Module 8 Business Decision Making
Accounting plays an integral role in a company’s decision making process. It provides managers with accurate financial information that they can then use to make judgments about how the company’s future. Managers make business decisions every day based on accounting information. A simple example might be, whether a manager should consider repairing a type of machinery or whether they should replace it with a new one. Or perhaps management needs to make a decision on whether to stop offering their least profitable product.
Regardless of their size, companies are constantly deliberating about how to improve their business. If a company has a tight budget, effective decision making is even more crucial. So how should a company go about making business decisions? What factors come into play? How do you assess the pros and cons of each alternative? This module explores the various aspects of business decision making and teases out some considerations that must be made before management, or any other branch, comes to a decision.
Content
Learning Outcomes
By the end of this module, you should be able to:
• Identify the characteristics of good decision making
• Assess the strategies management uses to make decisions based on financial and non-financial information
• Use the incremental analysis approach to make effective business decisions.
Elements of Decision Making
Business consultants and experts have identified numerous characteristics of effective decision-making. Rather than providing you with an exhaustive list of them here, this topic shows that the key to making sound business decisions is to approach the process systematically. Making decisions has clearly defined elements that need to be addressed step by step. These phases include classifying the nature of the problem, defining its parameters, identifying the choices that impact the outcome, and finding a resolution.
The first article listed below was published in the Harvard Business Review. Be warned: the text delves into the minutiae of the decision making process, especially as it relates to management. For our purposes, review the text for insight into the general elements of the decision making process. As you peruse the article, think about how the approach outlined by the author relates to accounting and the HR profession. Do the same steps apply to decision-making in human resources? If so, how?
The second article provides you with a good synopsis of the issues and steps related to decision making in management. Focus on the article’s discussion of analyzing alternatives. There are many things to consider before you making a decision, and assessing the merits and demerits of alternate choices is one of the most important.
How might accounting information help with this process?
• The Effective Decision (14 pages)
Supplementary Reading
• Decision Making in Management(hyperlink opens in a new tab) (11 pages)
Financial and Non-Financial Information
Organization members who wish to make productive (and profitable) business decisions must take into account both financial and non-financial information. (Factors that would be classified as non-financial information include the reputation of an organization both internally and externally, employee morale, employee turnover.) Financial and non-financial information impacts business decisions within the HR profession. For example, the HR function may currently have a small and mighty team of payroll professionals and must decide whether they want to continue with this approach or fully outsource to a payroll provider.
A combination of financial and non-financial information enables the user to make informed business decisions about the direction of the company. Let’s say you are deciding whether to a) buy new computers in a department or b) hire someone to come and fix the current computers. Both these options have costs associated with it. With both options the department will need to know the cost information (through getting quotes and etc.) and provide to the accounting/finance department.
As you go through the readings below, pay attention to the terms relevant costs, sunk costs, and opportunity costs. These terms are important to know because they often inform the business decision making process.
• Cost Characteristics and Decision Making Ramifications(hyperlink opens in a new tab) (7 pages)
From: Principles of Accounting by Larry Walther
• Considering Alternatives and Opportunity Costs (4:00 min)
From: Setting your Financial Goals, by Ken Boyd
o To access these videos:
1. Go to the McMaster LinkedIn Learning page
2. Click the “How to Get It” LINKEDIN LEARNING button
3. Click “Sign In”
4. Enter your McMaster Email and follow the prompts to log in.
5. Search for the title of the video in the search bar at the top of the page
6. Click the link to the video from the list of search results.
Incremental Analysis Approach
As we saw earlier in this module, an important aspect of the decision making process is to weigh alternative options and approaches to a problem. In the business world, managers frequently use an Incremental Analysis Approach to assess different approaches and outcomes. Incremental Analysis, also known as Differential Analysis, is a process that a manager uses to identify financial information that would change based on the decision she/he makes
Incremental Analysis is an important process when making decisions about whether a company should consider outsourcing, or what an organization should do when they are at capacity. Should they take additional orders for goods or services? Should a company take any special orders? Should they consider repairing existing equipment or replace it with a new one? These are some of the questions that Incremental Analysis helps to answer.
• Terms related to evaluation and decision making (4:00 min)
From Accounting Foundations: Managerial Accounting by Jim Stice and Earl Stice
• Business Decision Logic(hyperlink opens in a new tab) (11 pages)
From: Principles of Accounting by Larry Walther
o To access the videos:
1. Go to the McMaster LinkedIn Learning page
2. Click the “How to Get It” LINKEDIN LEARNING button
3. Click “Sign In”
4. Enter your McMaster Email and follow the prompts to log in.
5. Search for the title of the video in the search bar at the top of the page
6. Click the link to the video from the list of search results.
Learning Activity
There are two learning activities for this module.
1. Practice Exercises
These activities are not graded, but essential to prepare you for evaluations in this course.
a. Go to Principles of Accounting – Chapter 24(hyperlink opens in a new tab)
b. Work at your own pace through these exercises from the textbook:
Fill in the Blanks (complete Questions 1-4)
c. Once completed, check your solutions using the answer key provided in the link.
2. Quiz #3: Business Decision Making
This is a graded activity.
Practice what you have learned in this module by completing a selection of quiz questions. This graded activity is essential to support your learning. Pay attention to the feedback you receive once it is released, as this will help you identify the concepts that you need to study further.
To complete this learning activity, access the quiz:
Quiz 3: Business Decision Making
To learn how to access and use quizzes, read Quizzes under the Evaluations module.
