The use of financial accounting information is to solicit investments from potential investors. Potential investors require information on various matters, including solvency, financial strength, earning capability, and the ability of the management in order to decide whether or not to invest in the organization. The financial statements and the various financial ratios derived from the financial statements as mentioned in the above paragraph can be used by potential investors to make this decision. In addition, financial accounting information is used to satisfy statutory requirements (Atrill & McLaney, 2003; Berry & Jarvis, 1997; Glynn & Murphy, 1998).
This information is used for purposes of taxation. It also has to comply with the provisions of the Companies Act, designed to control activities of companies and to protect the interest of investors and others. Lastly, financial accounting information is used to facilitate wage and employment negotiations (Berry & Jarvis, 1997). Information on an organization’ s performance is also an assurance of steady employment and can also boost employee morale. Management accounting information is used for decision making such as to accept or reject special sales order, fix selling or tender price, add or delete a product line or department, maximise profits with a limited productive capacity or scarce resources, make or buy a component, or further process joint products (Berry & Jarvis, 1997; Dyson, 2003; Glynn & Murphy, 1998; Mott, 1991).
The management accounting information used in decision making is relevant costs such as differential and marginal costs. Differential costs or incremental costs are differences in costs between alternatives when there is a change in the activity level. Marginal costs are variable costs incurred as a result of undertaking a certain activity or the costs that can be avoided if the activity was not undertaken.
A special sales order, such as an order of a particularly large quantity such that certain costs can be reduced, can be accepted if it gives a positive contribution margin (sales minus marginal costs), provided the organization has idle capacity, fixed costs will not change, etc.
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