2012 Paper F2 Study Text Sample Download v1

Study Text b Management Accounting

www.tonysurridge.co.uk

MAIN PAGE CONTENTS FORMULAE PV TABLE ANNUITY TABLE

1 ©Tony Surridge Online Limited, 2012

http://www.tonysurridge.co.uk/�




ACCA Papers F2/FMA:

MANAGEMENT ACCOUNTING Exam Study Text

Published by Tony Surridge Online Limited in 2012

Copyright © Tony Surridge Online Limited

Part of the Tony Surridge +AddVance study materials range

Tony Surridge Online Limited [email protected]


Tony Surridge Online Limited is grateful to the Association of Chartered Certified Accountants (ACCA) and the Chartered Institute of Management Accountants (CIMA) for permission to reproduce past examination

questions. The suggested solutions in the exam answer bank have been prepared by Tony Surridge Online Ltd, unless otherwise stated.

This E-book is sold subject to the condition that no part of it shall be reproduced, transmitted, or freely distributed, in any form by any means, electronic, photocopying, recording or otherwise, without the prior permission in writing of Tony Surridge Online Limited. This book is not to be used for commercial use. It

is sold on the understanding that a private individual has bought it for individual personal use, and prohibits purchase by any company or organisation entity (limited or otherwise) or sole trader or

partnership. Such entities must contact [email protected] separately to purchase a multi-user license.



mailto:[email protected]�


mailto:[email protected]�




DOWNLOAD SAMPLE Welcome to our download sample of the Tony Surridge +AddVance E-book publication:

ACCA Paper F2/FMA – Management Accounting Thanks for taking time to review a download extract of this Study Text publication which we have developed specially for the ACCA Paper F2/FMA: Management Accounting. We hope you like our electronic study material and recognise that at our affordable prices the complete purchased and downloaded version represents true value for money. This is only a small sample, taken directly from the full version, and as such not all hyperlinks will be active. For illustrative purposes, the selection shown here is Tutorial 1 in full, as highlighted in the table of contents. All hyperlinks are fully functional only in the full downloaded version when purchased. You may like to learn some details about the full version: (please note these details may vary slightly depending on which updated version you have purchased) - Pages 992 - Activities with answers 64 - Diagrams/charts/tables 131 - Examples 48 - Mnemonics 34 - Diagnostic Questions and Answers 437 It is important for you to know that each Tony Surridge +AddVance E-book can only be used on the computer it is initially downloaded to. The data cannot be transferred to any portable memory or any other computer or electronic device. This condition is enforced to protect our digital rights. If you wish to use the full version of this +AddVance Exam Study Text on two separate computers (such as a desktop and laptop), then you will need to purchase an additional license. For further details on minimum computer requirements and our license restrictions please visit our webpage at www.tonysurridge.co.uk/exam-material/how-to-buy Good luck with your studies.



http://www.tonysurridge.co.uk/exam-material/how-to-buy�











“No snowflake in an avalanche ever feels responsible.” Voltaire

Thank you for helping to save our environment.

Studying ONLINE protects trees! LEARN ONLINE





Main Page Copyright statement For the ladies only Why study from a computer screen? Memorising: Tips and techniques Writing or saying things over and over again …. Vocalising Initial letters and making phrases The use of mnemonics The use of jingles Word association Visualising Link/story technique Do I need to memorise all your mnemonics? Disguise your use of mnemonics in the exam Charts Colour codes Electronic links within the database

Syllabus The structure of the syllabus and study guide Level of assessments - Intellectual demand Value of assessments (based on UK frameworks) - Guided learning hours Guide to exam structure Guide to examination assessment Qualification structure

Syllabus structure Study Guide Aim A. The nature, source and purpose of management Rationale information Main capabilities B. Cost accounting techniques Rational diagram of main capabilities C. Budgeting Detailed syllabus D. Standard costing Approach to examining the syllabus E. Performance measurement

Sections Full Contents Screen 1 The nature, source and purpose of management information 2 Cost classification 3 Accounting for materials 4 Accounting for labour 5 Accounting for overheads 6 Absorption and marginal costing 7 Job, batch, unit and process costing 8 Service/operation costing 9 Alternative cost accounting 10 Budgeting 11 Statistical techniques 12 Capital budgeting and capital investment appraisal 13. Budgetary control and behavioural aspects 14 Standard costing 15 Performance measurement

ACCA Papers F2/FMA Management Accounting +AddVance Exam Study Text

“Where shall I begin, please your majesty?” he asked. “Begin at the beginning,” the king said gravely, “and go on till you come to the end: then stop.” Lewis Carroll Through the Looking-Glass

Click


This free sample shows Tutorial 1





Formulae Sheet






payment until periods ofnumber n ratediscount r here

n-r) (1 i.e. 1 of valuePresent

Table ValuePresent

==

+






“It has always been an axiom of mine that the little things are infinitely the most important.” Sherlock Holmes Arthur Conan Doyle, 1859 - 1930

( )

periods ofnumber n ratediscount r Where

rn -r) 1 - 1 i.e. 1 of annuity an of valuePresent

Table Annuity

==

+






Chapter 1

The nature, source and purpose of management

information

ACCA Papers F2/FMA Management Accounting


The contents for this tutorial are on the next screen Click here





Either click to required sub-topic or scroll through the tutorial screen by screen

Sections within the tutorial Coverage

Main topic Sub-topic Search

Accounting for management

1 Purpose and role of cost and management accounting within an organisation

CLICK

2 Managerial processes of planning, decision making and control

CLICK

3 Differences between strategic, tactical and operational planning

CLICK

4 Distinction between data and information CLICK

5 Attributes of good information CLICK

6 Limitations of management information in providing guidance for managerial decision-making

CLICK

Sources of data

1 Sources of information from within and outside the organisation (including government statistics, financial press, professional or trade associations, quotations and price list)

CLICK

2 Uses and limitations of published information/ data (including information from the internet)

CLICK

3 Impact of general economic environment on costs/revenue

CLICK

4 Sampling techniques (random, systematic, stratified, multistage, cluster and quota)

CLICK

Presenting information 1 Written reports representing management information in suitable formats according to purpose

