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
The financial information
required by management
might include canteen staff
costs, costs of subsidising
meals, capital costs and costs
of heat and light.
Strategic information
Strategic information is used by
senior managers to plan the
objectives of their
organisation, and to assess
whether the objectives are
being met in practice. Such
information includes overall
profitability, the profitability of
different segments of the
business and capital
equipment needs.
BY: SHAHAB SHAFI
MANAGEMENT ACCOUNTANT F2
Non-financial
The non-financial information
might include management
comment on the effect on
employee morale of the provision
of canteen facilities, details of the
number of meals served each
day,
meter readings for gas and
electricity and attendance
records for canteen employees.
Types of information
Tactical information
Tactical information is used by
middle management to decide
how the resources of the
business should
be employed, and to monitor how
they are being and have been
employed. Such information
includes
productivity measurements
(output per man hour or per
machine hour), budgetary
control or variance
analysis reports, and cash flow
forecasts.
Combination of both
combine financial and non-
financial information to
calculate the average cost to the
company of each meal served,
thereby enabling them to predict
total costs depending on the
number of employees in the
workforce.
Operational information
Operational information is
used by 'front-line' managers
such as foremen or head clerks
to ensure that specific tasks are
planned and carried out properly
within a factory or office and so
on. In the payroll office, for
example, information at this level
will relate to day-rate labour and
will include the hours worked
each week by each employee,
the rate of pay per hour, details
of the deductions and, for the
purpose of wages analysis,
details of the time each person
spent on individual jobs during
the week.
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Strategic information therefore
has the following features.
 It is derived from both
internal and external
sources.
 It is summarised at a
high level.
 It is relevant to the long
term.
 It deals with the whole
organisation (although it
might go into some
detail).
 It is often prepared on
an 'ad hoc' basis.
 It is both quantitative
and qualitative.
 It cannot provide
complete certainty,
given that the future
cannot be predicted.
Information for management is likely to be used for planning, control and decision making.
Planning
Planning involves the following:
 setting the objectives for
the organization
 making plans for
achieving those
objectives.
The planning process is a formal
process and the end-result is a
formal plan,
authorised at an appropriate level
in the management hierarchy.
Formal plans
include long-term business plans,
budgets, sales plans, weekly
production schedules, capital
expenditure plans and so on.
Information is needed in order to
make sensible plans – for
example in order to prepare an
annual budget, it is necessary to
provide information about
expected sales prices, sales
quantities and costs, in the form
of forecasts or estimates.
BY: SHAHAB SHAFI
MANAGEMENT ACCOUNTANT F2
Featuresof information
Tactical information therefore
has the following features.
 It is primarily generated
internally.
 It is summarised at a
lower level.
 It is relevant to the short
and medium term.
 It describes or analyses
activities or departments.
 It is prepared routinely
and regularly.
 It is based on
quantitative measures
Why information is needed?
Control
Control of the performance of an
organisation is an important
management task.
Control involves the following:
 monitoring actual
performance, and
comparing actual
performance with the
objective or plan
 taking control action
where appropriate
 evaluating actual
performance.
When operations appear to be
getting out of control,
management should be alerted
so that suitable measures can be
taken to deal with the problem.
Control information might be
provided in the form of routine
performance reports or as
special warnings or alerts when
something unusual has occurred.
Operational information has
the following features.
 It is derived almost
entirely from internal
sources.
 It is highly detailed, being
the processing of raw
data.
 It relates to the
immediate term, and is
prepared constantly, or
very frequently.
 It is task-specific and
largely quantitative.
Decision Making
Decisions taken by managers
include planning decisions and
control decisions. In addition,
managers might need to make
‘one-off’ decisions, outside the
formal planning and control
systems. Management
accounting information can be
provided to help a manager
decide what to do in any situation
where a decision is needed.
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 MANAGEMENT ACCOUNTANT F2

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

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

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 MANAGEMENT ACCOUNTANT F2
resources means that optimum
output is achieved from the input
resources used. It relates to the
combinations of men, land and
capital (for example how much
production work should be
automated) and to the productivity
of labour, or material usage.
(c) Effectiveness in the use of
resources means that the outputs
obtained are in line with the
intended objectives or targets.
planning and management control.
Consider the following.
(a) Senior management may
decide that the company should
increase sales by 5% per annum
for at least five years – a strategic
plan.
(b) The sales director and senior
sales managers will make plans to
increase sales by 5% in the next
year, with some provisional
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
organisation over a defined period and the state of
affairs at the end of that period.
Limited liability companies must, by law, prepare
financial accounts.
The format of published financial accounts is
determined by local law, by International
Accounting Standards and International Financial
Reporting Standards. In principle the accounts of
different organisations can therefore be easily
compared.
Financial accounts concentrate on the business as
a whole, aggregating revenues and costs from
different operations, and are an end in themselves.
Most financial accounting information is of a
monetary nature.
Financial accounts present an essentially historic
picture of past operations.
Management accounts are used to aid
management record, plan and control the
organisation's activities and to help the decision
making process.
There is no legal requirement to prepare
management accounts.
The format of management accounts is entirely at
management discretion: no strict rules govern the
way they are prepared or presented. Each
organisation can devise its own management
accounting system and format of reports.
Management accounts can focus on specific areas
of an organisation's activities. Information may be
produced to aid a decision rather than to be an
end product of a decision.
Management accounts incorporate non-monetary
measures. Management may need to know, for
example, tons of aluminium produced, monthly
machine hours, or miles travelled by salespeople.
Management accounts are both an historical
record and a future planning tool. Financial
accounts

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 MANAGEMENT ACCOUNTANT F2

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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