UNIT - 3

3.3 Types of managerial decisions

Decision Making Styles

1. Psychological: Psychological decision-making styles tend to be more

creative and flexible, as they allow for gut instinct to play a role in the
process. However, this style can also lead to impulsive decisions that are
not well thought out.

2. Cognitive: Among the many decision-making styles, one of the most

popular is the cognitive style. This involves making decisions based on
logic and reasoning, rather than intuition or emotion. When using
cognitive style, it is important to consider all of the available
information before coming to a conclusion. This can sometimes mean
taking a long time to make a decision, but it also means that you are
more likely to make a sensible choice.

3. Normative: Normative decision making in project management is a

style of decision making that is based on sticking to established rules
and procedures. This type of decision making is often used in situations
where there is little time for deliberation and the stakes are low.
 Types of Decision Making in Management

1. Routine and Basic Decision-making:

• Routine decision-making involves frequent and predictable
choices guided by established rules and procedures, simplifying
daily operational tasks like ordering supplies.
• Basic decision-making involves slightly more analysis than
routine decisions but still deals with uncomplicated situations.
• Both streamline processes, freeing resources for more complex
decisions requiring strategic thinking.

2. Personal and Organisational Decision-making:

• Personal decision-making involves choices individuals make for
themselves based on their preferences, values, and circumstances.
It often centre's on personal matters such as lifestyle,
relationships, and career paths.
• Organisational decision-making, on the other hand, pertains to
choices made within a company's structure, affecting its
operations and goals. It involves analysing data, considering
stakeholders, and aligning decisions with the organisation's
strategy for optimal outcomes.
3. Individual and Group Decision-making:
• Individual decision-making process in project management
typically occurs when the stakes are low and the impact will be
limited to a single person.
• Group decision making is necessary when the stakes are high or
the impact will be felt by multiple people.
• In general, group decision making is more effective than
individual decision making because it allows for a greater
diversity of perspectives.

4. Programmed and Non-Programmed Decision-making:

• Non-programmed decisions making is unique and not repetitive.
Typically, they are made in response to an unforeseen event or
opportunity.
• Programmed decisions, on the other hand, are routine and often
based on established rules or procedures. Because they are more
predictable, programmed decisions are typically less risky and
easier to make.
• However, non-programmed decisions often require more
creativity and judgment, and can be more difficult to reverse if
they turn out to be wrong.
5. Policy and Operating Decision-making:
• Policy and operating decision making are two important aspects
of any business.
• Policy decisions are made at the strategic level and focus on long-
term issues, such as the overall direction of the company.
• Operating decisions, on the other hand, are made at the
operational level and focus on short-term issues, such as which
products to produce and how to staff the production process.

6. Tactical and Strategic Decision-making:

• Tactical decision making is important because it helps
Organisations to respond quickly to changes in the environment.
However, too much emphasis on tactical decision making can
lead to a lack of focus on long-term goals.
• Strategic decision making is important because it helps
Organisations to establish a clear direction and make informed
choices about resource allocation.

7. Organisational, Departmental, and Interdepartmental

Decision-making:
• Organisational type of managerial decision making is the process
of identifying and choosing the best course of action to achieve
Organisational goals. It includes both formal and informal
 methods of decision making, and it occurs at all levels of an
Organisation.
• Interdepartmental decision making is the process of identifying
and choosing the best course of action to achieve
interdepartmental goals. It occurs at all levels where two or more
departments interact.
• Organisational, departmental, and interdepartmental types of
managerial decisions making are all important aspects of an
Organisation's operations, and each type of decision making has
its own benefits and challenges.

Characteristics of Decision Making

1. Selective Process:
It is the process of selecting a course of action among many
alternatives to solve problems. A manager has to consider various
factors before selecting a course of action. These factors may
involve the capacity to implement the action, the Organisation’s
nature, the existing work environment, the objectives of the
Organisation, time factors, and so on.

2. Human and Rational:

It is a human and rational process and is needed by all types of
Organisations. A manager has to make mental exercises to study the
 impact of the course of action before making a decision. A manager
has to invest his personal skills, experience, knowledge, and
capability to study the alternatives from many angles. Hence, it is
common in every Organisation.

3. Dynamic:
While making a decision it is essential to consider the time factor
and existing environment, wherever a course of action is taken. A
manager has to make decisions at the right time for their
effectiveness. Besides, he has to consider future environments,
which may affect future activities. Therefore, it is not a static but
dynamic process of management.

