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Chapter

Management and Organizational Studies 1023A/B Chapter Notes -Financial Accounting, Financial Statement, List Of Fables Characters


Department
Management and Organizational Studies
Course Code
MOS 1023A/B
Professor
Maria Ferraro

Page:
of 4
Chapter 3 (Pg 55-70) Accounting: Info For
Decision-Making
Four Step Framework for Decision-Making:
Decision the choosing of one option form a set of options to
achieve a goal
4 steps:
QV slide 11
First: Specify the problem, including the decision maker’s goals
Decisions help accomplish goals
Individual goals normally differ in the factors they consider
and importance of these factors
Understanding the factors that influence decision-makers
goals and their relative importance
Max profit is not always the main goal
o Based on owners motive not on profit motive
Second: ID options
Business decisions usually have numerous options
Managers normally distinguish themselves by their ability to
ID the most promising options
Separate the most promising goals/options from the less-
fortunate options
Third: Measure benefits (advantages) and costs (disadvantages)
Every option presents a unique trade-off between benefits
and costs
Value equals benefits less costs
Contribution of an option to the decision maker’s goals
Measure relative to status quo
Not need to be a monetary base
Opportunity Cost value to the decision maker of the next best
option
Business measures value and opp cost in terms of money,
profit
Effective decisions = value of chosen decision exceeds its opp
cost
Fourth: make the decision, choosing the option with the highest value
Best choice = option with the highest value to the decision
maker
o Only option whose value exceeds opp cost
Decision-Making in Organization:
2 differences between organization decisions and personal
o organization tends to have focused goals
o how do individual goals relate to organizational goals
individual goals might differ from companies
can lead to actions not in best interest for
company
Organizational Goals:
Organization a group of individuals engaging in a collectively
beneficial mission
Shareholder value to maximize returns (streams of profits or,
equivalently, stream of cashflows) to shareholders investing in
company
Aligning Individual Goals with Organizational Goals:
Firms owners would like to frame decision problems in terms
of maximizing profits
o Employees may equate a lower importance level to firm
goals in attempts to pursue personal goals
Result = firms utilize the following methods to prevent this:
o Policies and procedure to define acceptable behaviour
o Monitoring to enforce policies and procedures
o Incentive schemes and performance evaluations
To motivate employees to adhere to
organizational goals
Key difference: (btwn firm and individual goals)
o Relates to Step 1 must make sure that the goals of
the employees meet the goals of the firm
The Planning and Control Cycle:
Planning decisions relates to the choices about acquiring and
using resources to deliver products to customers
Deciding which products to offer, prices and resources needed
Control decisions to motivate, monitor and evaluate the
performance of planning decisions
Examining past performance with the purpose of improving
subsequent plans
Making sure our plans are meeting our goals
*QV pg 62 Exhb 1.3*
PIER Cycle:
planning and control descisions work together with one
following the other
broken down into four stages (PIER Cycle)
o Planning
Which products are being offered
What resources are needed? How much?
Selling streams
o Implementing
Determining how and when to use resources
Setting performance standards
o Evaluate
Measuring actual performance
Understanding reasons for deviations
o Revise
Where are we correct?
Feasible performance targets
Effectiveness of incentive schemes
Accounting and Decisions Making:
Most important in Step 3
o Primary role = help measure the cots and benefits of
decision options
2 classes rely on accounting info for decisions:
o Decisions makers outside firm
o Decision makers inside firm
Characteristics of Financial Accounting Info:
Financial accounting aims to satisfy information needed by
decisions makers outside the firm
Satisfied by issuing comprehensive set of financial info at
regular intervals
Must have comparitablility to other firms financial reports as
investors must be able to understand the status of a business
o Standard set of rules for reporting financial statements
Characteristics of Managerial Accounting:
Managerial accounting aims to satisfy the info needs of decision
makers inside the business
Determine things like:
o Products to sell
o Prices of the products offered
o Labour needs and wage rates
o Equipment needs
Supports planning and control decisions
Ethics of Decision Making
View organizations goal as not just one of profit maximization
but profit maximization in an ethical manner
Relates to every aspect of decision framework
o Step 1 influences how we frame decision problems
o Step 2 many decision makers will not consider
unethical actions in their choices
o Step 3 it can change the outcome of a cost-benefit
analysis
Leading to gains or losses