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MODULE
1
DECISION MAKING,
INFORMATION NEEDS, AND
INTRODUCTION TO
INFORMATION PROCESSING
SUPPORT SYSTEMS
The LEARNING OBJECTIVES
FOR
1. Describe the basic process by
which effective managers make decisions, as well as the various types of
decisions made by managers.
2. Discuss the information needed by the managers of firms to make decisions.
THIS MODULE ARE TO ENABLE YOU TO:
3. Contrast the various types of information processing support systems and levels of decision
support.
INTRODUCTION
Various chapters have emphasized that processing transactions is a major purpose of a firm’s
accounting information system (AIS). However,
providing managers with pertinent decision-making information to run the firm is an even more
important role of accountants, especially management accountants. This role consists of collecting
and storing relevant data, processing the data
through decision models, and providing useful
information outputs in varied forms. These decision-making functions are collectively called infor-
mation processing. During the course of our discussion, we recognize that managers, a very important group of decision makers, are fallible human
beings. They tend to be biased and to employ distinctive cognitive styles in making decisions. Managers are also quite limited in their information
processing capabilities. With the advent of recent
developments in information technology, firms can
develop information systems to enhance the information processing capabilities of managers,
thereby effectively aiding managers in their decision-making efforts.
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ROLES OF ACCOUNTANTS IN MANAGERIAL DECISION MAKING
Accountants have traditionally provided financially oriented information for decision
making. For instance, financial information generated by a firm’s accounting information system (AIS) flows to users both inside and outside the firm. In recent decades,
accountants have continued to perform this information processing and interpreting
role. With the flowering of the computer age, other professionals have joined accountants in providing decision-making information. Computer information analysts,
management scientists, knowledge engineers, financial modelers, and industrial engineers have all become increasingly involved in business information processing.
To retain their degree of usefulness, accountants must become familiar with the
key concepts discussed in this and the following module. These concepts are decision making, information needs, and computer-based information processing support systems.
MANAGERIAL DECISION MAKING
In order to design effective information processing support systems that produce
useful information outputs, we must understand managerial decision making. Thus
we begin this module with a discussion of the decision process and the specific types
of decisions made in business firms.
THE DECISION PROCESS
The managers of a firm are responsible for setting its objectives and making decisions to achieve the established objectives. Each decision maker is unique. In addition, problems vary widely, and thus processes by which decisions are made vary
considerably. Some problems are defined very clearly and objectively, and a manager
has complete information to examine all the alternatives with a great deal of certainty. Usually, for these types of problems, a manager attempts to make what are
called optimal decisions. Conversely, other problems, and hence decision process
steps, are characterized by much vagueness, subjectivity, incomplete information,
and uncertainty. Because of time and processing constraints and other personal considerations, only a limited number of alternatives are evaluated. These problem situations can be effectively solved by making what are called “good enough” or
satisfactory decisions.
Some decision makers employ a systematic or reasoned approach and seek to
collect information to develop the most explicit decision model possible in each
problem situation. Others employ an intuitive or unsystematic approach to analyze
problems; they habitually depend on implicit decision models. Both approaches are
recognized as effective in making decisions. Nevertheless, the process by which all
decisions are made follows a relatively standardized series of steps. Although decision makers and problems requiring decisions differ greatly, a rational process for
making effective decision choices can be generalized. Figure M1-1 shows the steps in
this decision process, which pertains to both individual and group decisions and accommodates a wide variety of problems and decision makers. The steps within this
process are as follows:
1. Recognize and define the problem. The problem may be recognized as an adverse
change, as when the profits of a product are declining. Alternatively, it may be an
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Recognize and define
the problem
Determine alternative
courses of action
Evaluate the alternatives
Select the best alternative
Carry out the decision choice
Follow up the decision results
FIGURE M1-1 Steps in a decision
process.
opportunity, such as the opportunity to acquire a smaller firm with a complementary product line. Defining the problem consists of expressing the desired
results (criteria), the key factors in the problem situation, constraints, assumptions, time horizon, and so on. This may be the most difficult step in the process.
One of the most important tasks during this step is to choose the criteria and determine their weight. The criteria are the important factors used to evaluate the
alternatives. Each criterion must be allocated a proper weight in relation to its
importance compared to the other criteria. For example, the most important criterion can be given a weight of 100 percent, with the other criteria being assigned weights against this standard.
2. Determine alternative courses of action. Feasible solutions to the problem or
courses of action should be listed, including the alternatives to “do nothing” and
“continue as we are now.”
3. Evaluate the alternatives. Each of the alternative courses of action must be compared to the others. To perform this step, a decision model must be employed.
A decision model (a) describes the relationships and behaviors of all the significant factors and (b) provides a means of evaluating the alternatives in terms
of the criteria. When data concerning each alternative are in turn fed into this
model, the resulting criteria values enable each alternative to be ranked in relation to the others. It is not necessary, however, to develop a formal written or
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programmed model. As stated, in many situations the decision maker simply
employs a “model” that is formulated implicitly within his or her mind.
4. Select the preferred alternative. This step consists of “making the decision.” Normally, the choice is based essentially on the results provided by the decision
model. If the model is sound and all feasible alternatives are considered, the
choice should focus on the quantitatively preferable course of action. Often,
however, qualitative factors enter the picture, especially when the decision situation is complex. In these instances, managerial judgment is necessary.
5. Carry out the decision choice. A decision is meaningless unless implemented.
Thus the decision choice must be communicated to those persons who are to
carry out the necessary activities.
6. Follow up the results. A decision maker should be clearly aware of the expected
results (e.g., the payoff) from each decision choice. In addition, he or she should
monitor the effects of each decision, comparing the actual results against those
that are expected. If this control procedure is followed, corrective actions can be
taken when necessary.
TYPES OF DECISIONS
The decision process described above is used by managers in making several specific
types of decisions. These decisions may be classified according to resources (e.g., inventory), organizational functions (e.g., accounting decisions), and other dimensions. One very useful classification relates to the problems that the decisions are
intended to solve. Thus a structured, or programmed, decision is routine and
repetitive and concerns a problem whose factors and relationships are very clear,
simple, and well-known to the decision maker. Since these decisions are common,
they have well-established procedures for solving them. Therefore, precise sets of instructions can be provided to clerks (or programmed for computers), and clear-cut
decision results will be derived. For instance, Diane Varney, treasurer and controller
of Infoage, is making a structured decision when she approves a customer’s credit application for purchasing a microcomputer, assigns one of her accountants to perform
a particular task, or approves an adjusting journal entry.
At the opposite end of the problem spectrum is the unstructured, or nonprogrammed, decision, which concerns an unusual or infrequently occurring problem
situation whose factors and relationships are poorly understood. These complex and
broad-scope problem situations require the exercise of considerable judgment, creativity, and logic. Many decisions fall into the semistructured category, which ranges
between these two extremes. When George Freeman, president of Infoage, authorizes the construction of a new retail microcomputer outlet in another state or initiates a campaign to advertise the firm’s line of microcomputers on the local television
station, he is making unstructured decisions.
MANAGERIAL FUNCTIONS AND DECISION MAKING
Perhaps the most useful way to classify decisions is in accordance with the key management functions of strategic planning, tactical planning, management control, and
operational control.
Planning The planning function consists of deciding among alternative courses of
action and then determining how to put the decision choices into effect. Planning
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within a firm is tied directly to its objectives. For example, Infoage sets an objective
of earning 10 percent greater profits from sales next year. It then must decide which
courses of action will help to achieve the profit target. Perhaps it should hire more
salespersons for the outlets or consider opening a new outlet. We can better understand planning by a firm if we look at two component planning processes: strategic
planning and tactical planning.
Strategic planning is the high-level process of deciding on the strategies and
resources necessary to achieve the firm’s enduring objectives. Strategies provide specific means by which to attain the objectives. For instance, Infoage may adopt a lowprice, high-volume strategy in order to achieve its objective of maximizing profits
from sales. Resource allocation decisions are ad hoc strategic decisions with long-range
time horizons and broad scopes. Managers at the highest level of an organization do
strategic planning, as indicated in Figure M1-2.
Tactical planning is the process of translating strategic planning decisions into
specific, more immediate operational plans. For example, Infoage’s broad marketing
policies are converted into detailed selling and advertising plans. Managers at the
middle levels of an organization do much of the tactical planning, as Figure M1-2
suggests.
Control The managerial function of control consists of ensuring that plans are being followed as intended to achieve a firm’s objective’s. Two processes involving feedback control in a firm are operational control and management control.
Operational control is the process that promotes efficiency in operations. Decisions made to ensure operational control focus on the tasks performed by the operational system. Thus they involve short time spans and are narrow in scope.
Lower-level managers usually make operational control decisions, as Figure M1-2
shows. For instance, Infoage’s shipping supervisor assigns shipping employees to
each day’s scheduled work. He can quickly determine when shipments fall behind
schedule and take quick remedial actions.
Management control is the process of ensuring that managers acquire and use
resources efficiently and effectively. It focuses on managerial performance rather
than operational tasks. Management control extends throughout the organizational
structure of a firm and tends to affect managerial behavior.
Strategic
planning
Tactical
planning
Operational
control
Operations
(and related transaction processing)
FIGURE M1-2 Levels of managerial decision-making activity and underlying operations.
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I N F O R M AT I O N N E E D S
Although the decision process is reasonably uniform for all types of decisions,
needed information varies widely from decision to decision. It also varies widely from
manager to manager within the same firm. We begin this section by looking at the
qualities that give value to information. Next, we examine personal differences
among individual decision makers and decisions. Then, we provide a general profile
contrasting the information needs of managers at the highest and lowest levels in an
organization. We examine specific information that can be furnished to managers
and other employees for making a variety of long-term and short-range decisions, including informal information. We conclude the section with an example illustrating
these information needs, as well as the decision process.
To make sound decisions, managers must be provided with valuable information. The value of information, and hence the soundness of decisions, can be affected
by qualities that attach to the information. Unfortunately, these qualities are missing or deficient in many firms, leading managers to make suboptimal decisions.
