Chapter: Engineering Economics and Financial Accounting

Managerial Decisions

A decision is an act requiring judgment that is translated into action.Decision making is much more comprehensive than problem solving.



A decision is an act requiring judgment that is translated into action.Decision making is much more comprehensive than problem solving.


The terms are interrelated, but not interchangeable.


The Significance of Decision Making

ü    Decision making is the one truly distinctive characteristic of managers.


ü    Decisions made by top managers commit the total organization toward particular courses of action.


ü    Decisions made by lower levels of management implement the strategic decisions of top managers in the operating areas of the organization.

ü    Decisions invariably involve organizational change and the commitment of scarce resources.


Characteristics of Managerial Decisions

ü    Long-range organizational objectives


ü    Best choice from among a set of alternatives


ü    Decision involves organizational change


ü    Decision requires a commitment of resources


The Managerial


Decision-Making Process


Process components are decision-making functions.


Decision-making functions are highly interrelated and interdependent.


The process is highly dynamic with several subprocesses.


The process can accommodate several concurrent Category II decisions.


Decision-Making Function No. 1


Setting Managerial Objectives:


Objectives constitute the foundation for rational decision making.


Objectives are the ends for the means of managerial decision making.


Attainment of the objective is the ultimate measure of decision success.


Decision-Making Function No. 2


Searching for Alternatives:


The limitations of time and money


The declining value of additional information


The rising cost of additional information


Abort the search in the zone of cost effectiveness


Decision-Making Function No. 3


Comparing and Evaluating Alternatives:


Alternatives result from the search.


There are usually three to five alternatives.



One alternative is to do nothing.


Alternatives are evaluated using criteria derived from the objective. Evaluation should include an anticipation of the likely outcome for each alternative.


Evaluation should also anticipate obstacles or difficulties at the time of implementation.




Decision-Making Function No. 4


The Act of Choice:


The choice is the culmination of the process, not all of it.


The choice confronts the decision maker with discernible constraints. The best alternative may not be readily apparent to the decision maker. The best choice is likely to ensue from the right approach.


The choice should be the alternative most likely to result in the attainment of the objective.


Decision-Making Function No. 5


Implementing Decisions:


Decision success is a function of decision quality and decision implementation.


Areas contributing to decision success:


Observance of operating constraints


Influence of the decision maker


Involvement of decision implementers


Absence of conflict of interest


Decision-Making Function No. 6


Follow-Up and Control


Follow-up and control is essential to ensure that an implemented decision meets its objective.


Performance is measured by observing the implemented decision in relation to its standard derived from the objective.


Unacceptable variance from standard performance should elicit timely and appropriate corrective action.

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Engineering Economics and Financial Accounting : Managerial Decisions |

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