Question

Describe a situation in which you made a decision based on accounting information, and identify whether that information was financial accounting information or managerial accounting information.

Answer 1

Answer. Our company is manufacturing computer CPU. We require cabinet for this CPU. Our company thinking about buys it from open market or make in-house. For this purpose, we use accounting information to analysis cost of each option, merits and demerits of each option. We found that our annual net incremental relevant cost of in-house make decision is $50,000 per annum of 10,000 CPU cabinet and we can also buy this cabinet from other manufacture at $8 per cabinet. And we decide to make it in-house.

That information used by us, were managerial accounting information, because these information relates to costing and top level management decision making. This branch of accounting’s information provides different types of reports to top management to take their important decision. For their decision management accounting provide various information regarding to business process and operation like costs, sales quantity, production, sales volume, profit margin, contribution margin, management decision making information etc.

In following decisions of an organization, this branch of accounting provides information and data to a firm’s decision making process.

•          Relevant cost technique provide information to an organization that what should be sold, how to sell it and In how much quantity should be sell to make maximum profit to a firm.   

•          Activity based costing analysis provide information to firm regarding cost driver, important activities of cost and production etc. so that an organization can eliminate their unnecessary activities.

•          Make or Buys Analysis provide information to an organization regarding make or buy form outsider which use by an organization in their production or service.