There are three main guidelines that are used by cost accountants in supporting their business strategic and operational goals. The first type is using a cost benefit approach. In a cost benefit approach cost accountants focus management on the costs associated with an activity, and their related benefits if the activity is undertaken. Management must use this data to decide if the overall decision is one that makes sense for the business given the costs and benefits expected.
The second guideline used is the behavioral considerations of a decision. The behavioral side looks at the human element of decisions and asks management to take this into consideration in their decision making. Behavioral elements often are used to motivate employees to perform as expected and to attain certain overall organizational goals that are set. Management is primarily a behavioral area, and ensuring that a mechanism is in place to manage these behavioral elements is the key to the overall success of the cost management system.
The final guideline is looking at different costs for different purposes. This guideline looks at the full set of anticipated alternatives that might exist for a given action. Cost accountants look into the various forms of alternatives that could be chosen and evaluate each from a cost perspective.
The five-step decision making process for cost accountants is outlined in the following interactive media piece. Spend some time reviewing each step by rolling your mouse over the steps on the left.
Identify the Issue – Be sure to clarify the real issue as well as any existing uncertainties.
Gather Information – Accumulate the information needed to make a decision.
Identify Alternatives for Use – Examine different options that might be used based on assumptions for the future.
Choose an Alternative for Use – Select one alternative to take, which completes the decision planning phase.
Evaluate Our Choice – Evaluate the overall effectiveness of the chosen alternative and learn from its budgeted and actual performance.
As this module has pointed out, there are five main steps in the decision making process. Head over to Guidelines for Cost Accounting and take some time to refresh your memory of them before you complete the discussion.
How would you use this five-step process in day-to-day cost accounting and management accounting practices to better develop a set of standards and guidance for use in a business?
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