THE USE OF ACCOUNTING AS A MANAGEMENT TOOL

THE USE OF ACCOUNTING AS A MANAGEMENT TOOL FOR DECISION MAKING

CHAPTER ONE

INTRODUCTION

1.1  Background to the Study

Accounting information is the language of business as it is the basic tool for recording, reporting and evaluating economic events and transactions that affect business enterprises. It processes all documents of a business financial performance from payroll, cost, capital expenditure and other obligations to sale revenue and owners’ equity. It provides financial information about ones business to the internal and external users, such as managers, investors and others. It is sometimes referred to as a means to an end, with the ending being the decision that is helped by the availability of accounting information (Arneld & Hope, 2009). The making of decision, as everyone knows from personal experience is a burdensome task (Wada, 2006). In most cases indecision is as disastrous as making a wrong one, therefore a plan of action is indispensable. Management is constantly confronted with the problem of alternative decision making especially knowing that resources are alternatively scarce and limited. It is therefore pertinent that good accounting information be made available for proper and accurate decision making, maximization of profitability and optimal utilization of scarce resources. Accounting information is not only necessary for evaluation of the past and keeping the present on course; it is useful in planning the future of the enterprise. According to Mbanefo (1997), planning may conventionally be call budget/budgeting targets, which give meaning and direction to operations of the organization within a defined period. At the end of the budget period the external results are compared with budgeted performance and discrepancies (variance) are analyzed for purposes of exposing the causes so as to prevent re-occurrence. Budgeting uncovers potential bottlenecks before they occur, coordinates the activities of the entire organization by integrating the plans and objectives of various parts. The budget ensures that the plans and objectives of the parts are in consistency with the broad goals of the organization. It compels managers to think ahead before formalizing their planning efforts and finally provides defined goals and objectives which serve as benchmarks for evaluation of subsequent performance.

Management uses both financial and non-financial information to make effective decisions that would help achieve the goals and objectives of the organization (Melisssa Bushman, 2007). Financial information used by management accountants include sale growth, profits, return on capital employed and market shares, non-market shares, non-financial information include customer satisfaction level, production quality, performance of competing products and customer loyalty. Decision making is however, the choosing of alternative courses of action using cognitive processes. Making decision is necessary when there is no one clear course of action to follow. Accounting systems can aid decision making by providing information relevant to the decision and to the decision makers. Accounting systems provides a check for the validity through the process of auditing and accountability (Gray et al., 2006). Effective and efficient accounting information plays a central role in management decision making.

1.2   Statement of Research Problem

Generally, the use of accounting information is indispensable for decision making in any business organization. The problem however lies in the quality and validity of the information, that is, if it’s timely, adequate and clear. According to the report of the Joint Auditor’s First Bank Annual Report and Account (2000/2001 page 30) falsified accounting information was the reason for many failed banks in Nigeria. The major purpose of the use of accounting information is to maximize risk, failure and uncertainties and also stay ahead of competitors. Notwithstanding the immense benefit of use of accounting information, it is generally acknowledged that most unqualified accountants generate inaccurate information and so result in failure of organizations to achieve desired goal. There are cases of managers refusing the use of accounting information because of their inability to interpret such data, thereby making the organization to remain at ‘status quo ante’. These problems largely contribute to the failure of the use of accounting information in business with the result that inaccurate decisions are made to the detriment of the organization. It is against these backdrops that this study is being conducted.