MANAGEMENT ACCOUNTANT F2

Chap#1 Accounting for Management

Data is the raw material for data processing. Data relates to facts, events and transactions and so forth.

Researchers who conduct market research surveys might ask members of the public to complete
questionnaires about a product or a service.

Information is data that has been processed in such a way as to be meaningful to the person who
receives it. Information is anything that is communicated.

These completed questionnaires are data; they are processed and analysed in order to prepare a report
on the survey. This resulting report is information and may be used by management for decision-making
purposes.

Quality of Good Information

Good information should be relevant, complete, accurate and clear, it should inspire confidence, it should
be appropriately communicated, its volume should be manageable, it should be timely and its cost should
be less than the benefits it provides.

A Information should obviously be accurate because using incorrect information

could have serious and damaging consequences. However, information should
only be accurate enough for its purpose and there is no need to go into
unnecessary detail for pointless accuracy.

C An information user should have all the information they need to do their job
properly. If they do not have a complete picture of the situation, they might well
make bad decisions.

C Information should have some value, otherwise it would not be worth the cost of
collecting, distributing and storing it. The benefits obtainable from the information
must also exceed the costs of acquiring it, and whenever management is trying
to decide whether or not to produce information for a particular purpose (for
example whether to computerise an operation or to build a financial planning
model) a cost/benefit study ought to be made.
U Information must be clear to the user. If the user does not understand it properly
they cannot use it properly. Lack of clarity is one of the causes of a breakdown in
communication. It is therefore important to choose the most appropriate
presentation medium or channel of communication.

R Information must be relevant to the purpose for which a manager wants to use it.
In practice, far too many reports fail to 'keep to the point' and contain irrelevant
paragraphs which only annoy the managers reading them.
A

T Information which is not available until after a decision is made will be useful only
forcomparisons and longer-term control, and may serve no purpose even then.
Information prepared too frequently can be a serious disadvantage.

E Information should be understandable to the users. Style, sentence structure and

jargons should be used keeping the receiver in mind. If report is targeted to new-
comer in the field, then it should explain technical jargons used in the report.

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What type of information is needed?

Financial Non-financial Combination of both

The financial information The non-financial information combine financial and non-
required by management might include management financial information to
might include canteen staff comment on the effect on calculate the average cost to the
costs, costs of subsidising employee morale of the provision company of each meal served,
meals, capital costs and costs of canteen facilities, details of the thereby enabling them to predict
of heat and light. number of meals served each total costs depending on the
day, number of employees in the
meter readings for gas and workforce.
electricity and attendance
records for canteen employees.

Types of information

Strategic information Tactical information Operational information

Strategic information is used by Tactical information is used by Operational information is

senior managers to plan the middle management to decide used by 'front-line' managers
objectives of their how the resources of the such as foremen or head clerks
organisation, and to assess business should to ensure that specific tasks are
whether the objectives are be employed, and to monitor how planned and carried out properly
being met in practice. Such they are being and have been within a factory or office and so
information includes overall employed. Such information on. In the payroll office, for
profitability, the profitability of includes example, information at this level
different segments of the productivity measurements will relate to day-rate labour and
business and capital (output per man hour or per will include the hours worked
equipment needs. machine hour), budgetary each week by each employee,
control or variance the rate of pay per hour, details
analysis reports, and cash flow of the deductions and, for the
forecasts. purpose of wages analysis,
details of the time each person
spent on individual jobs during
the week.

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Featuresof information
Strategic information therefore Tactical information therefore Operational information has
has the following features. has the following features. the following features.
 It is derived from both  It is primarily generated  It is derived almost
internal and external internally. entirely from internal
sources.  It is summarised at a sources.
 It is summarised at a lower level.  It is highly detailed, being
high level.  It is relevant to the short the processing of raw
 It is relevant to the long and medium term. data.
term.  It describes or analyses  It relates to the
 It deals with the whole activities or departments. immediate term, and is
organisation (although it  It is prepared routinely prepared constantly, or
might go into some and regularly. very frequently.
detail).  It is based on  It is task-specific and
 It is often prepared on quantitative measures largely quantitative.
an 'ad hoc' basis.
 It is both quantitative
and qualitative.
 It cannot provide
complete certainty,
given that the future
cannot be predicted.

