Qualitative and Quantitative Relevant Information

Managers divide the outcomes of decisions into two broad categories: quantitative and qualitative. Quantitative factors are outcomes that are measured in numerical terms. Some quantitative factors are financial; they can be expressed in monetary terms. Examples include the cost of direct materials, direct manufacturing labor, and marketing. Other quantitative factors are nonfinancial; they can be measured numerically, but they are not expressed in monetary terms. Examples include reduction in new product-development time for companies such as Microsoft and the percentage of on-time flight arrivals for companies such as JetBlue. Qualitative factors are outcomes that are difficult to measure accurately in numerical terms. Employee morale is an example.

Relevant-cost analysis generally emphasizes quantitative factors that can be expressed in financial terms. Although quantitative nonfinancial factors and qualitative factors are difficult to measure in financial terms, they are important for managers to consider. In the Precision Sporting Goods example, managers carefully considered the negative effect on employee morale of laying off materials-handling workers, a qualitative factor, before choosing the reorganize alternative. It is often difficult for managers to consider and trade off nonfinancial and financial considerations. For example, the benefits of decisions to reduce environmental impacts include the reputation benefits of these actions with consumers, employees, and investors. These benefits are not easy to measure but are relevant and important for managers to evaluate and weigh against the costs of reducing harmful environmental effluents. Managers must consider all the consequences of their decisions and not focus on financial factors alone.

Exhibit 12-3 summarizes the key features of relevant information that apply to all decision situations. We present some of these decision situations in this chapter. Later chapters describe other decision situations that require managers to apply the relevance concept, such as joint costs (Chapter 17), quality and timeliness (Chapter 20), inventory management and supplier evaluation (Chapter 21), capital investment (Chapter 22), and transfer pricing (Chapter 23). We start our discussion on relevance by considering a decision that affects output levels, such as whether to introduce a new product or to try to sell more units of an existing product.