In the previous sections, I have illustrated broad principles as well as “basic” decisions in isolation. However, as you might expect, managers usually design more complex decision alternatives out of these building blocks. They also typically consider more than two alternatives before making a decision. In this last page I will thus draw a slightly more realistic and interesting picture of the decision-making process.
A decision is often the complex outcome of an incremental and iterative process. Managers often start with simple alternatives triggered by an event. These alternatives are then combined with, and confronted to, other solutions, leading to new improvements and other courses of action. Decision alternatives are thus progressively enriched and refined until managers see no additional improvement possible.
For instance, imagine that a customer comes with a special order exceeding the available capacity. The manager starts with a simple take-or-leave decision based on existing parameters and estimates. But she is also likely to look for ways to act on these parameters and estimates to minimize opportunity costs incurred if she takes the special order.
First, she will identify the bottleneck and prioritize products. To avoid having to refuse too many normal orders, she will also try to influence the demand through pricing and advertising policies orienting it towards the optimal product mix.
She might also look for ways to relax the constraint and fix a bottleneck. She may for instance increase capacity by paying a premium for extra hours, or invest to increase productivity (increasing speed, reducing defects) to use less of the most constrained resource. Reducing the demand on the constraining factor of production is indeed often preferred to increasing the supply of the constraining factor. Finally, she may even consider freeing the necessary capacity of production by outsourcing the production of some components.
This example illustrates the highly creative process of progressively designing better decision alternatives. The greater and the more reliable your knowledge about possible options, available capacity, constrained resources, and estimates of prices, unit variable costs and fixed costs, the greater your ability to increase short-term profit. This is one of the major contributions of management accounting to organizations.
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