Why information is needed?

Information for management is likely to be used for planning, control and decision making.
Planning Control Decision Making

Planning involves the following: Control of the performance of an Decisions taken by managers
 setting the objectives for organisation is an important include planning decisions and
the organization management task. control decisions. In addition,
 making plans for Control involves the following: managers might need to make
achieving those  monitoring actual ‘one-off’ decisions, outside the
objectives. performance, and formal planning and control
comparing actual systems. Management
The planning process is a formal performance with the accounting information can be
process and the end-result is a objective or plan provided to help a manager
formal plan,  taking control action decide what to do in any situation
authorised at an appropriate level where appropriate where a decision is needed.
in the management hierarchy.  evaluating actual
Formal plans performance.
include long-term business plans, When operations appear to be
budgets, sales plans, weekly getting out of control,
production schedules, capital management should be alerted
expenditure plans and so on. so that suitable measures can be
Information is needed in order to taken to deal with the problem.
make sensible plans – for Control information might be
example in order to prepare an provided in the form of routine
annual budget, it is necessary to performance reports or as
provide information about special warnings or alerts when
expected sales prices, sales something unusual has occurred.
quantities and costs, in the form
of forecasts or estimates.

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TYPES OF PLANNING

Managers carry out their responsibilities at different levels in the hierarchy of an organisation, and
decisions are made at all levels of management. These may be planning decisions, control decisions or
‘one-off’ decisions. Decision-making can be categorised into three levels: these different categories are
probably most easily understood in relation to planning decisions.

Strategic planning. Tactical planning. Operational planning.

Strategic planning involves Tactical planning involves Operational planning is planning

setting overall objectives for the developing shorter-term plans to the operational activities of an
organisation and developing implement longer-term strategic entity in detail. Operational plans
broad plans, mostly over a fairly plans. They have a shorter time include production schedules,
long-term, about how the frame than strategic plans, and work schedules, machine
objectives should be achieved. many tactical plans cover a utilisation plans, maintenance
An example of a strategic plan is period of six months or one year.
schedules, delivery schedules
a five year business plan. They might also be sub-divided
and so on. They are short-term
Strategic planning is the into shorter control periods, such
responsibility of senior as monthly periods, for the plans such as daily or weekly
management, who plan the purpose of routine control operating schedules and most
strategic direction that the entity reporting. They are also more are not financial in nature.
should be taking. detailed than strategic plans. In a Operational planning should
To make long-term plans, large organisation, tactical involve junior management and
managers need information. planning involves managers supervisors, although they might
Much of this information below the most senior level need the approval of middle
is not financial in nature, and (‘middle management’), although management.
much of it comes from external tactical plans might require
sources (from senior management approval.
sources outside the Much of the information for
organisation). However some tactical planning comes from
accounting and financial sources within the organisation,
information is needed for such as the cost accounting
strategic planning purposes, and system, and much of it is
‘strategic management financial in nature. An example of
accounting’ is a term for the a tactical plan is an annual
provision of information for budget.
strategic planning purposes.

