Introduction to the context of accounting
Introduction to the context of accounting

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Introduction to the context of accounting

6.2 Conflicting objectives

You have just seen how an objective to maximise market share may not be compatible with an objective to maximise profits. Businesses may have multiple objectives, many of which conflict. Think, for example, how difficult it would be for an oil refinery to both maximise profits and minimise the effect upon the environment of its production activities. Similarly, maintaining high product quality while minimising costs would be extremely difficult.

Imagine if a business was struggling. Its costs were rising, its revenue was falling, and it was being threatened with closure. It had two objectives, to minimise costs while maintaining a high quality product. It could survive if it were to reduce the quality of its products, but it would have to alter its quality objective. It might get away with it in the short term, but its customers would be bound to notice fairly soon. If they do, the reputation of the business would suffer. Demand for its products would fall and it could end up in an even worse position than it is in at present.

Activity 14

What would you do if you were in charge of the business? Spend a minute writing down your thoughts.

Answer

You could try improving the after-sales service, to ensure that anyone who had a substandard product would be able to get a good one or a refund very easily. That might be quite expensive. You could try increasing demand by spending more on promotion, but that may take some time to make an impact, by which time the market may have become aware of the drop in product quality. It really is a very difficult situation that can possibly only be dealt with by the business completely revising its objectives. To do so, it needs good information from its accountants.

To summarise, people working in a business need to know what its objectives are if they are to take the correct decisions. If they don’t, decisions will be taken on the basis of the individual beliefs of the decision takers and the business will suffer as everyone pursues different objectives.

Thus, everyone in the business needs to know what the objectives are, and accountants need to provide the decision takers with the information they need in order to (a) pursue their objectives (b) monitor performance in relation to the objectives, and (c) amend the objectives when needed.

Accountants provide information so that decisions can be taken that are compatible with the objectives of the organisation.

B680_1

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