CLICK

2 Information using tables, charts and graphs (bar charts, line graphs, pie charts and scatter graphs)

CLICK

Diagnostic questions Questions CLICK

Answers CLICK

In this tutorial The nature, source and purpose of

management information






Title of chart or diagram SEARCH

Typical finance department in a large organisation CLICK

The decision-making hierarchy in a finance department CLICK

Management Accounting Information System (MAIS) CLICK

Management Accounting Information System (MAIS)- Overview CLICK

Roles and functions of a typical finance department CLICK

Main responsibilities of the manager CLICK

Management levels CLICK

Graphs of sales of A and B: 2006 - 2011 CLICK

Effect of using different scales for the same graph CLICK

Graph showing break to zero CLICK

Barcodes - U-Wear Plastics: Sales of plastic raincoats CLICK

Component bar chart (actuals) - U-Wear Plastics: Sales of plastic raincoats CLICK

Component bar chart (percentages) - U-Wear Plastics: Sales of plastic raincoats CLICK

Multiple bar chart - U-Wear Plastics: Sales of plastic raincoats CLICK

Pie chart: U-Wear Plastics: Sales of plastic raincoats 2007 - 2011 CLICK

Bar charts: Ashley Furniture Company Sales; Tables and Chair 2011 CLICK

Scattergraph of Table 1.4 data CLICK

Scattergraph of Table 1.4 data with line of best fit added CLICK

Scattergraph of Table 1.4 data with line of best fit added showing the coordinate of $5,000 advertising and $50,000 sales

CLICK

Charts, diagrams, tables and mnemonics

in this tutorial: The nature, source and purpose of

management information

Mnemonic Aspect covered by the mnemonic SEARCH

CORE PHD MAP Purpose of information CLICK

ACCURATE CAUSE Characteristics of effective information CLICK

AID NOT USEFUL Characteristics of ineffective information CLICK






Accounting for management 1. Purpose and role of cost and management accounting within an organisation (a) The distinction is not clear Cost accounting and management accounting are essentially the same subject - such differences as there may be between the two reflecting the more elementary approach of cost accounting and its greater concern with shop-floor and lower levels of management as against board-room matters. At this point in time it is still, perhaps, acceptable to draw an artificial distinction and informally say that cost accounting is limited to cost ascertainment - that is, to finding what something costed - whereas management accounting is concerned with providing cost information which assists managers to manage. Since telling managers what a thing costed assists managers to manage, cost accounting is clearly part of management accounting. It is therefore, logical to have a single subject covering both topics and thereby eliminating much of the overlap which arises when they are treated as separate topics. In our coverage reference to management accounting will include cost accounting. (b) The finance function It makes sense to start our studies by looking at the broad sweep of financial management before moving to the more specific practices and principles of management accounting. Management accounting is obviously part of financial management, in its broadest sense. The finance function is performed by a separate department within larger companies or organisations and usually by the accounting department within smaller firms. Financial managers depend heavily upon other managers, such as accountants and market researchers, to provide information for financial decision making. Figure 1.1 shows how in a large organisation the head of finance, typically a finance director, might report directly to the managing director, with authority over the treasurer and controller. (c) The Finance Director The has overall responsibility for the planning and control of: (i) maintenance of statutory accounts; (ii) management accounting and management accounting information systems, such as budgetary control; (iii) internal audit (perhaps reporting to the Audit Committee); and (iv) treasury management and strategic financial decisions. In fulfilling this responsibility the Finance director would advise the Board of Directors on strategic financial matter such as: - whether proposed corporate investments are appropriate; - how such investments are best financed; - the level of dividend distributions. (d) The treasurer The treasurer, usually a senior manager, is responsible for managing external financial matters, such as cash and credit management, raising funds, capital budgeting, and financial analysis and planning. The treasurer needs information from manufacturing and marketing to carry out these activities.






(e) The financial controller The financial controller, another senior finance manager, is responsible for internal matters, `such as accounting, budgeting, payroll, taxes, and information processing. Figure 1.2 illustrates the financial management hierarchical decision framework. (f) Different accountancy roles The work of accountants' is sectionalised into four main roles, which provides for the specialist needs within the accountancy profession, such as evidenced by The Institute of Chartered Accountants (England and Wales), The Chartered Association of Certified Accountants, and The Chartered Institute of Management Accountants, and so on. These four roles, briefly described below, are: - financial accounting - financial management - cost accounting - management accounting Note, that although the overall financial management function is often called the 'Finance Department‘ the role of financial management is only one of four. (g) Financial accounting This involves the recording of financial transactions of the business and the subsequent production of financial statements, usually the statement of comprehensive income, statement of financial position and cash flow statement. In large companies these statements are audited by independent auditors and then submitted to shareholders and other interested groups. We see from this, that financial accounting is mainly concerned with historical aspects of external reporting, that is, providing information about financial results to outside parties such as investors, creditors, and governments. To protect those outside parties from being misled, financial accounting is governed by what are collectively called generally accepted accounting practices (GAAP) which include financial reporting standards. An important accounting standard being used by many companies throughout the world is the International Financial Reporting Standards (IFRS). (h) Financial management (sometimes called 'Treasury management‘) Extending on the points raised previously, financial management is concerned with four key aspects: (i) planning the firm's financial strategy; (ii) planning and controlling the financing of working capital; (iii) obtaining funds for expansion and investments; and (iv) planning and controlling long-term investments.