4. Goal-Oriented:
Without any goal made, the decision seems unrealistic. It focuses
on Organisational objectives. Many problems arise in an
Organisation during its courses. The manager has to solve all the
problems at the proper time and also in a proper manner by
considering Organisational goals. Thus, the right decision at the
right time contributes to achieving the predetermined objectives
within the defined time and standard.
5. Continuous Process:
Decision-making is a continuous process till the existence of the
org. In the course of regular performance, many problems may
arise at different times and situations. Managers have to solve those
problems in the proper time so that Organisational performance is
smooth.

6. Freedom to Decision Maker:

Managers have the freedom to make any kind of decision. As chief
of the org, a manager takes any course of action to solve a problem
by using his own logic, idea, knowledge, and experience. But while
taking any course of action he has to consider the org objectives.

7. Ethical Considerations:
Many decisions involve ethical dilemmas and require careful
consideration of moral principles and values. Ethical decision
making involves choosing actions that are morally sound and
aligned with one's values.

8. Time-bound:
The timing of a decision can be crucial. Some decisions need to be
made quickly, while others benefit from careful consideration and
analysis.
Functions/Roles of management accounting:
1. Planning and Accounting:
• Includes preparing an accounting system which covers costs, sales
forecasts, profit planning, production planning, and allocation of
resources.
• It should also include capital budgeting, short-term and long-term
financial planning.
• They also prepare the procedures necessary to implement the plan
effectively.

2. Controlling:
• It assists in the control of an org's perf. through the use of std costing,
accounting ratios, budget control, revenue & funds flow statements, cost-
cutting initiatives & assessing capital expenditure proposals and ROI.

3. Reporting:
• Assists the top management in finding out the root cause of an
unfavourable operation by identifying the real reasons for the adverse
events and as well as the responsible parties and eventually reporting
them.
4. Coordinating:
• Management accountants improve an org's efficiency and profits by
providing various coordination tools such as budgeting, financial
reporting, financial analysis and interpretation, etc.
• These tools aid management by comparing cost and financial records,
preparing financial budgets and establishing standard costs, and
analysing cost deviations.

5. Financial evaluation and Interpretation:

• Analyses the data and presents it to the management in a non-technical
approach, with comments and ideas.
• This helps the shareholders and senior management employees to better
understand it and make informed decisions.

6. Tax Administration:
• Management accountants are in charge of tax policies and processes.
They make the reports that are required by various authorities.
• Further, they establish enough tax provisions, ensuring that quarterly tax
payments are made in advance, as required by the Income Tax Act, to
prevent the payment of penal interest on late tax payments.
7. Evaluation of External Effects:
• There may be changes in government policy and even existing laws.
These amendments and policy changes can affect business goals.
• Management accounting assess the extent of any impact of these external
factors of the business and report it to the stakeholder to take necessary
precautionary measures.

8. Asset Protection:
• They create the rules and regulations for each type of fixed asset and get
insurance coverage for all types of fixed assets.
Difference between management accounting and cost
accounting:
Basis Management Accounting Cost Accounting
Purpose To provide info to mngmt for Ascertain and control the
e ff i c i e n t l y p e r f o r m i n g t h e
cost of products/ services.
function of planning, directing
and controlling.
Scope Financial accounting, cost Cost ascertainment and
accounting, budgeting, tax control.
planning & reporting to
management.
Emphasis Based on future projection on Based on historical and
the basis of historical and present cost data.
present cost data.
Data Qualitative & Quantitative Only Quantitative Data.
Used Data.
Principles No prescribes practices. Established practices and
procedure.
Developm As per the changing needs and R e l a t e d t o i n d u s t r i a l
ent the evolution of the business revolution.
environment.
Term short and long term planning/ short term planning/control.
control.
Users I n t e r n a l a n d e x t e r n a l Internal Management
stakeholders
Fin State FS prepared as and when FS prepared yearly
needed.
Differential Costing:
Differential cost refers to the difference in costs between two or more
business decisions. Specifically, a differential cost arises when there are
multiple similar options and it's necessary to select one at the forfeiture of
others. There are three types of differential costs namely Fixed costs,
Variable costs and Semi-Variable costs.

It is a technique based on preparation of adhoc information in which only

cost and income differences between 2 alternative course of action are
taken into consideration.

