Facilitating and Improving Managerial Decisions
22/10/2021
‘Decision making’ and ‘Control’. These two managerial challenges form the simple dichotomy of managerial accounting; the collection and preparation of information to facilitate and improve managerial decisions. Management accounting helps to ensure that the right information – both short-term information as well as predictions about the long-term effects of a strategic move, for example – is available and decisions are based on facts as much as possible. It is indispensable in these times where an intense market competition and technological changes create an immense need for control systems that enable managers to manage efficiently and effectively.
One of the challenges associated with management accounting is correctly interpreting the overwhelming amount of data that is generated. We are at risk of no longer clearly seeing what data is or is not relevant in the decision-making process. Therefore, Management Accounting is, alongside Financial Management and Corporate Governance, one of the three main topics of the MaastrichtMBA’s module on Corporate Finance and Accounting. It provides the participants with the skills to manage their costs effectively.
No limits to application
The objectives of management accounting are to ensure that information is available, understandable, and that whatever is decided actually happens. This is then more the control part where incentives and other mechanisms are used based on performance measures, budgets and evaluations. The big advantage of management accounting is that there are no limitations to its application. It can be applied in any organisation and/or in all kinds of levels of management.
Various tools
Today’s manager can use various tools to enhance decision-making and (management) control and to collect and structure information to ensure that the core business is implemented effectively and efficiently.
The balanced scorecard, for example, where performance is measured along four different dimensions (financial, process, customer, and learning) is an important tool. Having these dimensions ensures that both short and long-term issues are considered and measured.
Other tools, such as different costing techniques are useful, where the goal is to estimate product costs as accurately as possible. Activity-based costing is one example where every activity in an organisation is defined and costs of that activity are estimated. Product costs are then also dependant on how many activities go into one product type.
One tool we can’t live without in applying management accounting is a proper cost accounting system, primarily because it is required by regulators. Whether it is sophisticated or not depends on the complexity of the organisation and whether management requires more detailed information. According to Prof. dr. Alexander Brüggen “you can hardly run a business without a costing system. But you could with a simplistic one.”
Investment decisions and management accounting
Managerial decisions are made with the help of management accounting, and investment decisions are among the most important decisions in firms. They shape the strategy of a firm and typically have a long-term impact. At the same time, managers need to make decisions about the future, sometimes the distant future, about whether an investment might be good or not. Prof. Brüggen says: “We cannot predict the future, but we at least try to deal with this uncertainty by using all kinds of measures and prediction methods that give us more confidence in an investment choice.”
Unfortunately, in the process of investment decision making, the steps that need to be taken are not necessarily always clear. Brüggen reiterates, “it is about understanding a business and the investments made and their consequences, and also understanding the different scenarios of how things could go well or what could go wrong and how a firm can deal with it.”
Prof. Brüggen’s concluding words on this topic make clear that management accounting on its own may be not sufficient in the decision-making process, but it is definitely an important management technique in balancing the different aspects of information in order to keep control and make the right decisions. Especially when used in conjunction with Financial Management and Corporate Governance.
MaastrichtMBA – Executive On-Campus
This article was written in the context of the ‘Management Accounting’ course that is part of the Executive On-Campus track of the MaastrichtMBA programme at UMIO. This track entails a unique journey that enhances knowledge and enriches capabilities through action-oriented learning, encompassing business practice and interactive co-creation with professors and fellow students.
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Alexander Brüggen
Professor of Management Accounting
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