BOARD OF DIRECTORS CHAIRMAN CHIEF EXECUTIVE

OPERATIONS DIRECTOR

DIRECTOR OF FINANCE

MARKETING DIRECTOR

FINANCIAL CONTROLLER

FINANCIAL ACCOUNTING

MANAGEMENT ACCOUNTING

PAYROLL AND TAXES

INFORMATION PROCESSING

INTERNAL AUDIT AND REVIEW

TREASURER

FINANCIAL PLANNING AND FUND-RAISING

MANAGER

CASH MANAGER

CAPITAL EXPENDITURE MANAGER

CREDIT MANAGER

PORTFOLIO MANAGER

TAX MANAGER

Figure 1.1: Typical finance department in a large organisation

Who learns by finding out has seven fold The skill of him who learned by being told Arthur Guiterman A Poet’s Proverbs






CORPORATE STRATEGY

TACTICAL PLANS

OPERATIONAL PLANS

ORGANISATION

DECISION FRAMEWORK

Corporate strategy concerns: - Decisions made by senior management. - Product-market portfolio - Major tactical manoeuvres, such as ‘green field’, acquisition, forming business alliances. - Major marketing decisions. One member of the Board is usually the Finance Director.

Tactical decisions are the responsibility of different functional (departmental) executives aimed at achieving the intended business strategies. One such functional area is the Finance Department and the Treasury Manager would be an example of an executive working in the Finance Department. Operational decisions regulate day-to-day activities designed to implement corporate policy and tactical plans. In the Finance Department, operational decisions are concerned with ledger accounting, payroll, credit control, cash management and the like.

FINANCIAL MANAGEMENT

- Strategic investment decisions (SIDs) - Capital structure - Dividend policy - Long-term financing - Portfolio management - Risk reduction

- Medium- and short-term financing - Short-term financial decision making, including - budgetary control - project planning and control - Foreign exchange management - Financing working capital investment - Budgetary control, standard costing and variance analysis - Cash management - Working capital management

Figure 1.2: The decision-making hierarchy in a finance department

Eureaka! (I’ve got it!) Archimedes 287 – 212 B.C. Vitruvius Pollio, De Architectura, ix. 215






(i) Cost accounting Traditionally, accounting systems have been divided into two separate parts, serving rather different purposes and generally kept in different books of account (or ledgers); namely (i) financial accounting (for external reporting, as described above) and (ii) cost accounting (for internal reporting). Clearly, in places the accounting categories overlap, and the attempt to integrate the two systems has been assisted by modern computer database files. A cost accounting system, which is based on a collection of cost ledgers, may be said to have two main purposes: (i) to assist in cost control, and (ii) to provide cost information for the purposes of making specific decisions and long-run plans. The second purpose is served principally by an analysis of the nature of the cost in terms of the various important concepts of cost (e.g. opportunity, marginal [or incremental], fixed, variable, full, joint, sunk, etc.) combined with an appreciation of how this cost analysis relates to various short- term and long-term decisions. Cost accounting , then, is concerned with measuring the economic performance of departments, methods and equipment and of measuring the value of the resources consumed in producing goods and services. Cost accountants still exist, although because cost data is input to the management accounting system the cost accountant is nowadays more often called a management accountant. In other words, the full management accounting information system, incorporates the work of cost accounting.

Example 1.1 To show an example, we consider the work of financial management in a 'quoted, high-growth company'. Typical characteristics are: (i) Strong management accounting skills with staff involved in the evaluation of strategic opportunities including expansion of existing businesses, product/market diversification and merger and acquisition work. If the capital structure is changing, then this will demand attention be given to the determination of the cost of capital. (ii) A relatively large amount of time may be spent on statutory and listing requirements, particularly if the company is growing by acquisition. (iii) The demands of growth are likely to impose the need to be constantly developing and adapting management information and accounting systems to meet the changing needs of the business. (iv) Strong treasury skills will be required to secure both short and long-term financing for the company and to contribute to capital structure decisions. (v) The financial manager must be able to adapt to a continually changing environment and to contribute to the strategic decisions facing the business. End of Example 1.1






(j) Management accounting Management accounting, as a profession in the modern sense, began to fully evolve and take shape through the 1950s, although its value has radically progressed since the advent of microchip technology in the early 1980s. Its central theme was, and still is, to provide information appropriate to the managerial needs of an enterprise. As a function within the Finance Department, management accounting may be defined as the use of output from the accounting system for planning and controlling the activities of the organisation primary from a financial viewpoint. In a historical context, management accounting has evolved from the need to distinguish a requirement to provide internal managerial information from those of traditional financial accounting with its emphasis upon reporting to parties external to the organisation. Management accounting, then, is concerned with measuring the economic consequences and implications of management plans and decisions. It concerns itself particularly with money as a measure of economic performance, and with using that measure to help managers manage. In truth, its ‘accounting for’ function is only a very minor aspect and the management accountant has far more in common with the economist than with the traditional accountant. It is broadest terms, management accounting can be defined as follows.

Definition: Management accounting Management accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information which is used to plan, evaluate, coordinate and control within an organisation. It ensures the appropriate use of and accountability for an organisation's resources. End of Definition

Good, better, best Never let it rest Until the good becomes the better and the better becomes the best. English elementary school rhyme






(k) Management accounting compared with financial accounting Management accounting is concerned primarily with providing information for internal managers who are charged with planning and controlling the operations of the organisation and making a variety of management decisions. Because of its internal use, management accounting is NOT subject to generally approved accounting practice (GAAP). More specifically, the differences between financial accounting and management accounting are summarised in Table 1.1. (l) More about the differences between cost and management accounting We have already seen that the differences between cost accounting and management accounting are subtle. Cost accounting could be defined as follows. This definition makes clear that the major function of cost accounting is cost accumulation (i.e. 'building up' costs). Costs need to be accumulated for inventory valuation and income determination. Management accounting, however, emphasises the use of cost data for planning, control and decision making purposes.

