Accounting Information and the Allocation of Resources

Accounting information and the allocation of resources

The various groups of information users which we have just discussed share a common concern, which is to make decisions about the allocation of scarce resources between competing ends. Students of economics will find such a statement echoes a popular definition of the subject matter of economics. The importance of accounting information is that it makes such an allocation possible in a market economy, where individuals and organizations are largely free to allocate the resources which they control between competing ends. Therefore, the theoretical objective of an accounting information system is to permit information users to make optimal decisions, that is, to make the best allocation of the resources which they control. As we have seen, optimal decision making may only be understood in relation to the objectives of decision makers, so that the various groups of information users whose information needs we have just discussed may be said to have quite different and occasionally competing decision objectives. Optimal decision making also means that the results of decisions should have a certain quality: optimal means that they should be the best possible results which could have been achieved under given circumstances, and implies a standard against which actual results may be compared.

We are stating, therefore, that the objective of accounting information systems is to enable decision makers to attempt to optimize the allocation of the resources which they control, and to assess the actual results of their decisions against the forecast results. A measure of the efficiency of the decision-making process is the extent to which the actual result compares to the optimal result. In this connection, the terms 'efficiency' and 'effectiveness' are used in the literature in a special sense. The term 'efficiency' is usually reserved for the analysis of input-output relationships, so that the 'efficiency' of a factory production process may refer to the degree of technical skill with which inputs of production factors are transformed into finished goods, as well as to the success with which input factors' values in monetary terms are transformed into outputs also valued in monetary terms. By contrast the term 'effectiveness' is reserved for the analysis of the success with which policy objectives are attained. Thus, we may talk of 'organizational effectiveness' in discussing how well management decisions lead to the attainment of organizational objectives.

Consequently, we may say that the 'effectiveness' of an accounting information system is the extent to which it enables its users to make optimal decisions. By examining the different objectives which we assume they have, we are able to judge the 'effectiveness' of accounting information by reference to the relevance of that information to the types of decisions which they wish to make. Management makes decisions about the allocation of men, materials, machines and money in such a way that the firm's objectives may be reached. As we shall see in Part 5, firms have different objectives, and income is one of these objectives. Often, it is thought that the size of the firm's income reflects the 'efficiency' of management in transforming inputs of factors of production into sales of finished goods. It is evident, however, that in our analysis income figures, though important, should not be confused with 'managerial effectiveness'.

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Read on: The Information Needs of Other Groups

The information needs of other groups

We have dealt so far with the information needs of four major groups which have vested interests in business organizations, and we have discussed the nature of their information requirements. How far and how adequately their information needs are suitably satisfied depends largely upon the pressure which these groups may exert upon the accountant to produce information tailored to these needs. How well they are able to articulate their information needs, how well accountants are able to understand the reasons why the information is needed and how willing... see: The Information Needs of Other Groups