Particularly useful information qualities are relevance, accuracy, timeliness, conciseness, clarity, quantifiability, and consistency. Each will be briefly discussed in
turn.
Relevance is the degree to which particular information directly makes a difference in the decision choice. Information is relevant, therefore, if it has specific content, it can be used in the decision process, and it leads to some action taken. For
instance, the level of microcomputer sales forecasted for next month is relevant to
the decision by Infoage concerning how many units to stock. In contrast, the production of mainframe computers worldwide last year is not relevant to the decision.
In summary, all relevant information pertaining to a decision should be provided,
while irrelevant information should be excluded.
Accuracy pertains to the reliability and precision of information. Reliability
refers to freedom from errors or bias; precision refers to the degree of refinement
during measurement. For instance, the actual sales made during the past year by
Infoage may be determined reliably and precisely from sales records to be
$2,589,376. The estimate of next year’s sales cannot be stated as reliably and should
not be stated precisely. Errors can be reduced by carefully checking input data and
processing steps through a series of controls and security measures built into
the AIS.
Timeliness concerns the currency and accessibility of information. With respect
to currency, timeliness is measured by up-to-dateness. For instance, if a customer’s
account is posted as soon as a sale is made, the information is continually up-todate. If postings occur once each day, the information is less up-to-date. With respect
to accessibility, information is sufficiently timely if it can affect the process of the decision for which it is intended. One measurement of accessibility is response time,
the length of time between the request for information and the receipt of information by the user. Computer systems allow the response times for certain information
to be a matter of seconds.
Conciseness is the degree to which the quantity of information has been selectively reduced. Conciseness can be viewed as a quality, since it avoids excessively detailed and unnecessary information and hence does not cause information overload.
It is also related to the quality of relevance. For instance, a manager may be provided
only the information needed for required decisions. Exception reports, in which only the
information items requiring control decisions are included, are examples of concise-
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ness. Conciseness can be a slippery quality. Thus managers often need information
that is summarized, such as sales summaries. However, if the information is aggregated, certain key trends or patterns may be hidden.
Clarity is the degree to which information is readily understandable by the users.
For instance, information concerning the sales made by Infoage may be explained in
three ways for the managers: in narrative terms, in analytical tables, and in graphs.
Thus, clarity is enhanced by differing formats as well as by completeness.
Quantifiability is the degree of measurability, or the extent to which numeric values can be assigned to items of information. In general, the quality of information is
enhanced if it can be quantified in some manner. For instance, a level of customer
satisfaction of 4.5 on a scale of 5.0 can be more useful than a statement that customers are “generally very satisfied.”
Consistency is the degree to which information can be compared in a uniform
and meaningful manner. For instance, the sales of one division of a firm may be
viewed as consistent and hence comparable with the sales of other divisions. Sales
reports for managers hence have greater value when division sales are shown in adjoining columns.
Other qualities of information may be briefly noted. Verifiability is the ability to independently generate the same information value, as when one person checks the
calculations of another. Scope is the span of activities or responsibilities covered by
an item of information. For example, a firm’s overall sales cover a broader scope than
the sales of one product line. If a piece of information reduces a manager’s uncertainty in making a particular decision, it is considered useful. An information-needs
analysis, which takes a variety of considerations into account, including the needs
and desires of individual managers, must identify useful information. Experience has
shown that this analysis cannot be performed well by any one person, either individual managers or skilled analysts such as managerial accountants. Instead, both
individual managers and information analysts such as accountants should jointly
undertake determining information needs.
INDIVIDUAL DECISION MAKERS AND DECISION MAKING
Personal characteristics have an impact on decision making and hence on information needs, since they determine each manager’s cognitive style. Cognitive style
refers to the manner in which a manager perceives and processes information in arriving at a decision. For example, Diane Varney may have an analytical style; other Infoage managers may prefer an intuitive approach. An area of study known as human
information processing reveals that cognitive styles vary widely among managers.
Another personal characteristic affecting decision making is the attitude of the decision maker. When a manager believes that his or her own well-being is aligned with
that of the firm’s welfare, the manager tends to make the best possible decision. This
condition is known as goal congruence.
GENERAL PROFILE OF INFORMATION NEEDS
Top-level managers, such as presidents and vice presidents and divisional heads,
make strategic planning decisions. Thus their information needs are directly related
to the qualities of information required by strategic decisions. As Figure M1-3 shows,
the needed information should be (1) broad in scope, (2) relatively summarized or
aggregated, (3) qualitative as well as quantitative, and (4) drawn mainly from external sources. Because strategic decisions pertain to the planning activity of a firm, the
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information is oriented toward the future and consists largely of estimates. Since top
managers have a long-range time horizon, the needed information is not likely to be
highly accurate or precise. Also, timeliness in making the decisions is not normally
critical. That is, making a sound decision is usually much more important than making a quick decision. Top-level managers often bypass the formal manual or computer-based information processing systems and obtain much of their information
from both verbal media (such as meetings, tours, and telephone calls) and written
media (such as periodicals, letters, and reports).
Lower-level managers, like department heads or supervisors, make operational
control decisions. As Figure M1-3 shows, the needed information tends to be (1)
narrow in scope, (2) relatively detailed, (3) mainly quantitative, and (4) derived
mainly from sources within the firm. Since the decisions often facilitate control,
the information pertains to the recent past or present and is compared against
benchmarks. Because the time horizon of operational control decisions is shortrange, the information can usually be quite accurate and precise. It should also be
timely, so that corrective actions can be promptly taken. Often a large portion of
the recurring information needs can be drawn from written media, such as reports,
and can be generated by the computer-based transaction processing activities of
the AIS.
Tactical-level or middle managers’ information needs range between those of
top and operational managers. As illustrated, tactical planning decisions have
Short-range
Time horizon
Long-range
Narrow
Scope
Broad
More
Details
Timeliness
Very important
Accuracy
Very important
Less important
Less important
Qualitative
Quantitative
Less
Less
More
Lower-level manager
FIGURE M1-3
Information-needs profiles of two managers.
More
Less
Higher-level manager
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shorter time horizons, are narrower in scope, and tend to employ less environmental information.
To make effective decisions, all managers, particularly middle-level managers,
need management control information, which provides them with attention-directing information. That is, they must have feedback concerning how well the plans are
currently being carried out. This feedback is usually provided through reports that
compare actual results with planned results. Upon receiving feedback, managers
must make appropriate decisions when necessary and take corrective actions. For example, one control technique that Infoage might employ is to establish an operating
budget that allocates resources to each managerial responsibility center. Periodic
budgetary control reports would compare the budgeted amounts for various objects
and activities against the actual amounts expended. If Jack Dyson, the inventory
manager, exceeds his budgeted amount for a period, an explanation and perhaps a
corrective action is in order.
SPECIFIC TYPES OF INFORMATION NEEDS
Employees (i.e., managers, key workers, and self-managed work teams) working for all
types of firms,* including so-called emerging world-class organizations, require financial and nonfinancial information.
Financial Information Responsible employees who are held accountable for the
results of work achieved should be able to effectively follow their firm’s financial
performance. Consequently, financial reporting systems should convey to proper
employees periodic financial Information so that the firm’s overall profitability
can be evaluated. Such information includes income, earnings per share, key financial ratios, budgetary information, economic value added (e.g., income after taxes
minus cost of capital), variances, product costs, activity-based costs, operating margins, cash flows, sales trends, and sales and operating profits by segments of the
business. This financial information should be accompanied by analysis of the
financial data, such as reasons for changes in the financial data, and the identity
and past effect of key financial trends.** For example, a former CEO of Wal-Mart
Industries stated that the only way the employees (associates) can effectively and
efficiently do their jobs is if important financial information is regularly shared
with them.***
Nonfinancial Information In addition to financial information, a wide variety of
timely nonfinancial information should be reported to employees. Some firms report
nonfinancial information to employees only on a need-to-know basis. However, the
trend in many of today’s organizations is to make nonfinancial information widely
available to all accountable managers, key workers, and self-managed work teams.
*The manufacturing sector includes mining, utilities, and most manufacturing and employs about 15 percent of the workforce. The services sector includes people-oriented services such as auto repair, banking,
and hotels; most health care; state and local government; and elementary and secondary education. This
sector employs about 70 percent of the workforce. The information sector includes information-oriented
services such as advertising and entertainment, communications, publishing, software, computers, higher
education, medical diagnosis, and the securities industry. About 15 percent of the workforce is employed
in this sector. See “A New Way to Split the Economy,” Fortune (November 7, 1994), p. 116.
**The AICPA Special Committee on Financial Reporting. Improving Business Reporting–A Customer Focus. Supplement to the Journal of Accountancy (September 1994), p. 4.
***Gerald M. Hoffman, The Technology Payoff (Burr Ridge, III.: Irwin Professional Publishing, 1994), p. 118.
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Nonfinancial information includes operational, customer, stockholder, general firm,
and external information, examples of which are presented in Figure M1-4. Whereas
financial information tends to be aggregated and summarized at regular intervals,
nonfinancial information often is disaggregated, detailed, and reported less frequently than financial information. However, at the present stage of development,
many firms’ formal reporting systems cannot capture certain nonfinancial information. As firms improve their financial reporting process (described in Chapters
11–13), other types of nonfinancial information will be captured and communicated.
In addition, some nonfinancial information is gathered by informal information
flows, described below.
Operational information includes all information relevant to an employee’s job,
such as information about product defect rates, machine breakdowns, amount of rework, error rates, orders filled, worker productivity rates, quality of product, percentage of rejected parts, and on-schedule performance. Much of this information should
be reported in a very timely manner, such as hourly or daily, so that key employees
can make decisions about the organization of work, the allocation of resources, the
evaluation of their performance, and how this performance affects the operations of
the department and the firm.
A second category of nonfinancial measures focuses on customer information,
such as number of customer complaints, percentage of revenues from new customers, percentage of products delivered on time, percentage of products returned,
and number of major competitors. This information should be communicated as
quickly as possible so that immediate actions can be taken to respond to customer
inquiries, to prevent misunderstandings, or to prevent lost revenues.
