May 2018 Q2 c.
Explain TWO limitations of management information in providing guidance for managerial decision-making. (4 marks)
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Management accounting information may fail to meet its objective of assisting management in the decision making process.
- Failure to meet the requirements of good information
If information supplied to managers is deficient, then inappropriate management decisions may be made. - The problem of relevant costs and revenues
Not all information produced by accounting systems is relevant to the decisions made by management. - The figures presented to assist in management decision-making are those that will be affected by the decision, i.e. they should be:
Future – ignoring costs (and revenues) that have already been incurred – ‘sunk costs’
Incremental – ignoring items such as the reapportionment of existing, unchanging fixed costs
Cash flows – ignoring book values, historical costs, depreciation charges. - Non-financial information
Managers will not always be guided by the sort of financial and other information supplied by the management accounting system. They will also look at qualitative, behavioural, motivational, even environmental factors. These non-financial factors can be just as important in relation to a decision as financial information – but they are often more difficult to estimate and quantify. - External information
The environment refers to all of the external factors which affect a company and includes government actions, competitor actions, customer demands and other factors such as the weather. An organisation should have information on its environment available to it within its accounting information systems – the organisation needs external information as well as internal information. (Any 2 points)