Advantages and disadvantages in taking qualitative considerations in capital expenditure decision:-Qualitative considerations in capital investment analysis are very important in decision-making process. Strategic investments are tools those are designed to affect a company’s long-term ability to generate profit. Understanding the qualitative factors that go into the decision-making process will help management accountant to work out the thinking process and make a better investment decision.
Qualitative consideration also the crucial part that company should not take it trivial. Many organizations supplement traditional performance measures with non-financial performance measure. Qualitative consideration provides valuable data for use in the design of a product including data about user needs, behavior patterns, and use cases. Qualitative consideration may emphasize strategy for organization to improve the capital expenditure decision. For example, if the company’s strategy is based on providing superior customer services such as telecommunication service, hotel, spa, flight service and etc, it makes sense to take qualitative consideration based on the level of customer satisfaction.
Besides that, qualitative consideration gives benefit to the organization to strike the good future financial performance. In this case, management accountant may measure product quality and customer satisfaction as they believe that high performance in these areas will flow through to improve financial performance. Managers also become more actionable in making the expenditure decision in order to meet the level of customers’ satisfaction. It is easier for management accountant to investigate the cost variances, as defects and customer complaints relate directly to activities and operations that they control.
Furthermore, when the organization take the qualitative consideration in capital expenditure decision will lead to increase employee morale. Some organizations or companies sometimes spend money on capital improvements because they want to improve a better work environment for their employees. For example, ordering new office furniture may not have an immediate quantifiable payback for the corporation, but it can improve employee morale and the result in greater productivity. The company’s management is considered as caring about whether the employees have an attractive, comfortable and functional place to work. The quality of the office environment is also important part to presenting a positive image to customers and vendors who visit and come to the office. The finance department may not be able to quantify the advantages of these expenditures.
However, the company or organizations also need to take quantitative consideration in order to make their capital expenditure decision. It is because qualitative and quantitative consideration may give differences in their inputs. Qualitative and quantitative analysis may use information about the different characteristic, qualitative methods rely on information that is not easily measurable while quantitative methods deal with data. For example, if manager want to analyze how positively customers view one product, manager might interview a cross-section of the customers and ask for feedback. This qualitative information is hard to express as numbers or monetary term. Instead, management accountant might analyze objective data such as how many customers buy the product again, how many make complaints, how many have warranty claims and how many return the product. Management accountant can express this quantitative information mathematically.
In addition, when the company or organizations only focus on qualitative consideration they may have problem in making capital expenditure decision. For example, once management accountant have input information, they need to analyze qualitative and quantitative material differently. For qualitative information such as interview transcripts, texts and pictures, they have to study the material to get insights about what it means. Similar in situation if manager want to judge how positively the customers feel about the product, they have to analyze what the customers say carefully, paying attention to the positive words they use. Manager analysis results in a qualitative judgment such as manager conclusion that most customers like their product very much.
Furthermore, the company or organization would get different outcome by using qualitative and quantitative. By focusing only qualitative consideration may resulted in different outcome for decision making process. The results of qualitative analysis often are ambiguous but may contain additional information, while the quantitative results tend to be decisive. For example, customer interviews might indicate that customers like the product but would appreciate faster deliveries. The quantitative analysis has no such extra information because it is focused narrowly on a particular characteristic, such as customer satisfaction. The different outputs analysis that management accountant use the qualitative output to check what the quantitative data says and to keep the extra information for additional action.
In conclusion, both qualitative analysis and quantitative methods can be used to make capital expenditure decisions. The decisions that most often result in the desired outcomes use one method to check whether the predictions of the other method are well reasonable. Essentially, it’s a system of checks and balances.Introduction
Quantitative factors can be accurately measured in numerical terms, while qualitative factors are measured subjectively. The capital expenditure decision is the process of making decisions regarding the investments in fixed assets, facilities, productive equipment, investments in labor or assets purchased for profitable appreciation and an expected return on investment. Therefore, it refers to long-term planning for proposed capital expenditures and includes in increasing of long-term funds and their utilization. The key function of the management accountant is to choose the most profitable project for investment. This task is very important because any action taken by the management accountant in this area will affects the working and profitability of the organization in future.
How qualitative considerations impact the decision making process
Qualitative considerations will influence capital expenditure decision process in the organization. These include the aims and objectives of the firm, current and expected state of the economy, possible impacts on image and reputation, environmental and ethical considerations, and past experience of the organization.
However, qualitative factors cannot be measured as a number and they represent either a negative or positive force affecting the company. But some of these qualitative factors will give an effective ways in determining the good capital expenditure decision. For example, if the company open new office branch in another city. By doing that, it may change the way of communication and information flow between teams and reporting relationships. It will give positive and negative effect to the employee morale.
In taking qualitative considerations, Management Accountant should identify a set of qualitative factors and then decide which of these factors will add value to the organization, and which of these factors decrease value. Then, Management Accountant should determine their relative importance, the qualities that can be analyze and categorized as having a positive effect, negative effect or minimal effect to the organization. Understanding these types of qualitative factors is part of making well-informed capital-investment decisions in future.