To keep them abreast of the latest developments within the firm, employees
absenteeism rates
amount of rework
back orders
best sales performance
competitors’ performance
competitors’ plans
core/noncore business
customer returns
customer sales
customer satisfaction levels
customer survey results
customer visits
defective goods delivered by suppliers
employee attitudes
employee morale
general economic conditions
lead time to receive orders
machine breakdowns
major competitors
management plans, objectives
market share
market trends
new product ideas
FIGURE M1-4 Examples of nonfinancial information.
number of customer complaints
number of customer visits
on-schedule performance
on-time deliveries
orders filled
price comparisons
product defect rates
production scheduling
product quality
recruitment plans
rejected parts per hour
sales by territories
sales/orders
sales trends
scrap rates
service response time
staffing requirements
status of work orders
Types of customer complaints
vendor performance
warranty claims
worker productivity rates
units produced
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need nonfinancial stakeholder and general information. Stakeholder information of
interest includes market value of the firm, market price per share of common stock,
and major shareholders. This data should also be accompanied by a commentary explaining the reasons for changes in the stakeholder data and key trends that the data
reveals. General firm information includes information on market share, employee
morale, employee attitudes, absenteeism rates, capital budgeting data, management
plans, objectives and strategies, and core and noncore business activities. External
information pertaining to the firm’s environment should also be reported. This type
of information enables key personnel to evaluate the potential future impact of the
many external influences on the profitability and competitiveness of the organization, particularly its ability to survive and adapt to the world beyond its borders. Relevant external information includes information about competitors’ plans and
performance, government regulations, legislation, market trends, and new technological developments.
INFORMAL INFORMATION FLOWS
In addition to formal information captured by a firm’s reporting systems, employees
also base decisions on information that they acquire through informal communication channels. Such informal information cuts across all functions and organizational
units and moves horizontally, vertically, and diagonally. All firms can effectively use
informal information. However, informal flows are more important in flattened organization structures.
Sources of informal information include networks of relationships among subordinates, colleagues, employees, and friends in other firms. Other important
sources include magazines, newspapers, fax, e-mail, observation of processes, and
suggestion boxes. For instance, George Freeman, president of Infoage, might have a
casual conversation at a computer technology convention that yields otherwise unavailable data about a new development in laptop microcomputers. Or a partner in
a CPA firm may read about a new type of consulting service that can be offered to
clients.
Informal information items can be critical when making certain strategic, tactical, or operational decisions. For instance, the planned routes of freeways can be extremely important information to Infoage’s managers when deciding where to locate
a new retail outlet computer store (a strategic decision). Or the number of complaints received from customers about a particular brand of microcomputer might influence George Freeman to drop the model from his product line (a tactical
decision). Also, comments received from a public accounting firm’s clients may convince the partners to expand their offering of income tax services (a tactical decision). Finally, observation of high scrap rates by a production supervisor may prompt
the supervisor to recalibrate the machine generating the excessive scrap (an operational control decision).
Even though informal information often enables quick decisions, informal flows
are not always useful or dependable. Often the information is unstructured, incomplete, imprecise, and misunderstood. It may be biased by the personal attitudes of
the sources. For instance, information received from one of Infoage’s accounting employees about possible wrongdoing by another accountant may be colored by the
“whistleblower’s” feelings about his or her supervisor, Diane Varney. Even information received from Diane Varney’s subordinate manager, the assistant controller, may
be distorted to make him or her “look good” or to keep unfavorable results from being exposed.
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SPOTLIGHTING
INFORMATION NEEDS
An Automated Scorecard Meets the Diverse Needs of Stakeholders*
Ftechnology
or all their investments in multibillion dollar
information systems, most executives
still run their firms with a management philosophy
devised by Phoenician traders while the pyramids
were still under construction. The Balanced Scorecard, which can be employed by all types of businesses, helps managers steer their businesses by
providing a comprehensive picture of their performance and stressing forward-looking indicators
like workforce quality and customer satisfaction. It
builds that picture with measures such as customer loyalty, quality, revenue, and employee
knowledge. Balanced Scorecards are designed for
today’s networked world. Financial and nonfinancial information are gathered from thousands of
people on the front lines, consolidated at the corporate level, and redeployed via a data warehouse
so all managers and employees in the firm can
benefit.
West Mercia Constabulary is an example of a
firm that is successfully using the Balanced Scorecard approach. The Constabulary provides policing
services to 1.1 million people in Herefordshire,
Telford & Renkin and Worcestershire, the United
Kingdom’s fourth largest police area. Through its
Joint Policing Plan the Constabulary reports to
many Basic Command Units or stakeholders, including the HM inspectors of Constabulary, the
Home Secretary, district and local councils, and
each of the small policing units. However, each Basic Command Unit group has its own priorities and
reporting requirements, many of which are measured differently. “It was suggested we had too
many performance indicators and that they were
not integrated with each other,” said Geoff Wilson,
research services manager for the West Mercia
Constabulary. “Most indicators were quantitative,
not qualitative or informal, and could not be compared because we had different ways of measuring.”
The Constabulary needed a system that could
provide each Basic Command Unit with information it needed to evaluate such factors as responsiveness, crime rates, safety, and community
safety. Wilson decided to address the problem by
converting the manual reporting system to a Balanced Scorecard application. If successful, the
resulting scorecard would provide senior management with an automated performance measurement tool and an integrated view of the
organization from different Basic Command Unit
perspectives.
Using software acquired from Gentia Software,
the Constabulary developed the Performance Indicator Measurement System (PIMS). PIMS has a
simple summary screen that shows how each Basic
Command Unit is performing against the indicators that make up its critical success factors: keeping the peace, meeting demand, reducing criminal
activity, providing road safety, and maintaining
partnerships with the community. Users can drill
down from this summarized Balanced Scorecard information to several levels, with each lower level
providing more details. The Balanced Scorecard
has been integrated into the management process.
Any member of the staff can go to any terminal and
see all the information concerning the whole organization. Basic Command Units can compare
themselves with others. Because Gentia Software
provides one version of the truth, they are comparing apples with apples, according to Wilson. The
main benefit is the timeliness of information since
it is now available on the second day of the month.
Hence users are more responsive and can make
corrections much earlier. Previously, users had to
wait six weeks to get the information.
Now that the Constabulary has identified its
critical success factors and performance indicators, everyone in the organization knows what they
must deliver. The Balanced Scorecard enables
users to understand how each target contributes
to the overall targets. They can also identify
overdelivery of services and consider whether they
are overresourced in one activity at the expense of
*Adapted from Scott Silk, “Automating the Balanced Scorecard,” Management Accounting, May 1998, pp. 38–40, 42–44.
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INFORMATION NEEDS
another. PIMS is now linked to management decision-making cycles, so there is a cascaded system
from headquarters to the Basic Command Units
and then to their sections.
In the ultimate Balanced Scorecard environment, there are different scorecards for all of the
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different Basic Command Units and for the firm itself. Ideally, all scorecards should be accessible via
the Internet. The Balanced Scorecard should work
in conjunction with a data mart or data warehouse,
treating them as key systems for collecting quantitative information.
AN EXAMPLE
To illustrate information needs—both formal and informal—as well as the decision
process, we will consider the strategic decision concerning the introduction of a
product line and the tactical and operational decisions regarding inventory management. Assume that George Freeman is exploring the prospect of introducing a leading-edge microcomputer product line to the firm’s existing line of products. A major
computer vendor manufactures the desired family of microcomputers. Since the
product life cycle spans several years, the decision is clearly at the strategic level.
George’s needed information includes expected sales during the product’s life, costs
of purchasing the laptop, amount of volume discounts, and expected unit prices that
can be charged to customers. To aid George in developing this quantitative information, Diane Varney may also obtain information concerning competitors’ unit sales
and prices, as well as qualitative information concerning evolving customer preferences and satisfaction with the new product line. Much of this external information
is likely to come from sources other than Infoage’s computer-based MIS or AIS. Mike
Barker, marketing manager of Infoage, may conduct surveys, interviews, and market
demand studies to determine customers’ preferences and satisfaction. He may also
hire consulting marketing associations or polling services to assist him in obtaining
the needed information.
The problems in the recurring inventory management decision are to have desktop and laptop microcomputers, printers, and peripheral devices available for Infoage’s customers at the retail outlets when requested, while avoiding excessive
inventory costs. Unsold units of microcomputers, particularly laptops, rapidly become outdated. Thus, if forecasted laptop sales are below expectation, excess inventory will accumulate and will force Infoage to incur a large loss on the
marked-down units. Conversely, if Infoage underestimates the demand for laptops,
significant lost sales and profits may result.* Dealing with these problems requires
two decisions with respect to each merchandise inventory item: (1) how much inventory to order and carry in stock and (2) when to reorder.
The former decision can be classified as a tactical planning decision and is normally made by a middle manager such as Jack Dyson, Infoage’s inventory manager.
To make this reorder quantity decision, Jack first considers two alternatives. One alternative is to maintain the inventory at a very high safety level, so that stockouts are
unlikely to occur. This inventory system is sometimes referred to as just-in-case (JIC).
Another alternative is to maintain the inventory at a moderate safety level, so that
costs are reduced but stockouts may occasionally occur. Jack uses a decision model
*For a recent Christmas season, both IBM Corporation and Compaq Computer Corporation lost tens of
millions of dollars when both firms incorrectly forecasted much higher unit microcomputer sales than actually materialized.
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MODULE 1/ DECISION MAKING, INFORMATION NEEDS, AND INTRODUCTION TO SUPPORT SYSTEMS
known as the economic order quantity (EOQ) formula to evaluate these alternatives. The
EOQ decision model yields the optimal choice, since it takes into account the stockout costs, carrying costs, and reorder costs, as well as the expected demand for the
inventory item. In fact, it specifies the exact quantity to reorder (which includes the
needed safety stock). After being computed, the EOQ is stored in the inventory
records for use as needed. However, even this model often results in carrying excess
inventory.
The decision when to reorder is a programmable operational control decision.
