© In

stitu

to In

tern

acio

nal S

an T

elm

o, 2

012

GENERAL OBSERVATIONS ABOUT MANAGERIAL ACCOUNTING INFORMATION

DIFFERENT NUMBERS FOR DIFFERENT PURPOSES

Each of the several purposes previously described requires a different accounting approach. Since these different numbers may superficially resemble one another, a person not familiar with them may easily get confused.

One of the most common sources of confusion is the word cost.

Cost could be defined as "... Everything a manager does, as well as many of the things he does not do." Cost is a synonym of sacrifice and as such, controlling it and reducing it is a great concern for managers.In management accounting, there are historical costs, standard costs, overhead costs, variable costs, fixed costs, differential costs, marginal costs, opportunity costs, direct costs, estimated costs, full costs, among others. Some of these are synonyms; others are not quite synonyms; still others, although not synonyms at all, are used by some people as if they were.

Accounting numbers should always be interpreted within the context of the specific problem they are intended to help solve, rather than in any abstract sense. Stating that "the cost of such-and-such is $100" has literally no meaning, unless those who hear it do clearly understand which of the several possible concepts of cost was referred to.

ACCOUNTING NUMBERS ARE APPROXIMATIONS

Users of accounting information must acquire an understanding of the degree of approximation present in the data.

Some accounting numbers (such as the amount of cash in the bank account) may be accurate within very narrow limits, whereas others are only rough approximations.

The degree of approximation is especially high in the case of numbers used for planning purposes, because they are always estimates of what will happen in the future.

WORKING WITH INCOMPLETE DATA

In a management problem, we almost never have exactly the information we would like to have. The person struggling with the problem usually can think of additional information that, if available, would be helpful. There are many decision-making situations in which pages of numbers are available but only a small portion of them is truly relevant to the problem at hand and perhaps none of them is quite what one needs in order to solve it.

The problem must be solved, it is a fact of life. Management decisions must be made and often cannot be delayed until all pertinent information is available. We do the best we can with what we have and then move on to the next problem. On the other hand, a decision should not be made if a vital, obtainable piece of evidence is missing. Deciding whether or not to act on the available evidence is one of the most difficult parts of managerial decision processes. "The art of business is the art of making irrevocable decisions on the basis of inadequate information" Wallace B. Donham

ACCOUNTING EVIDENCE IS ONLY PARTIAL EVIDENCE

Few, if any, management problems can be solved solely by collecting and analyzing numbers. Usually, there are important factors that cannot be, or have not been, reduced to quantitative terms. Some people act as if most problems could be solved by means of a numerical analysis. At the other extreme are those who believe that intuition is the sure guide to a sound decision and therefore pay no attention to numbers.

Although the correct attitude is clearly somewhere between those extremes, there is no way to describe precisely where it is.

"The real trouble with this world of ours is not that it is an unreasonable world, nor even that is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is nor an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait." G.K.Chesterton.

PEOPLE, NOT NUMBERS, GET THINGS DONE

An obvious statement about organizations is that they consist of human beings. Anything that an organization accomplishes is the result of human actions. Although numbers can assist the people in an organization in various ways, the numbers by themselves accomplish nothing. But numbers do not talk back; they give the appearance of being definitive and precise. It is a comforting illusion to imagine that the construction of a set of numbers is the same as acting on a real problem.

A management accounting system may be well designed and carefully operated, but it will be of no use to management unless it results in action by human beings. For instance three companies may use exactly the same system with entirely different results. - In the first company, the system may be useless because management never acts based on the information collected and the organization has become aware if this fact. - In the second company the system may be helpful because management uses the information as a general guide for planning, implementation and, control and has educated the organization to use it in the same spirit. - In the third company, the system may be even worse than useless. It may be damaging because management overemphasizes the importance of numbers and therefore takes unwise actions.

© In

stitu

to In

tern

acio

nal S

an T

elm

o, 2

012