Table 1.1: The main differences between financial accounting and management accounting

Financial accounting

Management accounting

Provides information for external users

Provides information for internal users

Is often a legal requirement Is not a legal requirement

Is subject to GAAP and accounting standards

Is not subject to GAAP or accounting standards

Must generate accurate and timely data

Emphasises relevance and flexibility of data

Records historical facts Has more emphasis on future events and decisions

Looks at the business as a whole Focuses on parts (such as individual contracts) as well as the whole of a business

Primarily stands by itself Draws heavily from other disciplines such as finance, economics and operational research

Is an end in itself Is a means to an end, such as decisions

Definition: Cost accounting Cost accounting is 'a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in detail. It includes methods for recognising, classifying, allocating, aggregating and reporting such costs and comparing them with standard costs.‘ End of Definition






Management accounting typically does not deal with the details of how costs are accumulated and how units costs are computed for inventory value and income determination. Although cost data are used for pricing and other managerial decisions, the method of computation itself is not a major topic of management accounting but rather of cost accounting. Management accounts use the cost data produced by the cost accounting system to support and advise management. Figure 1.3 summarises the work of management accountants in providing the 'Management Accounting Information System (MAIS)'. Figure 1.4 shows the relationship between cost and management accountants and management. Figure 1.5 summarises the roles and functions of a typical finance department. (m) The organisational aspect of management accounting The management accounting function is usually a staff function with responsibility for providing senior, departmental and line managers and other staff managers with specialised, often customised, services. We are reminded by Figure 1.1, management accountants often work in the department headed by the Financial Controller.

Activity 1.1 The following statements relate to financial accounting or to cost and management accounting: (i) Management accounting is used to aid internal planning, decision making, monitoring and control. (ii) A financial accounting system produces statements and other information for users external to the organisation. (iii) Cost accounting is part of financial accounting and reports on costs incurred on cost units (or cost objects). Which of the statements are correct? A (i) only B (i) and (ii) only C (i) and (iii) only D (i), (ii) and (iii) only End of Activity 1.1

Activity 1.1: Answer Answer B Cost accounting is not part of financial accounting. End of Answer for Activity 1.1






Figure 1.3 Management Accounting Information System (MAIS)

Financial accountants

Financial managers

Cost accountants

Management accountants

The MANAGEMENT ACCOUNTANT

The role of the management accountant: Finding out what information managers require Deciding what data is required Determining where the data is to acquired (sourced) Processing the data to produce the information (Management accountants use techniques, models, formulae and frameworks) Analysing and interpreting the information for its implications and significance Reporting and distributing the information to managers Advising the managers, where applicable

Operates what is known as a Management Accounting Information System

(MAIS)

Provides information and support for managers Managers are responsible for: planning and decision making controlling these decisions organising work motivating subordinates

There is often three levels of decision making: strategic level (WHAT TO DO) executive (tactical) level (HOW TO DO) operational level (DO)

From where does the

management accountant

obtain data?

External sources

External sources

Environmental scanning Market research Competitor analysis

Marketing records Operational records Human resources records Accounting information system

An overview of the AIS is on the next screen

He who learns but does not think, is lost. He who thinks but does not learn is in great danger. Confucius 500 B.C.

This chart consists of

TWO screens






Accounting Information

Systems (AIS)

Financial Accounting

System (FAIS)

Cost Accounting

System

Books of account (usually computerised): The Nominal (or General) Ledger Subsidiary ledgers Journals Day books Source documents (documents of original entry), such as invoices

Financial information

Statement of Income

Statement of

Financial Position

Cash Flow Statement

Who obtains information from these statements?

Shareholders: - current - potential investors Loan group - payables - bankers Business advisors (those advising others on investments) Employees: - currently employed - potential employees - past employees (those receiving a pension from the organisation) Government agencies such as: - Customs and Excise and Inland Revenue (UK) - Companies House (UK)

Note: The statements are NOT designed for the specific needs of MANAGERS

A system designed to provide management information

Books of account (usually computerised) but different from the Financial Accounts: The Costing Nominal (or General) Ledger Subsidiary ledgers Journals Source documents (documents of original entry), such as invoices

Costing techniques

Costing techniques are universal to any type of work and can be used in any organisation

Costing methods

A costing method is designed for the specific

needs of a certain mode of work or organisation

Batching (a number of similar products)

Process production

On-site contracts

Non-manufacturing work

Jobbing (unique, separate jobs)

Mode or methods of work

Batch costing

Process costing

Contract costing

Non-manufacturing costing

Job costing

Method of costing (specific to the mode/method of

work)

Cost data (output)

Management Accounting Information

System MAIS

Cost accounts provide data for the MAIS. It will ultimately be used to provide Information for managers

Performance report

Cost report

Product income report

Examples of management

reports

Absorption costing

Marginal costing Relevant costing

Standard costing

Budgetary control

Examples of costing techniques






Business environment

COST ACCOUNTING

SYSTEM

Often maintained as

an integral apart of the Financial

Accounting System

MANAGEMENT ACCOUNTING INFORMATION

SYSTEM

Specialist software

Tactical

Operational

Strategic

Decision making Control of decisions

Analytical Interpretation

Routine (periodic) reports

Special (ad hoc) reports

Cost data

Costing methods Costing techniques

Inventory account

Wages account

Work-in-progress account

Overhead account

Finished Goods

account

Cost of Goods Sold

account

Operating Profit/Loss

account

Conventional accounts Responsibility of management accountants

Other internal data

External data

Control systems

Performance appraisal Internal audit

Risk appraisal and

management

Figure 1.4: Management Accounting Information System (MAIS) - Overview

Main involvement of management accountants

Source Documents

Investment decisions

Other decisions






The financial management function is normally performed by a separate department within larger companies or organisations and usually by the accounting department within smaller firms. Financial managers depend heavily upon other managers, such as accountants, economists and market researchers, to provide information for financial decision making. As shown below, in a large organisation the head of finance, typically a Director of Finance, reports directly to the Chief Executive and has authority over the work of Treasurer and the Financial Controller.

The Director of Finance has overall responsibility for the planning and control of: 1. Maintenance of statutory accounts. 2. Management accounting and management accounting information systems, such as budgetary control. 3. Payroll and taxes. 4. Treasury management and strategic financial decisions.

The Treasurer is responsible for managing external financial matters, such as financial planning and fund raising and the management of cash, capital expenditure, credit provision, portfolio and tax, and financial analysis and planning. Treasury managers need information and support from internal operations, as well as from the financial control functions, to carry out the responsibilities involved.

Management accounting can be defined as 'the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial and management information which is used to plan, evaluate, and control within an organisation. It ensures the appropriate use of and accountability for an organisation's resources.' It is a service for management.