An inventory control supervisor, a subordinate of Jack Dyson, usually makes it. The
decision model used to implement this decision is called the reorder point formula,
which computes the reorder point by multiplying the average daily demand for the
inventory item by the expected lead time (the time between placing an order and receiving the item from the supplier). Since the reorder decision is of the control type,
it is implemented by comparing the reorder point to the actual quantity on hand. The
“corrective action” consists of Infoage’s inventory control supervisor notifying the
purchasing section that the EOQ quantity needs to be reordered. As the inventory example illustrates, the needed information is detailed, quantitative, and focused on
individual inventory items; it also can be employed in a very timely manner.
IMPACT OF REPORTS ON MANAGERIAL BEHAVIOR
The information needs of managers are often met via hard-copy reports and other
outputs. A typical firm generates a large number of specific reports and output displays that emphasize conciseness, focus on strategic objectives, or offer other
virtues. These specific reports aid in making the necessary planning and control decisions and in meeting the firm’s other responsibilities.
Reports influence managerial behavior. Managers make decisions and take action
based on information in reports. If the information is reported effectively, the managers are likely to make sound decisions and take desirable actions. If the information
is not reported effectively, the managers are inclined to act in undesirable ways.
Consider the common reporting deficiency of information overload—providing
more information than busy managers can reasonably digest. For instance, an inventory manager may receive a thick listing of all materials, showing the quantities
on hand and on order, a personnel manager may receive a report containing numerous comparisons of personnel needs and availabilities. Managers who receive such
reports may act dysfunctionally, perhaps by simply tossing them in a corner or using
the information ineffectively.
T Y P E S O F I N F O R M AT I O N P R O C E S S I N G S U P P O R T S Y S T E M S
We have seen that a firm’s information system is actually a collection of systems.
Each system has one or more purposes and serves certain users with needed information.
LEVELS OF SYSTEMS SUPPORT
Before introducing each type of information processing system, let us briefly survey
the varied levels of support assistance, as well as the kinds of information, that a system can provide. Figure M1-5 portrays five degrees of support, designated by lines
and numbered circles.
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TYPES OF INFORMATION PROCESSING SUPPORT SYSTEMS
Input
data
System
processes
data
System
stores
data
System
suggests
decision
choice
System
models
data
System
makes
decision
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Outputs
Processed
information
Support level
1
2
3
4
5
FIGURE M1-5 Levels of decision-making support provided by support systems.
Support Level 1, which provides the lowest degree of support, collects data from
internal or external sources and stores it in unprocessed form. An example would be when Diane Varney collects current interest rates from local
banks.
Support Level 2 collects and processes or analyzes data. For instance, Diane Varney might collect data concerning daily sales and prepare a monthly sales
analysis report for Mike Barker, Infoage’s marketing manager.
Support Level 3 employs a decision model to process data and to estimate the
consequences of alternative courses of action. For example, Diane Varney
may collect data related to product prices from the marketing department.
She may incorporate the product prices into a pricing model to estimate the
effects of several prospective prices on sales. The resulting information
might help Mike Barker select the most suitable price for a particular product.
Support Level 4 uses a decision model, as in Support Level 3. However, at this
higher level of support, the system continues the decision process to
the point at which it determines the best alternative course of action. For
instance, a decision model prepared by Diane Varney might suggest the
best possible location for a third retail outlet is in the Seattle metropolitan
area.
Support Level 5, which represents the highest level of support, employs one or
more decision models to make one or more decisions, which are automatically put into effect. This support level may be labeled the replacement level,
since the system has essentially replaced the human decision maker. An instance of the replacement level may be found in a system at Infoage in which
Diane Varney constructs decision models to determine when inventory items
need to be replaced, how many units to reorder, and which supplier to order
from—after which the system actually prepares the purchase orders for mailing to Infoage’s selected suppliers.
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Each of these levels of support can be identified with specific types of processing systems. The assumptions underlying the levels of support are cumulative; that
is, each higher level includes all of the assumptions of the lower levels, plus one or
more new assumptions. The set of assumed system capabilities for the various levels is summarized in Figure M1-6.
Now we shall contrast the types of processing systems arrayed in Figure M1-7
and examine the levels of decision support they provide. As illustrated, data processing support systems are composed of transaction processing systems, and information processing support systems embrace operational support, decision
support, and artificial intelligence systems. Another type of support system—executive information systems (EISs)—is described separately. Since EISs are similar to
decision support systems, they are omitted from Figure M1-7. Figure M1-8 represents
the first three types of data and information processing systems as support layers
within the overall information system. Since the data and information processing
support systems mirror the organizational and physical features of a firm, the layers
within the triangle also represent managerial and operational levels. In addition,
these layers interrelate with operational, tactical, and strategic decisions that must
be made by a firm’s managers.
TRANSACTION PROCESSING SYSTEMS
Transaction processing systems reside at the lowest, or operational, layer of a firm’s
processing systems. We have become quite familiar with these systems, which together
make up the accounting information system (AIS) of a firm. Although the sole purpose
of a transaction processing system (TPS) is not to aid managerial decision making, it
does nevertheless generate useful information that appears in scheduled reports and
documents. For instance, a purchasing TPS generates outputs such as purchase orders,
open purchase order reports, and analyses of purchases. Since such reports and documents are a result of processing, a TPS typically provides level 2 support.
Support Level
1
2
3
4
5
Assumed System Capabilities
Data concerning observations of actual events (e.g., sales) can be stored in an organized manner
that allows easy retrieval of specified data elements or records
In addition to the capability of Support Level 1, data concerning actual events can be processed
and analyzed and then be used to generate specified reports and/or analyses
In addition to the capabilities of Support Levels 1 and 2, data concerning projected events (e.g.,
sales forecasts) can be processed and analyzed via decision models; users can interact with the
models to determine consequences of assumed alternatives or changes (e.g., “What is the effect
on net profits if sales are 10 percent higher than forecasted?”); then the results from applying
the models plus the responses to such assumed changes can be provided in the forms of model
analyses or reports
In addition to the capabilities of Support Levels 1, 2, and 3, consequences of assumed alternatives
can be compared against rules or criteria (which must be predetermined and incorporated into
the system), in order to select the best alternative course of action; then this recommended alternative is provided to the user in the form of a statement.
In addition to the capabilities of Support Levels 1 through 4, the recommended course
of action can be fully carried out (which includes the capabilities of initiating actions, committing resources, and monitoring results without the aid of humans)
FIGURE M1-6 Assumed information system capabilities for five levels of support.
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TYPES OF INFORMATION PROCESSING SUPPORT SYSTEMS
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Types of processing
systems that
support decision
making
Information
processing
support systems
Data processing
support systems
Transaction
processing
systems
Operational
support
systems
Decision
support systems
(DSS)
Nonintelligent
DSS
Natural
languages
Robotics
Artificial
intelligence
systems
Intelligent
DSS
Expert
systems
Neural
networks
FIGURE M1-7 Types of processing systems that support managerial decision making.
OPERATIONAL SUPPORT SYSTEMS
At the middle layer of the triangle are operational support systems. An operational
support system (OSS) is an information processing system that aids the planning
and control of operations. It focuses mainly on the short-range tactical planning and
operational control decisions (although management control decisions may also be
included). Middle-level and lower-level managers make these relatively structured
types of decisions.
As Figure M1-8 shows, an OSS uses both nonroutine data from internal
sources and transaction data from external sources. It also may require nonroutine data from external sources. All of these data are processed before being
stored or reported. An OSS may thus provide support ranging from level 2 through
level 5.
The collected OSSs within a firm essentially compose the management information system (MIS) of a firm. Since the MIS can be subdivided into functional information systems, an OSS may be classified as a financial OSS, an inventory
management OSS, and so on. The system that automatically provides purchase orders at Infoage, used as an illustration for level 5 support, is an example of an inventory management OSS. Most OSSs are dedicated to particular activities, which
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Nonroutine data
(mainly from
external sources)
Nonroutine data
(mainly from
internal sources)
Transaction
data (mainly
from external
sources)
Decision
support
systems (DSS)
Operational support
systems (OSS)
Transaction processing
systems (TPS)
Strategic and
tactical planning
decisions
Control and
short-term
tactical planning
decisions
Operational
actions
INFORMATION SYSTEM
Data flows
Information flows that
lead to actions or decisions
FIGURE M1-8
Types of support systems.
vary according to the type of firm. For instance, motels and airlines have dedicated
reservations systems.
Information generated by an OSS will generally appear in periodic and routine
managerial reports such as an operational budget report and a work-order status report. Information from an OSS may appear in other forms, however. For example, an
automatic credit-checking system developed by Diane Varney may simply notify the
firm’s credit manager of approvals or rejections of credit orders via a video display
screen.
Because of the variety of decisions that they may support, OSSs range widely in
capabilities. Most OSSs possess the first two of the following attributes, and many
possess some or all of attributes 3–5.
1.
2.
3.
4.
5.
Interactive processing and inquiries by users.
Concurrent, or time-shared, access by a variety of users.
Algorithmic and computational perspective toward decision making.
Real-time control over an ongoing process or operation.
One or more embedded decision models, which the system applies automatically in controlling a process or an operation.
Most OSSs enhance the efficiency and timely control of operations. Some OSSs help
to improve the quality of operational and short-range tactical decisions.
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TYPES OF INFORMATION PROCESSING SUPPORT SYSTEMS
Because of their
distinctiveness
and increasing
importance, nonintelligent
and intelligent DSSs are
explored more fully in
Module 2 on this CD-ROM.
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CD–19
DECISION SUPPORT SYSTEMS
At the top layer of the triangle are decision support systems, another type of information processing system that requires its users to have relatively sophisticated
computer expertise. A decision support system (DSS) aids higher-level and middlelevel managers in making strategic and certain tactical planning decisions. It is therefore concerned with decisions that usually involve relatively unstructured or
semistructured problem situations with long-range impacts. A DSS usually provides
level 3 support and sometimes level 4 support. However, a DSS by definition cannot
provide level 5 support.
EXECUTIVE INFORMATION SYSTEMS
An executive information system (EIS) is a customized information support system.