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Planning in detail

An organisation should never be surprised by developments which occur gradually over an extended
period of time because the organisation should have implemented a planning process. Planning
involves the following.
Establishing objectives
Selecting appropriate strategies to achieve those objectives
Planning therefore forces management to think ahead systematically in both the short term and the long
term.
Objectives of organisations
An objective is the aim or goal of an organisation (or an individual). Note that in practice, the terms
objective, goal and aim are often used interchangeably. A strategy is a possible course of action that
might enable an organisation (or an individual) to achieve its objectives.
The two main types of organisation that you are likely to come across in practice are as follows.
Profit making Non profit seeking
The main objective of profit making organisations is The main objective of non profit seeking
to maximise profits. A secondary objective of organisations is usually to provide goods and
profit making organisations might be to increase services. A secondary objective of non profit
output of its goods/services. seeking organisations might be to minimise the
costs involved in providing the goods/services.
In conclusion, the objectives of an organisation might include one or more of the following.
Maximise profits Maximise revenue
Maximise shareholder value Increase market share
Minimise costs

Anthony's view of management activity

Anthony divides management activities into strategic planning, management control and operational
control. R N Anthony, a leading writer on organisational control, has suggested that the activities of
planning, control and decision making should not be separated since all managers make planning
and control decisions. He has identified three types of management activity.

(a) Strategic planning: 'the (b) Tactical (or management) (c) Operational control: 'the
process of deciding on objectives control: 'the process by which process of assuring that specific
of the organisation, on changes managers assure that resources tasks are carried out effectively
in these objectives, on the are obtained and used effectively and efficiently'.
resources used to attain these and efficiently in the
objectives, and on the policies accomplishment of the
that are to govern the acquisition, organisation's objectives'.
use and disposition of these
resources'
Strategic plans are those which While strategic planning is The third, and lowest, tier in
set or change the objectives or concerned with setting objectives Anthony's hierarchy of decision
strategic targets of an and strategic targets, making consists of operational
organisation. management control control decisions. As we have
They would include such matters is concerned with decisions about seen, operational control is the
as the selection of products and the efficient and effective use of task of ensuring that specific
markets, the required levels of an organisation's resources to tasks are carried out effectively
company profitability and the achieve these objectives or and efficiently. Just as
targets. 'management control' plans are set
purchase and disposal of
(a) Resources are often referred within the guidelines of strategic
subsidiary companies or major
to as the '4 Ms' (men, materials, plans, so too are 'operational
non-current assets. machines and money). control' plans set within the
(b) Efficiency in the use of guidelines of both strategic

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resources means that optimum planning and management control.
output is achieved from the input Consider the following.
resources used. It relates to the (a) Senior management may
combinations of men, land and decide that the company should
capital (for example how much increase sales by 5% per annum
production work should be for at least five years – a strategic
automated) and to the productivity plan.
of labour, or material usage. (b) The sales director and senior
(c) Effectiveness in the use of sales managers will make plans to
resources means that the outputs increase sales by 5% in the next
obtained are in line with the year, with some provisional
intended objectives or targets. planning for future years. This
involves planning direct sales
resources, advertising, sales
promotion and so on. Sales quotas
are assigned to each sales
territory – a tactical plan
(management control).
(c) The manager of a sales territory
specifies the weekly sales targets
for each sales representative.
This is operational planning:
individuals are given tasks which
they are expected to achieve.

Financial accounting and cost and management accounting.

Financial accounts Management accounts

Financial accounts detail the performance of an Management accounts are used to aid
organisation over a defined period and the state of management record, plan and control the
affairs at the end of that period. organisation's activities and to help the decision
making process.
Limited liability companies must, by law, prepare There is no legal requirement to prepare
financial accounts. management accounts.
The format of published financial accounts is The format of management accounts is entirely at
determined by local law, by International management discretion: no strict rules govern the
Accounting Standards and International Financial way they are prepared or presented. Each
Reporting Standards. In principle the accounts of organisation can devise its own management
different organisations can therefore be easily accounting system and format of reports.
compared.
Financial accounts concentrate on the business as Management accounts can focus on specific areas
a whole, aggregating revenues and costs from of an organisation's activities. Information may be
different operations, and are an end in themselves. produced to aid a decision rather than to be an
end product of a decision.
Most financial accounting information is of a Management accounts incorporate non-monetary
monetary nature. measures. Management may need to know, for
example, tons of aluminium produced, monthly
machine hours, or miles travelled by salespeople.
Financial accounts present an essentially historic Management accounts are both an historical
picture of past operations. record and a future planning tool. Financial
accounts

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Cost accounts
Cost accounting and management accounting are terms which are often used interchangeably. It is not
correct to do so. Cost accounting is part of management accounting. Cost accounting provides a
bank of data for the management accountant to use.