Steps involved in Differential Costing:

1. Differential cost (incremental/decremental) - TC of each alternative
with cost bfr taking up the alternative.
2. Incremental Revenue - Diff between total income bfr and aft
implementing the decision.
3. Diff between incremental revenue and diff cost is known as net
increment.
4. Net increment is related to incremental revenue and ROR

Applications of Differential Costing:

• Continue or Discontinue Business Segments: Differential costing
helps in evaluating whether to continue or discontinue specific
 product lines, divisions, or business segments based on their
contribution to overall profitability.
• Make or Buy Decisions: Organizations use differential costing to
compare the costs of producing a product or component in-house
(making) versus purchasing it from an external supplier (buying).
• Lease and Sell Equipment: When deciding between leasing and
purchasing equipment or selling versus retaining assets, differential
costing aids in comparing the financial implications of each option.
• Keep or Replace an Asset: Organizations use differential costing to
decide whether to keep and repair an existing asset or replace it with
a new one, considering factors like maintenance costs and improved
efficiency.
• Capital Investment Analysis: In capital budgeting, differential
costing is applied to assess the financial feasibility of investment
projects. It helps determine whether the expected benefits of an
investment outweigh the associated costs.
• Accept Business at a Reduced Price: When faced with the
opportunity to accept a business order or contract at a reduced price,
differential costing helps evaluate whether the reduced price is still
profitable after considering variable costs.
 Decision Making Process

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1. Identify the Problem:

• Identify the problem you need to solve or the question you need to
answer.
• Clearly define the decision as if the problem is misidentified/ broad, a
solution can never be found.
• If you need to achieve a specific goal, make it measurable and timely.
2. Collect Information:
• Collect relevant data related to your problem and ensure that you have a
comprehensive understanding of the situation and its potential causes.
• Internal assessment check, where the organisation is and where it wants
to be, identify areas in need for improvement.
• External assessment studies, market research and evaluation from paid
customers.

3. Identify the Alternatives:

• To identify the one or more possible solution, alternative to meet the
goal.
• Be creative and consider multiple range of options.
• For example, a company wants to increase its engagement in social
media, so the company could use paid advertisements or organically
change the social media strategy or use a mix of both.

4. Weight the evidence:

• Analyse each alternative based on various criteria, such as feasibility,
cost, benefits, risks, and alignment with organisational goals.
• Compare the pros and cons of each alternative to understand their
potential outcomes.
• Identify what the company has done in the past for the same situation
and try to do better than that.
5. Choose from the Alternatives:
• Based on the evaluation, choose the alternative that best aligns with the
organisation's objectives, values, and constraints.
• Consider the short-term and long-term consequences of each option.

6. Implement the actions:

• Develop a plan to make the decision tangible and achievable.
• Allocate necessary resources, assign responsibilities, and create a
timeline for execution.

7. Evaluate the results:

• Keep track of the implementation process to ensure that it's progressing
as planned.
• Continuously assess the outcomes to determine if the decision is
achieving the desired results.
• Collect feedback from those involved in the implementation and affected
by the decision to make any changes to the plan if required.

Importance of Decision Making:

Achieving Goals, Problem Solving, Resource Allocation, Risk
Management, Strategic Planning, Adaptation, Competitive Advantage
Limitations of Decision Making:
Uncertainty, Emotional Influences, Time Constraints
Data: Data is the raw material for data processing. Data relates to facts,
events and transactions. Organised, Individual and Unrelated.

Information: Information is data that has been processed in some way to

make it meaningful to the person who receives it. Information is anything
that is communicated. Information is sometimes referred to as processed
data. It maps out the relative data to provide a big picture.

Qualities of good information:

Good information should be
A accurate
C complete & clear
C cost beneficial
U user targeted
R relevant
A authoritative
T timely
E easy to use
 • Accurate: Information should be free from errors, both factual and
grammatical. It should be up-to-date and relevant to the context.
• Complete and clear: Information should be comprehensive and easy
to understand. It should be written in a way that is clear and concise,
and it should avoid using jargon or technical language.
• Cost-beneficial: Information should be worth the time and effort it
takes to obtain and use it. It should be relevant to the user's needs
and should help them to achieve their goals.
• User-targeted: Information should be written for the specific
audience that it is intended for. It should take into account the
audience's level of knowledge and understanding, as well as their
needs and interests.
• Relevant: Information should be relevant to the user's needs and
interests. It should be useful for the purpose for which it is being
used.
• Authoritative: Information should come from a credible source. The
source should be accurate and reliable information.
• Timely: Information should be up-to-date and reflect the current
state of knowledge. It should not be outdated or obsolete.
• Easy to use: Information should be presented in a way that is easy to
access and understand. It should be organized in a logical way, and it
should use clear and concise language.