Originally designed for the chief executive officer of a firm, now it is often used by
other high-level executives and many middle managers as well. The purpose of an
EIS is to provide rapid and easy access to critical information used to fulfill managerial responsibilities, such as making timely and well-informed strategic planning
and management control decisions and overseeing firm operations.
Although they have many similarities, an EIS and a DSS exhibit several important and noticeable differences. First, an EIS’s most vital concern is to facilitate more
effective control by key managers. A DSS aids primarily in the planning process. Second, an EIS is data-retrieval oriented, thereby allowing limited analysis of the data. A
DSS is model oriented, allowing users to thoroughly analyze and manipulate data.
This versatility makes the DSS more complicated to master than an EIS. Third, since
an EIS is easier to use than a DSS, top executives are hands-on users of the system.
On the other hand, because of the complexity of DSSs, professional support staff
such as accountants or marketing researchers work directly with the DSS software
and report the results to the managerial users. Finally, most EISs at present use a
concept known as drill down. Drill down means that the EIS software can display information in several levels of detail, with each successively lower level displayed in
more detail. On the other hand, DSSs rarely allow the visualization of more than one
level of detail.
The heart of an EIS is a data base. The data base of an EIS usually includes data
from both internal and external sources. Examples of internal data captured by an
EIS include sales, budgets, trends, cash flows, variances on product quality, segment
data, profitability figures, and other key business variables. External data often accessible via on-line commercial data bases include information about competitors,
products, stock prices, economic data, projected legislative action, world news, and
industry trends.
Data might be stored in multidimensional forms, with separate dimensions for
the major income statement and balance sheet accounts, time periods, product
lines, customer classes, and divisions of the firm. Thus the amount sold of product
line A to customer class 2 during the past three years would be accessible. Stored
models might relate to the industry and economy as well as the firm itself. By using menus, prompts, and touch screens, an effective EIS aids the manager in accessing the EIS’s data base. He or she can quickly display preformatted,
easy-to-understand, multicolored tables, graphs, trend analyses, and comments
interpreting the screen displays. Consequently, an EIS can provide support ranging
from level I to level 3.
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ARTIFICIAL INTELLIGENCE
Because expert
systems have many
applications in the
accounting area, we will
examine them more closely
in Module 2 on this
CD-ROM.
Because these
emerging neural
networks
potentially have a significant
number of applications in
the accounting area, we will
examine them further in
Appendix 2 to Module 2 on
this CD-ROM.
Artificial intelligence (AI) is the science of building computer devices and software applications that mimic many of the characteristics that we associate with human behavior, such as the ability to reason, see, learn, solve problems, understand
language, and so on. As shown in Figure M1-7, artificial intelligence systems are subdivided into natural languages, robotics, expert systems, and neural networks. However, our discussion will be limited to expert systems and neural networks, both
branches of which have important implications for accountants. In a sense, both expert systems and neural networks are variations of DSSs. However, expert systems
and neural networks can be designed for problems that arise at any managerial level
or even for some types of clerical applications of a firm. In contrast to the other areas of AI, expert systems, neural networks, and robots process and analyze information. AI technologies are becoming increasingly adaptable; thus their use is expected
to become commonplace and widespread.*
An expert system (ES) is a computer program that contains a knowledge base of
one or more experts’ rules. To a degree, the program can replicate the reasoning or
thought processes of human experts by recommending solutions to specific but difficult problems. Since expert systems recommend decisions, they provide level 4
support.
A neural network (NN) is structured to solve problems in a manner similar to the
parallel processing technique used by the human brain. A neural network computer
software model is constructed to repeatedly analyze sample data. The neural net
learns the relationship between the sample data by constructing a mathematical
model that recognizes patterns in the sample data, such as correlations between
seemingly unrelated data. Since neural networks recommend decisions, they provide
level 4 support.
SUMMARY
The managerial decision-making process consists of six
steps that should result in the preferred alternative being selected, carried out, and followed up. Decisions
may be classified as structured, semistructured, or unstructured. Alternatively, they may be classified in accordance with the management activities of strategic
planning, tactical planning, management control, and
operational control.
A firm’s information consumers (e.g., managers, key
workers, and work teams) need information to aid in
making a variety of decisions. In determining information needs, an information analyst attempts to maximize
the value of information communicated to every information consumer in the firm. Information needs vary
significantly along such dimensions as managerial activities, managerial levels, organizational structures, job
responsibilities, and operational functions. By analyzing
information needs along these dimensions, an accountant or systems analyst gathers clues concerning the information needs of individual information consumers.
Specific information needs include financial and nonfinancial information. The latter category encompasses
operational, customer, stakeholder, general firm, and
external information. Managers also frequently rely on
informal information sources, such as colleagues, employees, and professional acquaintances, to make important decisions.
The purpose of an information system is to support
decision making. To do so, it may employ a variety of
systems: transaction processing systems, operational
support systems, decision support systems, executive
information systems, expert systems, and neural net-
*Systems Auditability and Control Report. Module 11: Emerging Technologies (Altamonte Springs, Fla.: Institute of
Internal Auditors Research Foundation, 1994), pp. 222 and 226.
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REVIEW PROBLEMS WITH SOLUTIONS
work systems. The transaction processing systems provide information relating to the operations; the operational support systems focus on short-range
operational and tactical decisions made by middleand lower-level managers; and the decision support
systems focus on long-range strategic and tactical
planning decisions made primarily by the higher-level
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CD–21
managers. Executive information systems provide information to higher-level managers for monitoring and
controlling the firm’s activities. Expert systems provide
recommendations concerning a range of difficult decisions. Compared to expert systems, neural network
systems give advice about a broader range of difficult
problems.
REVIEW PROBLEMS WITH SOLUTIONS
HIPPO COMPANY
Statement
Hippo Company is a large department store in downtown Denver. One day Ms. Carlene Franks, the treasurer,
receives a phone call from the president, who says, “We
have a problem. Our fleet of delivery trucks is no longer
adequate because of our continued growth in sales and
the flight of many of our customers to outlying suburbs.
Roger, our marketing manager, feels we should take
prompt action. We’ve discussed the possibility of acquiring new trucks. I’d like for you to look into the problem, including the financing aspects.”
Ms. Franks begins the definition of the problem by
reviewing relevant objectives. The Hippo Company
stresses customer service. Part of this service consists of
prompt customer deliveries. Another objective emphasizes economy in all activities, including the delivery of
customer packages and the financing of capital acquisitions. She concludes, therefore, that the decision should
(1) minimize total delivery costs while (2) ensuring
prompt deliveries. These two measures represent the
overall criteria by which the decision choice will be
judged. (Note that she does not narrowly state the criteria to be the acquisition of funds promptly and at the
lowest interest rate. Therefore, she widens the range of
possible actions beyond the acquisition of new delivery
trucks.)
Next Ms. Franks considers constraints, assumptions,
and the planning horizon. The first constraint pertains to
the decision deadline, which, because the matter is urgent, she sets at one week. Next she eliminates the possible solution of issuing common stock. Firm policy
forbids this method of financing, since Hippo Company
is family owned. Then she ascertains that available
garage space is limited to only one dozen more trucks.
Any additional trucks would have to sit unprotected or
would require additional garage space. Her assumptions
are that sales will grow at the same rate as in recent
years and that interest rates will remain at about the
same level for the near future. Finally, she specifies the
planning horizon to be three years, the estimated life of
delivery trucks.
As the final aspect of problem definition, she gathers
relevant data (with the aid of the accounting department). The gathered facts include the acquisition cost of
each truck, the terms of sale, the operating costs of similar trucks, the availability of drivers in the labor market,
the current financial status of the store, the current interest rate, the rates charged by commercial delivery services in the area, and so on.
Ms. Franks next lists the following courses of action:
a. To purchase trucks by borrowing funds from the local bank on a long-term note.
b. To lease trucks and pay out of current revenues.
c. To contract with a commercial delivery service.
She also considers briefly the alternative of factoring accounts receivable but discards it as involving too high
cost for funds.
She then determines that a decision model can be
developed in explicit terms, since most of the factors are
quantitative in nature. Therefore, Ms. Franks sets to work
and has a completed model in a matter of hours. Her
model relates the financing costs, the initial and operating costs pertaining to the trucks, the costs of added
garage rental, and other relevant costs. Although none
of the alternatives will incur all of these costs, the model
is sufficiently general to apply to all. That is, it enables
all of the alternatives to be compared based on the first
criterion-minimized total delivery costs (expressed at
present values).
Furthermore, it enables the second criterion, prompt
delivery service, to be incorporated in the decision
model via the values of key factors. That is, the operating costs of acquired trucks in the first and second alternatives and the contract price for a commercial delivery
service in the third alternative can be computed under
the assumption that one-day delivery service is provided.
Thus Ms. Franks uses the newly developed decision
model to determine the total delivery costs, at present
values, for the four alternatives. She finds that contracting with a commercial delivery service involves the least
cost over the three-year planning horizon. The purchase
of trucks involves the next lowest cost. She then meets
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MODULE 1/ DECISION MAKING, INFORMATION NEEDS, AND INTRODUCTION TO SUPPORT SYSTEMS
with the president and marketing manager, since all
three managers must agree on the final decision choice.
After considerable discussion, in which nonquantitative
factors are added to the quantitative results, they reach
this decision: The commercial delivery service alternative should be rejected, and the alternative involving the
purchase of trucks should be selected.
Their reasoning in reaching this decision is as follows. In spite of incurring the lowest cost and providing
a contractual guarantee of prompt service, the commercial delivery service alternative is not suitable. Its acceptance would conflict with objectives relating to the
store’s public image and control over its activities. On
the other hand, purchasing and using its own labeled
trucks enhances both these objectives while incurring
only relatively small added costs. By means of this latter
alternative, the store preserves its image as a personalized messenger service as well as a merchandiser of
goods, it also retains control over the truck drivers, so
that instances of discourtesy and unreliability can be
corrected easily.
With the concurrence of the president, Ms. Franks
prepares a schedule of all required activities. For instance, the first activity she lists is to notify all managers
and employees of the decision, the next step is to contact the bank officials, and so on. Beside each activity
she notes the expected completion date. As each activity is executed, she inserts the actual date of completion.
