Three guidelines help management accountants add value to strategic and operational decision making in companies: (1) employ a cost–benefit approach, (2) give full recognition to behavioral and technical considerations, and (3) use different costs for different purposes.
Managers continually face resource-allocation decisions, such as whether to purchase a new software package or hire a new employee. They use a cost–benefit approach when making these decisions. Managers spend resources if the expected benefits to the company exceed the expected costs. Managers rely on management accounting information to quantify expected benefits and expected costs (although all benefits and costs are not easy to quantify).
Consider the installation of a consulting company’s first budgeting system. Previously, the company used historical recordkeeping and little formal planning. A major benefit of installing a budgeting system is that it compels managers to plan ahead, compare actual to budgeted information, learn, and take corrective action. Although the system leads to better decisions and consequently better company performance, the exact benefits are not easy to measure. On the cost side, some costs, such as investments in software and training, are easier to quantify. Others, such as the time spent by managers on the budgeting process, are more difficult to quantify. Regardless, senior managers compare expected benefits and expected costs, exercise judgment, and reach a decision, in this case to install the budgeting system.