Financial accounting is concerned mainly with historical aspects of external reporting, that is providing financial information about results to outside parties such as investors, creditors, and governments. To protect those outside parties from being misled, financial accounting is governed by what are called generally accepted accounting practices (GAAP) which include financial reporting standards.

The Financial Controller is responsible for internal matters such as accounting, budgeting, payroll, taxes and information processing.

Administration Treasurer

The Financial management

function

Financial accounting Management accounting

Director of Finance

Financial Controller

Figure 1.5: Roles and functions of a typical finance department






2. Managerial processes of planning, decision making and control (a) The role of management A detailed examination of management and the role of management is not required for this syllabus. However your examiner will expect you to understand how a management accounting information system (MAIS) is designed to meet the varying needs of different managers. The management function is an essential one in all organised activity, as well as at all levels of an entity. Management responsibility and work stretches from the board of directors to the work of shop supervisors and office managers. People in managerial roles seldom devote all their time and talents simply to making decisions and considerable research has been conducted into what constitutes the work of management. As we see, Fayol postulated on the practices and principles of management. A part of his treatise is given to an examination of the elements of management, and his observations are, on the whole, still valid after more than nine decades of study and experience by other researchers in the field. In modern industry management tend to motivate (rather than 'command'); organising includes coordination; and an important element of modern management is that of decision making. Figure 1.6 provides an overview of the following five main elements of management activity in modern business: (i) planning (ii) organising (iii) motivating staff members (iv) controlling (v) decision making

Tutorial comment Perhaps the father of modern 'operational-management theory' is the French industrialist Henri Fayol. His thesis on the general principles of management first appeared in 1916 in French, under the title Administration Industrielle et Général, a work which although influential in France was not translated into English until 1929. The five elements of management, translated from his own words are: (1) "To forecast and plan" : "examining the future and drawing up the plan of action". (2) "To organise" : "building up the structure, material and human, of the undertaking". (3) "To command“ : "maintaining activity among the personnel". (4) "To co-ordinate“ : "binding together, unifying and harmonising all activity and effort". (5) "To control" : "seeing that everything occurs in conformity with established rule and expressed command". End of Tutorial comment






The elements of management: Planning Controlling Organising Motivating Decision making

Planning and decision making

Managers need to be aware of their objectives which may be short-term and/or long term be aware of the problems they face and their significance and consequence consider optional courses of action evaluate the options to decide which is best make a decision

Strategic management

Tactical (executive) management

Operational management

Levels of decision making

Controlling

Controls are based on plans/decisions Results are monitored (recorded) Periodically, often monthly, results are compared with the objectives of the plans/decisions Variances (the difference between the objectives and results) are calculated The variances are investigated for cause, significance, future consequence and to identify potential remedy Corrective (control) action is planned: - to change the plan or objective, or - bring the activity into line with the plan/objective

Organising

Managers: need to plan their objectives and decide the work required to achieve them decide what decisions will need to be taken in the work need to break the work into manageable tasks link people with tasks, which might require recruitment issue ‘Terms of Reference’ (job descriptions, procedure instructions, etc). train the people involved, as required plan to coordinate the different activities

Motivating

Managers will try to motivate individuals to work hard towards achieving their personal objectives and work assignments motivate groups/teams of people

Figure 1.6: Main responsibilities of the manager

A modern management accounting information system is

designed to support managers accomplish these responsibilities






(b) Management accounts act in a support role Management accountants act in a support role for management. In general, the work of management can be classified as planning, coordinating, controlling, and decision making. (i) Planning The planning function of management involves the selection of long-range and short- range objectives and the drawing up of strategic, and other, plans to achieve those objectives. (ii) Coordinating In performing the coordination function, management must decide how best to put together and integrate the organisation's resources in order to carry out established plans. (iii) Controlling Controlling entails the implementation of a decision and the use of feedback and other signals, so that the organisation's goals and strategic plans are optimally obtained. (iv) Decision making Decision making is the purposeful selection from among a set of alternatives with the aim of achieving a given objective. The management accounting information system (MAIS) supports all these functions. 3. Differences between strategic, tactical and operational planning Researchers in the field of management distinguish between three levels of decision and related responsibility and authority: - strategic (senior) management - tactical (middle) management - operational (junior) management. (a) Strategic (senior) management A strategic decision relates to a proposed action or sequence of actions intended to have a far- reaching effect on the company's ability to achieve its objective. Strategic decisions are often long-term, decided by the board of directors and may remain valid for a period of several years. Strategic decisions often concern one, or more, of the following: - the mix of markets - the mix of products in markets - the development of new products - large scale investment, such as the acquisition of another company - marketing strategies, such as pricing and advertising. The examples cited above are illustrative but not exhaustive. There are many other types of strategic decision.






(b) Tactical (middle) management Once approved, each part of the strategy (strategic plan) becomes the responsibility of an executive who may take a series of tactical decisions in order to implement or, within the limits of his or her authority, modify the strategy. Because strategic plans are usually broad statements concerning the continued use of existing resources or the introduction of new ones; there are two types of tactical planning, one dealing essentially with the use of existing resources, the other with the detailed implementation of a strategy. Also, tactical planning consists largely of frequent revisions of plans in response to changing conditions. Tactical decisions often concern one, or more, of the following: - planning objectives (and perhaps programmes) for the operational management - controlling the work of operational managers - planning the annual budget - controlling the annual budget - obtaining resources (including human resources) - controlling the use of the resources. (e) Operational (junior) management. Each part of the tactic becomes the responsibility of a manager or supervisor who may take a series of operational decisions in order to implement or, within the limits of his or her responsibility, modify the tactical plan. Operational management is synonymous with day-to-day operational work of whatever nature: goods-producing, service provision, support activity and technical/specialist advice. An operational decision often has a short-term duration, sometimes as short as a few hours. Operational decisions often concern one, or more, of the following: - planning day-to-day on-going work and activities - controlling such work and activities - organising and controlling the work of non-managerial employees - ensuring the continued availability of resources required for operations - trouble-shooting problems. Figure 1.7 summarises the role and information needs of the three main managerial decision levels.

