Discuss the characteristics of “relevant information” in the context of managerial accounting and strategic decision making. What are opportunity costs? What is the relevance of sunk costs when analyzing new opportunities?
One of the major roles of the managers is to make decisions where they must choose the most suitable course of action; this role can only be fulfilled successfully when the manager is able to acquire the relevant information. There are basically two broad characteristics of information which makes it relevant including it being future oriented and the presence of alternatives. Any historical information can not differ between the alternatives where the correct decisions are being reviewed so historical information cannot be relevant at all. In order to be useful, this information must be reliable, understandable and comparable along with being relevant. Relevance is also dependent upon the timely availability of the information as it must be present on time to impact the prediction of future (Lal and Srivastava, 2009). Managerial accounting and strategic decision making requires that relevant information is obtained or else the decisions for future cannot be made correctly. The profit which one foregoes by choosing one alternative over the other is known as the opportunity cost; in other words, it refers to the cost which one “pays/gives up” by choosing any other option. Opportunity costs are highly relevant when making any decisions but they are rarely recorded in the accounting system. The historical information is also known as the sunk cost because it has already been incurred; as it is a transaction made in the past, it would have no impact in the coming future and so it has no relevance for the strategic decisions to be made in the future. In order to analyze new opportunities, only prospective costs are relevant not the retrospective costs (Edmunds and Tsay et al., 2011). If the sunk cost is included in the decision, then a poor choice would be made; but opportunity costs are necessary to be included while making a proper decision.
References
Edmunds, T., Tsay, B. and Olds, P. 2011. Fundamental Managerial Accounting Concepts. 6th ed. New York: McGraw-Hill Irwin.
Lal, J. and Srivastava, S. 2009. Cost Accounting. 4th ed. New Delhi: Tata McGraw-Hill.
