understand, readily available, and timely. Then a high quality decision-making process is used (Exhibit 1.7). This is a process that is thorough, as unbiased as possible, focused, creative, and visionary as it relates to strategies.

1.9 There are many reasons for behaving ethically. From an economic perspective, if everyone behaved ethically, less investment would be needed in police and security protection. In addition, written contracts would be less important, and a court system would not be needed to determine whether people are acting unethically and then penalize wrongdoers. More business would probably be transacted because people could trust each other. From a personal perspective, people would feel their world was more certain and safe if they knew others would always treat them ethically. Even in a world where many people are unethical, organizations and individuals who act ethically develop better long term reputations and self-respect and improve social welfare.

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