Activity 1.2 Which of the following are correct? (i) Strategic information is required by senior management. (ii) Budget planning is an example of tactical management. (iii) Details of inventory levels is required by operational management. A (i) and (ii) only B (i) and (iii) only C (ii) and (iii) only D (i), (ii) and (iii) End of Activity 1.2

Activity 1.2: Answer Answer D End of Answer for Activity 1.2






The types of information at this level of management include: historical, current and prediction data data which is relevant to the department some data summarised, and some detailed (such as sales trends, budget results, and so on)

The types of information at this level of management relate to: current activities specific activities (within departments or activities) measurable events, such as overtime hours works, kilograms of material used, etc. data which is detailed

Strategic management WHAT TO DO!

Executive (tactical) management HOW TO DO!

Operational management DO!

Strategic managers will make decisions which: decide the entity’s direction and set the long- and medium-term objectives require high cost investment and associated risk have uncertain results influence the operations of the different departments are non-routine and proactive

The types of information and support they need include: predictive as well as historical data which concerns the WHOLE entity data which is compact and summarised (and yet with the ability to ‘drill down’ into more detail as required) data which relates to external (environmental) factors as well as internal factors

Executives make decisions which: involve the medium-term implementation of the strategy (policy) involve departmental performance monitoring, measurement and control are partly routine and partly non-routine are both reactive and proactive

Operational managers make decision which: involve a short time scale (sometimes very short- term) are routine (‘rules and regulations’ based) have predictable outcomes

Figure 1.7: Management levels






4. Distinction between data and information One of the main responsibilities of the management accountant is to produce and deliver information to managers and to provide appropriate support with regard to it. The syllabuses of Paper F2 and FMA require you to have basic knowledge of what information is, and to appreciate its main characteristics. Of all the techniques used by the management accountant none is more critical than reporting. What ever invaluable data accountants may collect, whatever inspired ideas they may have, unless they can present the data and their conclusions in a lucid and meaningful manner they would have wasted their time. In management accounting it is not enough to have completed all the ‘technical’ work competently, it is also necessary to report to one’s colleagues on the management team so that they are as well informed and fully alert regarding the economic significance of events as the management accountant. And it should be appreciated that the onus of effective reporting is wholly on the person reporting - not the person reported to. The views of Professor Longworth are interesting. He suggests that there is an ‘information ladder’ that steps up from data, at the lowest rung, to wisdom, at the top. We, however, are here only concerned about the first two rungs - data and information. (a) The nature and role of accounting data Cost and management accounting is essentially the use of accounting data to construct cost and management accounting statements and reports. Accounting data in this context may be looked on as atoms, i.e. the smallest divisions of accounting data that exist. For instance, we may know that a tin of paint worth $10 was drawn from inventory for general use in the Finishing Department. There is no further breakdown of this $10 cost, and it is therefore similar to an atom. Clearly, in any accounting situation there will be a great many such ‘atoms’. As the different combinations of chemical atoms in chemistry give different substances, so the different combinations of accounting atoms (or items of data) give different kinds of accounting statements and reports. Yet another way of looking at accounting data is to consider them as building blocks. Such bricks can be used to construct ‘buildings’ of quite different designs, i.e. used to construct quite different statements and reports, and, moreover, are re-usable for as many statements as are required. The important point to note here is that the same accounting data can be arranged and rearranged to give a number of different statements, and that no one way is the only correct way.

Tutorial comment The information ladder is a diagram created by education professor Norman Longworth to describe the stages in human learning. According to the ladder, a learner moves through the following progression to construct 'wisdom' at the highest level from 'data' at the lowest level: Data → Information → Knowledge → Understanding → Insight → Wisdom

Whereas the first two steps can be scientifically exactly defined, the upper parts belong to the domain of psychology and philosophy. End of Tutorial comment






(b) The basic principle of data arrangement, or data processing It must be emphasised at this point, and it cannot be emphasised strongly enough, that all management statements must always be prepared with the following question in mind: for what purpose is the information required? This question lies at the heart of all cost and management accounting, and every such statement should be prepared with its particular purpose in the forefront of the accountant’s mind. It would be useful at this point to consider the definitions of (i) data, (ii) information and (iii) data processing. (c) Reliability of cost data Accountants should never forget that data relating to actual circumstances may not always be reliable. Much of it comes from the shop-floor - time-sheets, material requisitions, material returned notes, transfer notes, piece-work tickets and scrap returns - and it should be appreciated that may shopfloor employees either make mistakes or else may deliberately falsify the data. In view of such possible unreliability in much of their basic data, accountants must beware of jumping to conclusions from such data.

Definitions: Data The term data refers to qualitative or quantitative attributes of a set of variables. Data (plural of "datum") are typically the results of measurements and can be the basis of graphs, images, or observations of a set of variables. Data are often viewed as the lowest level from which information and then knowledge are derived. Raw data, i.e. unprocessed data, refers to a collection of numbers, characters, images or other outputs from devices that collect information to convert physical quantities into symbols. Also, data are representations of a fact, figure, and idea, which is isolation do not provide meaning. For example today’s date, by itself , is a fact has little meaning Information Information is a term with many meanings depending on context, but, generally is closely related to such concepts as meaning, instruction, communication, representation and mental stimulus. Information may be considered as data that has been processed into a format that gives meaning. For example, today’s date has meaning if you consider it to be the day you read these notes! Information normally forms a message and as such typically has a sender and receiver. Information is data that has been structured, by some form of data processing system, but has not been interpreted as knowledge. Data processing Data processing is any process that converts or transforms data into information. The processing is usually assumed to be automated and running on a personal computer or other information system. More generally, data processing can apply to any process that converts data from one format to another, although data conversion would be the more logical and correct term to use in this case. End of Definitions