After the delivery trucks are acquired, the appropriate managers receive periodic reports. Ms. Franks receives reports concerning loan repayments. The
marketing manager receives reports indicating the level
of operating costs and the number of complaints about
delivery service. If the actual level of operating costs
rises significantly above predicted costs, the marketing
manager will investigate and take necessary cost-reduction steps.
Required
Identify the several steps of the decision process that are
illustrated in this problem situation.
Solution
Step
1. Problem recognition and definition.
2. Determination of alternative courses
of action.
3. Evaluation of alternatives.
4. Selection of best alternative.
5. Implementation of decision choice.
6. Follow-up of decision results.
Paragraph
1, 2, 3, 4
5
6, 7, 8
8, 9
10
11
TOLLIVER ELECTRONICS, INC.
Statement
George Morrill is the purchasing manager for Tolliver
Electronics, Inc., an Amherst, Massachusetts, manufacturer of high-quality electronics products. Before becoming purchasing manager, he was an electronics
technician and quality control supervisor.
Among George’s decisions are the following:
a. Selecting the suppliers from whom to buy parts and
subassemblies (tactical planning decisions).
b. Establishing purchasing policies (strategic planning
decisions, to be made together with higher level managers within the firm).
c. Hiring and evaluating supervisors, buyers, and other
purchasing department personnel (management control decisions).
d. Negotiating purchase contracts (tactical planning
decisions).
Required
a. Describe briefly how George would determine his information needs.
b. For one of the foregoing decisions, list needed
items of information and required properties.
c. Note any other information that should be provided
to George.
d. Describe a key report that George should receive.
Solution
a. Together with one of the firm’s accountants or systems analysts, George would first list the decisions that
he makes. Then they would develop information specifications for each decision, add other information
needs, and design suitable reports to provide the information.
b. With respect to the selection of suppliers, George
needs such information concerning each potential supplier as the expected unit prices of the parts or subassemblies, the expected lead times (time periods
between the order dates and receipt dates), the quality
of the parts or subassemblies, and the current availability of the parts or subassemblies. He needs this information in a summarized form at least weekly.
Although some of the items, such as unit prices and
availability, are subject to change, they should be as reliable as possible and thus based on up-to-date facts.
The quality of parts or subassemblies should be expressed quantitatively if possible; perhaps an index rating based on a top score of 10 could be used.
c. Because of George’s technical background, he also
might desire key technical information concerning criti-
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DISCUSSION QUESTIONS
cal subassemblies. For instance, he may want to know
the allowable tolerances between the various parts
within such subassemblies, as reflected in the manufacturer’s specifications. If he has this kind of information for the subassemblies available for each potential
supplier, he may feel that he has a better basis for comparing quality.
To help spot upcoming supplier problems, George
should receive information that shows trends in (1) the
unit prices charged by each supplier for critical sub-
•
CD–23
assemblies and (2) the expected lead time for each
supplier.
d. One key report George might receive would be a
weekly report that summarizes on a single page the important factors pertaining to each potential supplier or
critical subassemblies. In addition to showing the upto-date status of unit prices, lead time, quality, and
availability, the report should reflect percentage
changes in unit prices and lead times.
KEY TERMS
accuracy (CD–6)
clarity (CD–7)
cognitive style (CD–7)
conciseness (CD–6)
consistency (CD–7)
control (CD–5)
customer information (CD–10)
decision model (CD–3)
decision process (CD–2)
decision support system (DSS) (CD–19)
executive information system (EIS) (CD–19)
external information (CD–11)
financial information (CD–9)
general firm information (CD–11)
goal congruence (CD–7)
human information processing (CD–7)
informal information (CD–11)
information overload (CD–14)
information processing (CD–1)
information qualities (CD–6)
management control (CD–5)
nonfinancial information (CD–10)
nonprogrammed decision (CD–4)
operational control (CD–5)
operational information (CD–10)
operational support systems (OSS) (CD–17)
optimal decision (CD–2)
planning (CD–4)
programmed decision (CD–4)
quantifiability (CD–7)
relevance (CD–6)
satisfactory decision (CD–2)
stakeholder information (CD–11)
strategic planning (CD–5)
structured decision (CD–4)
tactical planning (CD–5)
timeliness (CD–6)
unstructured decision (CD–4)
DISCUSSION QUESTIONS
M1-1. What are suitable roles of accountants in managerial decision making?
M1-2. How do the information needs of external users
differ from the needs of managers?
M1-3. What are the possible drawbacks of providing too
much information to a manager? too little information?
M1-4. What do you feel are the most important steps in
the decision process?
M1-5. Discuss the extent to which a formal information
system can be expected to provide information for
making the typical strategic planning decision and for
making the typical operational control decision.
M1-6. Do you feel that the accounting profession needs
to provide direction and leadership to ensure that users
get the critical information they need?
M1-7. Log-on to the following three Web sites: http://
wwwbrint.com/, http://www.computerworld.com/, and http://www.
infoworld.com/. What type of information/articles are
available at these sites about knowledge work, information needs, management information systems, decision support systems, executive information systems,
artificial intelligence, expert systems, and neural networks? Can you print full-text articles from any of
the three sites? special reports? Are their links to
other relevant sites related to the topics covered in
Module 1?
M1-8. “Computer technology has given firms easy
access to all kinds of information, but too much
information can sometimes be as limiting as not enough
if it cannot be used to solve a problem or gain an
advantage.” Comment on this statement.
M1-9. What types of nonfinancial information would be
important to a small CPA/consulting firm? Would the
firm’s current financial reporting systems be able to
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MODULE 1/ DECISION MAKING, INFORMATION NEEDS, AND INTRODUCTION TO SUPPORT SYSTEMS
generate these necessary measures? What modifications, if any, to the reporting systems would be in order
to generate such information?
M1-10. Discuss the role of accountants in developing
transaction processing systems, management information systems, and decision support systems.
M1-11. What role should accountants assume in developing artificial intelligence systems?
M1-12. Describe how firms can use expert systems to
increase their knowledge base.
M1-13. How can properly designed information processing support systems enhance the productivity of
knowledge workers?
M1-14. Explain how financial and/or nonfinancial information can help companies (a) improve customer relations, (b) share good ideas, (c) avoid repeating mistakes,
(d) compete with major market leaders, (e) quickly launch
new products, and (f) avoid duplication of work.
M1-16. Assume that you are to give a 15-minute talk
to the local CPA chapter on “The Importance of
Nonfinancial Information.” Prepare a one-page outline
of the talk.
M1-17. Log-on to the Datamation Magazine Web site at
http://www.datamation.com/. Beginning at the home page,
search for an article on how to turn data into useful
information. Prepare a written summary of the article or
a related article. What are the implications of this article
or a related article to accountants?
M1-18. How might a firm’s internal control environment influence the manner in which managers make
decisions?
M1-19. Assume that you are making a decision about
what new auto to purchase after graduation. List the
alternatives for this decision and the criteria that should
be evaluated for each alternative. How could a decision
support system aid in making the decision? an expert
system?
M1-15. “He who mines data may strike fool’s gold.” Do
you agree or disagree with this statement?
PROBLEMS
M1-1. Indicate how the following computer and related technologies can improve the decision-making
process of managers:
a. Data marts and data warehouses.
b. Communication networks, including the Internet, Intranets, and Extranets.
c. Web content management tools such as browsers
and search engines.
d. Enterprisewide messaging software.
e. Microsoft Access (a relational data-base management system).
f. Data mining software.
g. Intelligent agent software.
h. Enterprise resource planning systems
i. Open computing platforms.
j. Collaboration software tools.
M1-2. Refer to the table on the following page which
illustrates types of computer software that can aid in
making decisions.*
*Based on an example of rank ordering the severity of 15 crimes
in Stephen P. Robbins, Management, 4th ed., (Englewood Cliffs,
N.J.; Prentice Hall, 1994), p. 181.
Required
a. In the column headed Student Ranks, order the 14
types of software in the table by rank according to the
importance of the software in helping to make effective
decisions. Assign the highest rank of 1 to what you feel
is the most effective decision-making software, a 2 to
the second most effective software, and so on. You
should be able to complete this step in about five to
seven minutes.
b. Your instructor will break down the class into teams
of three to five students after you complete your individual rankings. Spend about 15 to 20 minutes to
arrive at a group consensus ranking of each of the 14
decision-making software packages and place in the
second column.
c. Place the actual rankings provided by your instructor in column 3.
d. Compute the individual and group error scores and
place them in columns 4 and 5, respectively.
e. Each group member should compare his or her
group error scores against his or her individual error
scores. Did the performance of the group, as a whole,
improve? Group members should then review the quality of discussion during the group decision making.
Was there any difference in the quality of discussion in
groups that had low group error scores compared to
those that had high scores?
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PROBLEMS
Type of Decision-Making Software
Student
Ranks
Group
Ranks
Actual
Ranks
Student
Errors
•
CD–25
Group
Errors
Analytical hierarchy process software (e.g., Expert
choice or Criterium Decision Plus)
Data mining
Electronic spreadsheet
E-mail
Executive information system
Expert system
Financial modeling software
Intelligent agent
Linear programming
Neural network
Push technology (e.g., PointCast)
Relational data-base management system
Statistical software
Web search engine
M1-3. Name two or more alternative courses of action
that should be considered during the decision process
pertaining to each of the following problems:
a. How to establish a public accounting firm’s billing
policies.
b. How to expand plant capacity.
c. How to promote a CPA firm’s products (services).
d. How to reduce costs in production operations.
e. How to generate a firm’s growth.
M1-4. Assume the following goals of different firms:
1. Selecting a new car by a pharmacy to make
deliveries in the local area.
2.
Evaluating the value of staff accountants.
3. Selecting the best site for a new branch
office for a regional stock brokerage firm.
4. Evaluating whether to merge with one of
several public accounting firms in the area.
5. Evaluating whether a new product line
should be introduced by a manufacturing
firm.
6. Selecting a new retail site by an ice cream
retailer.
7. Selecting a new staff accountant for an
internal audit department of an automotive
manufucturer.
