Options

Options

Why do business people make the choices they do? How do they know if what they choose will work? Everyday people have to make decisions that derive from options that are given to them. Managerial accounting can help managers see what options they have and can help them to decide what actions need to be taken for the good of their company.

Options can mean a couple of different things. The dictionary defines options as “the power or right of choosing or something that may be or is chosen; choice” (dictionary.com, 2011). In the accounting world “an option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock or bond, is a security. It is also a binding contract with strictly defined terms and properties” (Investopedia, 2011, para. 1). Whether you define option from the dictionary or from the accounting world, from these options, there are decisions that need to be making between different alternatives. So why should you choose on things over another? “In business decisions, each alternative will have costs and benefits that must be compared to the costs and benefits of the other available alternatives” (Noreen, Brewer, & Garrison, 2011, p. 52). Another words, managers, business owners, accountants, and any other person or persons involved with running’s a company will need to compare different alterative and take the options from these comparisons to come to a decision. Using the different costs, a manager can choose to take one action over the other. Or they can take steps to change direction of their company based on information provided to them. Often opportunity cost will be presented to the manager to help them to choose which direction to go. Opportunity cost “is the potential benefit that is given up when one alternative is selected over another” (Noreen, Brewer, & Garrison, 2011, p. 53). When an option is...