5. Attributes of good information (a) Benefits should exceed costs An important need of management information is that the benefits obtained outweigh the costs of its preparation, processing and delivery. Obviously, a cost-benefit analysis for each report is not practical - nevertheless a review of regularly produced reports should be carried out to determine whether their continued production is justified. (b) Other needs There are no definitive rules that make one type of statement or report better than another; books may point the way, but always the final decision as to how to arrange and format data must be left to the judgement of the individual accountant. However there are requirements that should always be borne in mind. (i) Relevance for intended purpose Each report, statement or item of information should fulfil specific needs and contain only data directly relevant to the need of its recipient. Extraneous matter should be omitted. For performance and control reporting, only activities, events or results within the responsibility of the recipient concerned are necessary. (ii) Accuracy Each report should be as accurate as circumstances require. (iii) Factual Where possible, reported information should be based on fact. When factual information is not available, or when the information requires subjective estimation, factual data should be distinguished from subjective information. (iv) Volume of information The extent, or volume of information, should be sufficient to give a full and clear description of the subject matter of the report but should not be so detailed and voluminous to cause an information overload. The amount of detail incorporated in a report depends on the level, or role, of the recipient within organisation. Senior managers need less detail in control reports than their juniors. (v) Presentation of information When information is reported or presented, important features should be highlighted. Regular reports should have consistent order and layout so that recipients can easily locate salient features and assimilate the knowledge communicated. (vi) Timeliness It is essential that information be produced and delivered in time for it to be useful. There is little point in producing a report, whatever its quality, if it is received too late to be acted on.






6. Limitations of management information in providing guidance for managerial decision- making

Sometimes the desirable attributes of information tend to conflict as the achievement of one aspect may prevent achievement of another. (i) Factual versus subjectivity Information which is relevant may need to be subjective rather than factual. This is especially so when reports are produced to assist decision making. (ii) Accuracy versus timeliness Producing a report quickly to deliver it on time so that it is useful may require estimation and potential loss of accuracy. (iii) Volume of information and detail The requirements tend to contradict. Too much/little detail or volume may produce ineffective reports. (iv) Cost versus all other aspects A need to reduce the costs of producing and delivering information can reduce the achievement of the other required attributes of information. Each item of information will need to be a compromise between the different attributes with judgement by the management accountant about what is important in the particular circumstances. Also the point raised previously abut the reliability of cost data , has bearing on the quality of information produced. For instance, when booking time to a mixture of small and large jobs employees may easily forget that they worked on some small jobs. Moreover, they are conscious that their excessive time is much more noticeable on a small job than a large job involving a number of other employees. As a result, small jobs are almost always underbooked and large jobs overbooked and accountants should allow for this when preparing cost statements. The following three screens contain mnemonics that might help you remember facts for your exam. - Purpose of information Mnemonic: CORE PHD MAP Click here. - Characteristics of effective information Mnemonic: ACCURATE CAUSE Click here. - Characteristics of ineffective information Mnemonic: AID NOT USEFUL Click here.

‘I don’t care too much for money, money can’t buy me love.’

John Lennon The Beatles Pop Group






Purpose of information

Memory jog: A PHD (post-grad qualification) requires a lot of information. One could say that a thesis requires a map of core information, a ‘CORE PHD MAP’.

Data is used to produce information and organisations need information for different reasons. Information is required for the following purposes:

C Control (feed-back, feed-forward and corrective response).

O Organising activity, such as the recruitment of staff.

R Receiving records and results of transactions.

E External communication – information to be used by shareholders, investors, business advisors, bankers, other creditors, employees, government agencies, and so on.

P Planning (which involves forecasting).

H Harmonising and coordinating activity across different departments, sections and activities.

D Decision making (which involves analysis, appraisal and evaluation).

M Monitoring events and activities.

A Auditing, such as financial audit, systems audit, management audit, post-implementation audit, etc.

P Performance measurement.






Characteristics of effective information The following attributes are what makes information effective.

A Authoritative, which means that the information should be reliable, well sourced, and well processed.

C Completeness, which means that everything that is required should be included.

C Cost effectiveness; the benefits of producing the information should exceed the costs of producing it.

U Up-to-date information is required, such as intelligence on what competitors are doing NOW.

R Relevant information, for instance some costs are relevant, and some are not, when evaluating the costs and benefits of a particular decision.

A Accuracy of information, for example in terms of calculations, assumptions, inclusion, analytical techniques.

T Timely, it is important that information is made available before, or at, the time it is required.

E Economical production of information would help contain the high costs which can be incurred in producing it.

C Conciseness. It is important that information precisely meets the needs and that excess data and padding is omitted.

A Availability where required. Information is required in a variety of different locations and technologies are available to meet this need.

U User focused, for example strategic, tactical and operational managers require information which meets their different needs.

S Security (confidentiality, restricted sight etc.) is sometimes an important aspect.

E Easy-to-use and understand.

Memory jog: Remember information has an ‘ACCURATE CAUSE’.






Characteristics of ineffective information The following weaknesses cause information to be ineffective:

A Access is insecure, for example confidentiality needs and privacy rights are violated.

I Inaccuracy.

D Distribution of copies which are not required.

N Noise – information ‘noise’ caused by lapses such as report padding, use of inappropriate terminology and ‘electronic noise’.

O Out-of-date information.

T Thin – the information is insufficient to achieve the requirements of the user.

U Unnecessary duplication of records, data items, files, etc.

S Stored too long – retained for too long a period, which can lead to operating costs and storage costs.

E Excessive information – padding of data.

F Filtering of information as it moves up the management chain.

U Uneconomic to produce.

L Lack of clarity – again, misuse of terminology, etc.

Memory jog: Remember these factors might mean that the ‘AID’ given by information is ‘NOT USEFUL’.