Required
a. For each goal, define the relevant criteria to be included in a decision model. Each criterion should be
assigned independent weights from 1 to 100 percent,
based on its relative importance to the other criteria.
How should these weights be assigned?
b. Select two or more alternatives for each goal.
c. How would you evaluate the criteria identified in
a above? That is, should the criteria placed in the
decision model be assigned numerical data? nonnumerical data? How would the data for each criterion be
weighted?
M1-5. Describe the steps in the decision process pertaining to each of the following problem situations:
a. Whether a local CPA firm should acquire the practice of another public accounting firm located in the
same city.
b. Whether to open a second fast-food restaurant in a
city of 75,000 residents.
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c. Whether a national fast-food chain should discontinue a sandwich that appeals mainly to older, healthconscious persons.
d. Whether a small firm should replace an accounting
software package that it has used for the last 12 years.
e. Whether to replace a van that is part of a university’s
motor pool.
M1-6. For the following managers of a typical firm, describe (1) decisions for which each is primarily responsible, (2) suitable performance measures by which
each decision may be evaluated, and (3) information
needed by each to make decisions and to carry out assigned responsibilities:
a. President.
b. Controller.
c. Production manager.
d. Sales manager.
e. Personnel manager.
f. Treasurer.
g. Materials manager.
h. Advertising manager.
i. Credit manager.
j. Production supervisor.
M1-7. Several words, phrases, and statements below
question 8 pertain to a firm that manufactures several
lines of athletic footwear for many competitive sports
including football, baseball, basketball, and tennis. Over
the past three years, sales and market share have been
declining for all major product lines. The president of the
firm is deeply concerned and believes that improved
planning and control could reverse this trend. The
president has called in a management consulting firm.
Statements numbered 1 through 8 below describe the
characteristics of different types of planning performed by
different levels of management. Select the appropriate
word or phrase from the following list to match each
statement. Use each word or phrase only once.
Words and Phrases
a. Operational planning.
b. Six months to two years.
c. Organizational mission.
d. Objectives.
e. One to ten years.
f. One week to one year.
g. Intermediate (tactical) planning.
h. Strategic planning.
1. Planning horizon for operational planning.
2. Planning horizon for intermediate planning.
3. A clear, formally written, published statement
that is the comerstone of any planning system.
4. Planning horizon for strategic planning.
5. The process of determining how to pursue the
organization’s long-term goals with resources
expected to be available.
6. The process of determining how specific tasks
can best be accomplished on time with available
resources.
7. Specific commitments to achieve a measurable
result within a given time frame.
8. The process of determining the contributions
subunits can make with allocated resources.
(CIA adapted)
M1-8. Arment Company has sales in the range of $25
million to $30 million, has one manufacturing plant,
and employs 700 people, including 15 national account
salespersons and 80 traveling sales representatives. The
home office and plant are in Philadelphia, and the
product is distributed east of the Mississippi River. The
product is a line of pumps and related fittings used at
construction sites, in homes, and in processing plants.
The firm has total assets equal to 80 percent of sales. Its
capitalization consists of current liabilities, 30 percent;
long-term debt, 15 percent; shareholders’ equity, 55
percent. In the last two years sales have increased 7
percent annually, and income after taxes has amounted
to 5 percent of sales.
Required
List the strategic decisions that must be made or confirmed during the preparation of the annual profit plan
or budget.
M1-9. Determine whether each of the following decisions is structured, semistructured, or unstructured,
and the managerial level most likely to make the
decision—top, middle, or operational.
a. Preparing an adjusting journal entry to record the
yearly depreciation expense.
b. The hiring of a new staff accountant. The new employee is a recent college graduate.
c. Determining the number of branch CPA offices to
open for business during the next two years.
d. Evaluating the performance of the accounting department.
e. Evaluating the performance of the accounts receivable accountant.
f. Authorizing the construction of a seven-story office
building to house a public accounting firm’s partners,
staff accountants, and nonprofessional staff.
g. Selecting the location of the office building in f
above.
h. Selecting a vendor to provide office supplies to a
Big-Five public accounting firm.
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PROBLEMS
i. Controlling the costs of the data processing department.
j. Promoting a senior accountant working for a regional public accounting firm to manager.
k. Assigning a salesperson to the Mid-Atlantic region.
l. Determining the amount of the advertising budget
for the next 10 years.
m. Determining the advertising media to employ to
promote the firm’s products for the coming year.
n. Selecting a repair service to fix the accounts
payable accountant’s microcomputer’s hard-disk drive.
o. Exploring the possibility of a large Midwestern bank
with 175 branches merging with a local bank having 15
branches.
p. Determining the best source of financing to purchase the local bank mentioned in o above.
M1-10. Determine whether each of the following decisions is structured, semistructured, or unstructured, and
the managerial level most likely to make the decision—
top, middle, or operational.
a. Determining the quantities of raw materials to purchase during the coming year.
b. Determining whether to add a new product to an
existing product line.
c. Assuming that the new product in b above is introduced, determining whether additional employees
must be hired and another shift added.
d. Billing a customer for merchandise ordered.
e. Determining what additional manufacturing facilities to purchase.
f. Determining where to establish a new sales branch.
g. Determining whether to hire new staff accountants
for a large public accounting firm.
h. Determining the amount of finished goods to produce during the coming month.
i. Determining which operational audits to conduct.
j. Determining the amount of product A to manufacture.
k. Determining the pay rate for a recently hired CPA.
The CPA has seven years of experience with a Big-Six
public accounting firm.
l. Determining whom to hire as the new controller.
m. Scheduling machines to produce special orders received from customers.
n. Approving a customer’s credit application.
o. Setting the prices on products.
p. Issuing common stock to finance the purchase of a
firm as a 100 percent wholly owned subsidiary.
M1-11. Matt Little, CPA, is a senior staff accountant specializing in providing management consulting
services to small and medium-size clients for his
•
CD–27
employer, Logan and Maddox, CPAs. Matt has been
assigned to perform an engagement for Suede Masters
Company. The firm cleans and repairs all types of leather
goods at its factory facility located in Springfield,
Missouri. The firm has contractual agreements with
numerous laundries in a six-state region encompassing
Missouri, Tennessee, Arkansas, Illinois, Oklahoma, and
Kansas. Swede Masters employs four full-time drivers
who stop at designated laundries along a two-state
route to pick up leather goods for cleaning or repairing
that have been dropped off by the firm’s customers. In
addition, drivers stop at various laundries along their
route to explain the merits of switching their business to
Suede Masters. A driver receives a $100 commission for
each new laundry that signs a contract with Suede
Masters. The drivers use a company-owned van to travel
to their clients and drive an average of 1600 miles a
week.
Matt’s assignment is to select a new van for Suede
Masters. After much research, Matt has narrowed the
search for a van to the following alternatives:
• GMC Savana
• Toyota Previa
• Dodge Caravan
• Nissan Quest
• Honda Odyssey
• Ford Windstar
• Plymouth Voyager
For each van, Matt will evaluate the following criteria:
• Cost
• Fuel economy
• Maintenance expense
• Safety features
• Overall reliability
• Appearance
• Performance (speed and acceleration)
• Cargo capacity
Required
a. Matt intends to develop a noncomputerized decision model to rank the seven potential vans from low
to high. Describe the structured decision process that
Matt would follow in developing this model.
b. Could Matt employ a computer to aid in making the
decision? If so, what kind of software package would be
useful and to what degree would the decision be automated? Be specific.
c. What Web vendors sell the software package(s)
identified in b above, and what is the cost of each
package identified? Is a free demo version of the software package(s) available for downloading from the
Web site?
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MODULE 1/ DECISION MAKING, INFORMATION NEEDS, AND INTRODUCTION TO SUPPORT SYSTEMS
M1-12. Log-on to the following Web site: http://www.uku.
edu/BusinessEconomics/dssakba/instmat.htm#instmat. Pages 2
and 3 of the Web site’s home page list vendors of
decision-making-related software. Click on the following vendor sites: (1) Comshare, (2) Data Mining Vendors,
(3) Expert Choice, (4) and Information Builders, Inc.
Required
Prepare a written report on each of the four vendor sites.
Include the following information in each report:
1. The types and main features of the automated
decision-making software provided by the firm.
2. The types of accounting-related decisions that can
be made with the software identified in 1 above.
3. Examples of actual case studies of how the vendors’
products have been employed by various firms.
4. Vendors that provide a free downloadable demo of
their software; a downloadable tutorial.
5. The potential benefits and limitations of the decision making software identified in 1 above.
M1-13. The nurse-manager of the orthopedic ward of
Bames General Hospital of Memphis, Tennessee, is
preparing a list of the most pressing problems to be
faced in the coming week. The ward is open 24 hours
a day, every day of the year, and employs 40 fulltime nurses. The management team consists of the
nurse-manager as well as three shift-charge nurses.
Vacations and sick leave are covered with part-time
replacements.
The following is a list of tasks or problems facing the
nurse-manager:
a. Decide what to do about a nurse on the 3–11 P.M.
shift whose performance has declined in the past two
weeks for no apparent reason.
b. Prepare salary increase recommendations for each
of the shift-charge nurses.
c. Decide which computer to get for the nursemanager’s office. (A PC has been approved; central data
processing has supplied a list of those available.)
d. Set up a personnel schedule for next month (account for vacations and shift rotations).
e. Do something to improve the appearance of the
ward. Patients are complaining that it looks depressing.
Required
a. Discuss whether the nurse-manager is a top,
middle-, or lower-level manager.
b. Questions 1 through 6 concern decision-making theory. For each question, mark the letter of the item on
the nurse-manager’s list that best matches the description given.
1. An unstructured decision.
2. A structured decision under relative certainty.
3. An item best suited for a decision maker with an
intuitive information processing style as opposed to one with an analytical style.
4. An item in the problem definition stage.
5. An item in the definition of alternatives stage.
6. An item in the evaluation of alternatives stage.
c. Questions 7 through 12 relate to the application of
decision-making theory. For each question, mark the
letter of the item on the nurse-manager’s list that best
matches the description given.
7.
A decision where creativity is important.