Types if info ppt

Tucker's 5 Q Model:
Tucker's Five Question Model is a strategic planning and decision-making
framework used to guide organizations in assessing the feasibility and
potential success of new projects, initiatives, or business ventures.

1. Is it profitable?
This question asks whether the proposed action or decision is financially
viable and aligns with the organisation's economic goals and interests. It
emphasises the importance of considering the financial implications of a
decision.

2. Is it legal?
This question focuses on whether the action or decision complies with all
applicable laws and regulations. It highlights the need for adherence to
legal requirements and ethical conduct within the boundaries of the law.

3. Is it fair?
Here, the emphasis is on fairness and equity. The question asks whether the
decision treats all stakeholders, including employees, customers, and
communities, fairly and without discrimination.

4. Is it right?
This question delves into the broader ethical dimension by asking whether
the action or decision is morally right or justifiable. It encourages
individuals to consider the ethical principles and values that underpin their
choices.
5. Is it sustainable or environmentally sound?
This question relates to the long-term impact of the decision on
sustainability and the environment. It encourages responsible and
environmentally conscious decision-making.

The American Accounting Association (AAA) seven-step model

1. Establish the facts of the case:
• This step means that when the decision-making process starts, there is no
ambiguity about what is under consideration.
• The leading questions about the facts will revolved around What? Who?
Where? When? How?
• Essentially, efforts are made to identify what we know or need to know,
to clearly define the problem.

2. Identify the ethical issues in the case:

• This involves listing the significant stakeholders of the case and defining
the ethical issues.
• A complete account of key ethical issues and dilemmas is developed that
helps in resolving the problem comprehensively.
• All threats to compliance with fundamental principles are identified and
explained.

3. Identify the principles, rules and values related to the case:

• This involves placing the decision in its social, ethical, and, in some
cases, professional behaviour context.
• As professional accountants, the Chartered Accountants are bound by the
Code of Ethics prescribed by the professional body. They are also
required to fulfil social expectations. Therefore, prescribed Codes and
social expectations of the profession are taken to be the principles, rules
and values.

4. Identify each alternative course of action:

• This involves compiling a complete set of major practical alternatives or
likely decisions one can make in a given situation. These alternatives
should not consider the norms, principles, and values identified in Step 3.
• It is expected that in these alternatives one may feel or see some form of
compromise or point between simply doing or not doing something.

5. Compare principles, rules and values to alternatives:

• The principles, rules and values identified in Step 3 are overlaid on the
alternatives identified in Step 4.
• All alternatives are assessed (initially made without any consideration of
principles and values) on the basis of principles and values.
• It gives an idea as to how compelling any one or combination of
principles and values are against each alternative.
 Unit - 4
Inflation accounting:
Inflation accounting is an accounting method used to adjust financial
statements for the effects of inflation. It's particularly relevant in high-
inflation environments. It helps companies present more accurate financial
information by restating the historical cost of assets and liabilities at
current values, taking inflation into account.

Methods of Inflation Accounting:

1. Current Cost Accounting:
Current cost accounting values assets and liabilities at their replacement
costs, considering the current prices prevailing in the market. By restating
the historical values to their current equivalents, this method reflects the
effects of inflation on the financial statements.
2. Current Purchasing Power Accounting:
Current purchasing power accounting adjusts financial statements by
incorporating changes in the purchasing power of the currency. It restates
historical values based on a price index that reflects the change in
purchasing power over time.
3. Replacement Cost Accounting Method:
It values assets and liabilities based on their current replacement cost. It
measures the cost to replace an asset at its current market price. This
method is particularly useful for assets that are expected to be replaced in
the future.
Advantages of Inflation Accounting:
• Inflation accounting reflects the current balance sheet of a company and
not the historical one.
• It is helpful during general inflation or hyperinflation, as during such
cases, it delivers a lot of benefits to its customers.
• It enables more realistic and comparable statistical analysis of the
financial statements of other companies profit and loss, as reflects the
true condition of a companies.
• It provides meaningful financial ratios with current value adjustments.