Cost accounting is concerned with the following.

Preparing statements (eg budgets, costing) Cost data collection
Applying costs to inventory, products and services

Cost accounting is the 'gathering of cost information and its attachment to cost objects, the
establishment of budgets, standard costs and actual costs of operations, processes, activities or
products; and the analysis of variances, profitability or the social use of funds.'

Management accounting is concerned with the following.

Using financial data and communicating it as information to users
Management accounting is the 'application of the principles of accounting and financial management
to create, protect, preserve and increase value for the shareholders of for-profit and not-for-profit
enterprises in the public and private sectors.'

Aims of cost accounts

(a) The cost of goods produced or services provided
(b) The cost of a department or work section
(c) What revenues have been
(d) The profitability of a product, a service, a department, or the organisation in total
(e) Selling prices with some regard for the costs of sale
(f) The value of inventories of goods (raw materials, work in progress, finished goods) that are still held
in store at the end of a period, thereby aiding the preparation of a statement of financial position of the
company's assets and liabilities
(g) Future costs of goods and services (costing is an integral part of budgeting (planning) for the future)
(h) How actual costs compare with budgeted costs (If an organisation plans for its revenues and costs
to be a certain amount, but they actually turn out differently, the differences can be measured and
reported. Management can use these reports as a guide to whether corrective action (or 'control' action)
is needed to sort out a problem revealed by these differences between budgeted and actual results. This
system of control is often referred to as budgetary control.)
(i) What information management needs in order to make sensible decisions about profits and costs
It would be wrong to suppose that cost accounting systems are restricted to manufacturing operations,
although they are probably more fully developed in this area of work. Service industries, government
departments and welfare activities can all make use of cost accounting information. Within a
manufacturing organisation, the cost accounting system should be applied not only to manufacturing but
also to administration, selling and distribution, research and development and all other departments.
rmation and decision making
Cost accounting information is, in general, unsuitable for decision making.
The information required for decision making is different from the information provided by
conventional cost accounts. Decision-making information should be relevant. However, absorption
costing (a widely used method of costing products and services which we will be looking at later)
provides information that in many situations is misleading and irrelevant.
All decision making is concerned with the future and so there will always be some degree of uncertainty
surrounding the possible outcomes of a decision. Information for decision making should therefore
incorporate uncertainty in some way. The methods of incorporating uncertainty are outside the scope of
this syllabus, but you should realise that if cost accounting information does not take account of
uncertainty it is unsuitable for decision making. If an attempt to incorporate uncertainty is made, the
information should be more suitable for decision making but can never be risk free.

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QUESTIONS
1. What, if any, is the difference between data and information?
A They are the same
B Data can only be figures, whereas information can be facts or figures
C Information results from sorting and analysing data
D Data results from obtaining many individual pieces of information

2. Required: Complete the table identifying each function as planning, decision making and/or
control.
Planning Control Decision making
Preparation of the
annual budget for a cost
centre
Revise budgets for next
period for a cost centre

Implement decisions
based
on information provided
Set organizations
objectives for next
period
Compare actual and
expected results for a
period

3. The following assertions relate to financial accounting:

Which of the following statements are true?
(i) The main purpose of financial information is to provide a true and fair view of the financial position of
an organisation at the end of an accounting period.
(ii) Financial information may be presented in any format deemed suitable by management.
A Assertions (i) and (ii) are both correct.
B Only assertion (i) is correct.
C Only assertion (ii) is correct.

4. The Management Accountant has communicated a detailed budget to ensure that cost savings
targets are achieved in the forthcoming period.
This is an example of:
A Operational planning
B Tactical planning
C Strategic planning

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