8. A decision where acceptance by employees is
important.
9. A decision that would be influenced most by
input from the environment.
10. A decision the nurse-manager should delegate
to the appropriate shift-charge nurse.
11. A decision the nurse-manager should not delegate.
12. A decision where brainstorming would be
helpful.
d. Select one of the tasks or problems on the nursemanager’s list and discuss the type of information
needed to make the decision.
e. What types of formal automated information systems would satisfy the information needs of the nursemanager?
(CIA adapted)
M1-14. Barbara Frankland, head accountant, supervises
seven assistants working in the accounting department
of Ogle-Andersen Construction Company. The firm uses
the MAS 90 accounting software package, which is
installed on a dedicated accounting server and linked
to 11 other microcomputers that form a local-area network (LAN). Fifteen different accounting modules are
installed on the server, including payroll, billing and
invoicing, job costing, budgeting and variance analysis, general ledger and financial reporting, accounts
receivable and payable, and inventory management. The
accounting modules are split among the seven assistant
accountants, and each assistant is assigned a password
to access his or her modules located on the accounting
server. Among other duties, the assistants enter and
post journal entries for their modules; the software
package automatically generates preformatted reports.
Barbara Frankland, among other duties, monitors the
work of her assistants; maintains the chart of accounts;
enters adjusting and correcting entries; and prepares
an adjusted trial balance, the monthly financial
statements, an audit trail report, and other monthly pre-
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PROBLEMS
formatted reports. She also responds to questions
from management concerning the monthly financial
statements and reports and provides them with an
explanation when variances from actual are above or
below a designated cutoff point.
To facilitate effective and efficient performance
within the accounting department, Ms. Frankland assigns tasks to the seven assistants and periodically reviews their individual performance. Each employee is
provided with written descriptions that clearly explain
his or her duties and responsibilities.
Required
a. Discuss whether Ms. Frankland is a top, middle-, or
lower-level manager. Explain your reasoning.
b. Describe specific planning, controlling, coordinating, human resource, and other types of decisions
made by Barbara Frankland. Classify each decision as
structured, semistructured, or unstructured.
c. List the specific types of information needed by Ms.
Frankland to make two of the decisions identified in b
above.
d. How can Ms. Franklin use a computer to assist her
in the decision-making process? Be specific.
e. Given the present state of information technology,
is it possible to fully automate Ms. Franklin’s job and
terminate her position with Ogle-Andersen Construction Company? Discuss fully.
M1-15. Reread the Spotlight entitled “An Automated
Scorecard Meets the Diverse Needs of Stakeholders.”
Required
a. Comment on the advantages and limitations of the
Balanced Scorecard (e.g., an automated performance
measurement system) used by the West Mercia Constabulary.
b. What are the roles of corporate accountants in developing, implementing, and evaluating such systems?
Discuss.
M1-16. What management level or levels—top, middle, or operational—can most effectively utilize the
following reports or information to make decisions?
a. Information about long-term trends.
b. Mainly quantitative information, financial as well as
nonfinancial.
c. Very detailed information.
d. Scheduled reports.
e. Management control information.
f. Gossip.
g. Largely external information.
•
CD–29
h. More timely information.
i. Highly summarized information.
j. Real-time information.
k. Graphical reports.
l. Short-range historical quantitative information.
m. Exception reports.
n. Strategic planning information.
o. Short-range quantitative task-oriented control information.
p. Information to evaluate alternatives.
q. Very accurate information.
r. Broad information, often spanning several functions.
M1-17. Assume the following categories of employees:
• Top management
• Middle management
• Operational management
• Line workers
• Self-managed work teams
Assume that the following specific types of information are generated and communicated to relevant employees:
1. Worker productivity rates.
2. Customer sales by region.
3. Production cost variances.
4. Earnings per share of common stock.
5. Key financial ratios.
6. Product defect rates.
7. On-schedule performance.
8.
Percentage of products delivered on time.
9.
Report of major shareholders.
10. Market value of the firm.
11.
Customer complaints compared to a prior period.
12.
Employee turnover.
13.
Financial statements.
14.
Responsibility accounting report on plant A.
15.
Pending legislation.
16.
Major competitors’ plans.
17. Benchmarks on major competitors and noncompetitors.
18.
Profit planning report.
19.
Sales and operating profits by segments.
20. Narrative explaining the changes in the financial
data.
21.
General economic conditions.
22.
Customer satisfaction levels.
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MODULE 1/ DECISION MAKING, INFORMATION NEEDS, AND INTRODUCTION TO SUPPORT SYSTEMS
Required
a. Which category or categories of the above employees can most effectively utilize each of the specific
types of information to make decisions?
b. How frequently do you feel that each specific type of
information should be prepared and communicated
(e.g., hourly, daily, weekly, etc.) to the relevant employee(s)?
c. Recommend the best way to communicate each of
the specific types of information. For example, information can be communicated in a formal report, informally, e-mailed over a network, and so on.
M1-18. Adler Harris has been treasurer of Varker College for two years. As treasurer, Harris manages the interrelationships between faculty, staff, and the board of
directors, and also manages the college’s finances. Harris has been notably effective in managing these relationships and, accordingly, was recently elected to the
position of secretary to the board and informally designated as the board’s liaison with faculty and staff.
Harris started a new practice of issuing a memorandum following each quarterly board meeting. The mem-
orandum below was issued following the most recent
meeting of the board.
Required
a. (1) Referring to the memorandum issued by Adler
Harris, identify and explain at least three characteristics of formal communication.
(2) Describe three other types of formal communication.
b. Review the memorandum that was issued by Adler
Harris, and identify
(1) At least three positive aspects of the memorandum as a communication device.
(2) At least three weaknesses of the memorandum
as a communication device, and provide a brief
explanation why each item identified is a weakness.
M1-19. For each of the following situations, identify a
suitable support system and the level of support that is
required or can reasonably be expected:
a. Checking pension plan provisions to determine if a
manufacturer’s plan meets federal regulations.
To:
From:
Faculty and Staff
Adler Harris
Date:
Subject:
October 25, 2001
Board of Directors’ Meeting
Listed below are some of the major actions taken during the October 2001 Varker College
(VC) board of directors’ meeting that was held this past week. These reported items are selected because they seem to be of general interest to the faculty and staff. This is not a total listing of all of the actions taken by the board nor do they represent a summary of the
official minutes.
•
•
•
•
•
•
•
•
Two long-time friends and avid VC supporters were elected to membership on the
board. They are Dr. Kenneth Bussman, Professor of Applied Sciences at Eastern Technical University, and Ms. Anna York, chief executive officer of EMK Enterprises.
A salary pool providing for a modest increase in faculty and staff salaries was set aside
from the reserve fund.
The tuition and fee charges for the 2002–2003 academic year were set.
Reports were received from each of the standing committees of the board as well as
from the Alumni Association and the VC Guild.
The financial report for the quarter ended September 30, 2001, was reviewed, and a tentative budget for the 2002–2003 academic year was approved.
A report from Vice President Marge Lemons, Academic and Administrative Computing
Department, was received and acted upon.
Ms. Susan Chester and Mr. Noel Dunes were installed as new members of the board,
while Mr. Garnett Dixon and Mr. Henry Foster were designated as honorary members of
the board.
The next meeting of the board is scheduled for January 25, 2002. This meeting will take
place on the VC campus.
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CONTINUING CASE
b. Making reservations by an airline.
c. Checking credit by a discount store.
d. Providing assistance to a large fast-food chain in locating new restaurants.
e. Maintaining control over accounts receivable by a
home appliance retailer.
f. Maintaining controls over the physical flows of job
orders by a manufacturer that has a complex production process involving numerous parts and materials,
labor inputs, machining operations, and inspections.
g. Detecting automatic teller machine fraud by a bank.
h. Maintaining controls over its freight cars by a railroad that carries cargo across the country.
i. Maintaining controls over the times and costs incurred on construction projects currently in progress by
a contractor.
j. Providing electronic transfer of funds service by a
statewide bank whose depositors can have bills debited
directly from their accounts into the accounts of creditors such as utilities.
k. Providing assistance to an architect in designing a
new special-purpose building.
l. Helping a manufacturer that has alternative uses
for its available production space to decide whether to
make or to buy parts.
m. Helping a public accounting firm decide whether to
terminate a staff accountant.
n. Deciding whether to authorize construction of a
new manufacturing facility to produce microcomputers.
o. Selecting a new plant site by a large microcomputer
manufacturer.
p. Providing assistance to a hospital in selecting the
most suitable capital expenditure projects to undertake
during the next five years.
q. Providing assistance to a regional public accounting firm in establishing pricing policies for its services.
r. Assisting a consumer goods firm in evaluating proposals for new products.
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CD–31
s. Verifying the validity of warranty claims by a large
automotive manufacturer.
t. Providing assistance to a public accounting firm in
determining whether to promote a manager to partner.
M1-20. Public accounting firms need to prepare to
expand their practices to include the “new assurance
services.” Assurance services are defined as independent professional services that improve the quality of
information, or its context for decision makers, and
would include assessing, attesting to, or auditing both
financial and nonfinancial information. The focus is on
improving information rather than on providing advice
or installing systems. Examples relating to assurance
services include the following:
1. Assess whether the information features of
electronic commerce provide assurance
with respect to the integrity and security of
electronic transactions, electronic documents, and supporting systems.
2. Assess the reliability and relevance of a
firm’s performance measures, identify performance measures, and design and implement a performance measurement system.
3. Improve the quality of risk information for
internal decision makers through independent assessments of the likelihood of significant adverse events by quantifying the
possible magnitude of the effects of such
events.
4. Provide assurance that systems are designed and operate in a manner that provides reliable information.
Required
a. Should public accounting firms provide the types of
services described above? Do you feel that CPAs are
qualified to provide these services?
b. Is it likely that the public accounting firms will have
competition from other firms who provide the same
types of services? Discuss.
CONTINUING CASE
For the systems project you have selected or been assigned to, specify a strategic or tactical decision that
must be made by one of the managers. Determine the
types of formal and informal information that the manager needs to make the decision.