Disadvantages of Inflation Accounting:

• Inflation accounting involves subjective judgments, affecting reliability
and selection of price indices.
• Accurate data for price indices and replacement costs is crucial for
accurate inflation adjustments in underdeveloped economies.
• Inflation accounting methods can be complex & costly, requiring
specialised software, training, and expertise.
• Misinterpretation of inflation-adjusted financial statements can lead to
misconceptions about an organisation's financial health.
Quality Costing:
Quality costing is a method used to measure the costs associated with
maintaining and improving the quality of products or services. It involves
categorising costs into prevention costs (to avoid defects), appraisal costs
(to assess quality), and failure costs (arising from defects). Quality costing
helps organizations identify areas for improvement in their quality control
processes.

Types of Quality Costs:

1. Prevention Costs:
It is the costs of activities undertaken to prevent the production of waste.
These expenses go towards establishing, implementing, and maintaining
procedures that reduce the possibility of errors and raise overall quality.
Prevention Costs include, for instance:
• Good preparation and documentation
• Teaching quality management methods to employees

2. Appraisal Costs:
Costs associated with inspecting, testing, and evaluating products or
services to identify defects. These expenses are primarily related to tasks
that monitor and check the outputs' quality to make sure they adhere to the
necessary standards. Here are some instances of appraisal costs:
• Inspection and testing of components, finished goods, and raw
materials
• Quality evaluations and audits
3. Internal Failure Costs:
These are costs incurred from performing activities that have produced
contaminants and waste that have not been discharged into the
environment. These expenses arise when a company's internal quality
control procedures fall short in spotting and resolving problems. The
following are some instances of internal failure costs:
• Reworking or fixing faulty goods or services
• Elimination of scrap and waste

4. External Failure Costs:

These are costs incurred on activities performed after discharging waste
into the environment. These expenses include those incurred as a result of
customer complaints, warranty claims, and a reduction in customer
goodwill. Examples of external failure costs are as follows:
• Repairs, warranty claims, returns and reimbursements to customers
• Costs associated with responding to customer complaints and service
improvement initiatives

Advantages of Quality Costing: 4CDRFR

• Cost Reduction: Reduced rework and waste can result in cost
savings when the main causes of poor quality are found and
eliminated.
• Decision-Making Support: Quality costing data assists
management in making informed decisions to improve quality and
allocate resources more effectively.
 • Continuous Improvement: By identifying potential areas for
improvement, quality costing encourages a culture of continuous
improvement.
• Customer Satisfaction: Higher satisfaction among consumers,
brand loyalty, and a great reputation are all benefits of quality focus.
• Competitive Advantage: High-quality products and services offer a
competitive edge, attracting customers and increasing market share.
• Regulatory Compliance: Quality costing ensures industry
compliance and avoids penalties.
• Financial Performance Improvement: Improve customer
satisfaction and quality failure costs for improved financial
performance.
• Resource Allocation Optimisation: Quality costing optimises
resource allocation by identifying areas for prevention and
improvement.

Disadvantages of Quality Costing: DISCEEL

• Data Collection Effort: Gathering data for quality costing analysis
can be time-consuming and resource-intensive.
• Subjectivity: Some cost allocations may require subjective
judgments, potentially leading to biased results.
• Initial Investment: Implementing quality improvement initiatives
may require significant initial investment, impacting short-term
profits.
• Complexity: For organizations with complex processes, accurately
identifying and allocating quality costs can be challenging.
 • Employee Resistance: Employees may resist changes related to
quality improvement initiatives if they perceive them as additional
work or disruptions to established routines.
• External Factors: Quality costing analysis may overlook external
factors like market demand, economic conditions, and supplier
performance.
• Limited Scope: Quality costing focuses on direct costs, overlooking
intangible benefits like brand reputation, customer loyalty, and
market differentiation.

Human Resource Accounting:

Human Resource Accounting (HRA) is an accounting technique that
attempts to quantify the value of a company's human assets, such as
employees' skills, knowledge, and experience. It helps management make
more informed decisions about workforce investments, development, and
recruitment.

Value Added Accounting:

Value Added Accounting (VAA) is an accounting approach that focuses on
the value added to a product or service at each stage of its production or
distribution. It calculates the difference between the value of inputs (raw
materials, labor, etc.) and the value of outputs (final products). VAA helps
assess the efficiency and profitability of various business processes and can
be a useful tool for cost analysis and performance evaluation.