Activity 1.3 The following statements refer to the qualities of effective information: (i) It should be relevant to the needs of the recipient. (ii) It should be requested by the recipient. (iii) It should always be completely accurate before being used. Which of the above statements are correct? A (i) only B (i) and (ii) only C (i), (ii) and (iii) End of Activity 1.3

Activity 1.3: Answer Answer A - Often information is not requested by the recipient. An example would be an adverse variance (say, over usage of material). - Complete accuracy takes time and incurs costs and may not be appropriate for a particular need. For example, figures are often rounded up or down. End of Answer for Activity 1.3







Sources of data

1. Sources of information from within and outside the organisation (including government statistics, financial press, professional or trade associations, quotations and price list) Business information is obtained from general surveys, data, articles, books, references, search- engines, and internal records that a business can use to guide its planning, operations, and the evaluation of its activities. Such information also comes from internal staff, customers, associates, and suppliers. Published sources may be daily newspapers; financial, trade, and association magazines; databases, government statistics, directories, technical manuals, and much else. In effect, since "information" is defined more by context than by content, business information is whatever information helps a business know its environment. The challenge for a management accountant is to capture and use information that is relevant and reliable. In more detail, the main sources of information are as follows. (a) Internal information (i) From the accounting system Accounting records are a prime source of internal information. They detail the transactions of the business in the past - which may be used as the basis for planning for the future (e.g. preparing a financial budget or forecast). Accounting records are primarily used to record what happens to the financial resources of a business. For example, how cash is obtained and spent; what assets are acquired; what profits or losses are made on the activities of the business. However, accounting records can provide much more than financial information. For example, details of the products manufactured and delivered from a factory can provide useful information about whether quality standards are being met. Data analysed from customer sales invoices provides a profile of what and to whom products are being sold. (ii) Other internal sources A lot of internal information is connected to accounting systems - but is not directly part of them. for example: - Records of the people employed by the business (personal details; what they get paid; skills and experience; training records) - Data on the costs associated with business processes (e.g. costings for contracts entered into by the business) - Data from the production department (e.g. number of machines; capacity; repair record) - Data from activities in direct contact with the customer (e.g. analysis of calls received and missed in a call centre) A lot of internal information is also provided informally. For example, regular meetings of staff and management will result in the communication of relevant information.






(b) External information As the term implies, this is information that is obtained from outside the business. There are several categories of external information, examples of which are: - government statistics, - trade associations, - interfirm comparison services, - print, - business contacts, - competitors (i) Government statistics For example, in the UK, the Office for National Statistics provides detailed statistics under eleven main themes, one of which is ‘Business and Energy’ Its ‘business statistics’ measure company structure, physical size and location; closures and mergers are covered as are key attributes such as International trade, turnover, employment and profits, by industry sectors. (ii) Trade associations A trade association, also known as an industry trade group, business association or sector association, is an organisation founded and funded by businesses that operate in a specific industry. An industry trade association participates in public relations activities such as advertising, education, political donations, lobbying and publishing, but its main focus is collaboration between companies, or standardisation. Associations may offer other services, such as producing conferences, networking or offering classes or educational materials. Larger trade associations publish membership directories and yearbooks to promote their association to opinion formers, lawmakers, regulators and other stake- holders. Such publications also help to promote members‘ businesses both to each other and to a wider audience. A typical membership directory contains profiles of each association member, a products and services guide, advertising from members, and editorial articles about the aims, objectives and activities of the association. (iii) Interfirm comparison services There are organisations which provide for formal interfirm comparisons. For example, in the UK, The Centre for Interfirm Comparison (CIFC), provides services to help businesses of every kind to improve their profitability and productivity by providing expertise in benchmarking, performance measurement and financial control. CIFC's activities include: - benchmarking and interfirm comparison which enable firms to target improvements against best practice - consultancy on improved planning and financial control through the use of management ratios - the use of performance indicators in both public and private sectors - surveys, statistics and business information. CIFC has worked for organisations of every kind in the United Kingdom and overseas for over fifty years.






(iv) Print (including electronically produced and delivered) The category of print covers not only a vast array of books and periodicals, but also includes microfilm and microfiche, newsletters, and other subcategories. Government, both central and local, reports also fit into this category. Perhaps the most accessible documents in the print category are newspapers, books and periodicals. Entrepreneurs and established business owners (as well as corporate executives, accountants, human resource managers, and nearly every other category of person involved in business) can turn to a variety of periodical sources, each with its own target niche. Some magazines and newspapers, such as Business Week, the Financial Times and Wall Street Journal, provide general interest coverage, while others (Forbes, Fortune, Inc.) provide more of an emphasis on subjects of interest to investors and executives in large firms. Then there are the trade journals, an enormous subsection of print aimed at very select audiences. These trade journals, which typically provide narrow coverage of specific industries (journals targeted at owners of bakeries, amusement parks, real estate businesses, grocery stores, and a variety of other businesses can all be found), often contain valuable industry-specific information. Another subcategory of the specialised print category is the material published through business research services and associations such as Commerce Clearing House and Dun & Bradstreet. Finally, both government agencies and educational institutions publish a wide variety of pamphlets, brochures, and newsletters on a range of issues of interest to business people. While government brochures and reports have long been a favored source of business information—in some measure because many of these documents are available free of charge—consultants indicate that valuable studies and reports compiled by educational institutions are often underutilised by large and small companies alike. (v) Business contacts - Customers Customers can provide information on such matters as - Product and quality specification required. - Price range they would expect. - Requirements for delivery time. - Preferences for packaging and delivery methods. - Opinions, feedbacks and complaints generally. - Suppliers Suppliers are usually able to provide information on - Price, adjustable by quantity, early payment and promotional discounts - Availability of products and services. This is often linked to quotations. In business, a quotation is a document that a vendor or service provider would give to a customer to describe specific goods and services that they may provide and its cost. Besides being called a quotation, it can also be referred ad Bid, Quote, Estimate, Tender and Proposal .



http://www.inc.com/topic/Dun+&+Bradstreet+Corporation�




Amongst other items of data, the quotation would include (i) Quotation Date (ii) Payment terms and (iii) a description of the goods to be supplied - quantity, unit of measure, price per unit and total amount for individual items. In the case of services, the scope of work and amount for individual items. Quotations are usually as specific as possible to avoid confusion and misunderstandings between the vendor and customer. Often drawings or specification etc are attached. Quotations are essential sources of information when certain decisions are made, such as investment decisions. - Alternative products or services which may be available, or may become available. (vi) Competitors Competitor analysis can reveal a lot about the competitor’s position, strengths, weaknesses and possible future strategies and actions. A common technique is for a company to create detailed profiles on each of its major competitors. These profiles give an in-depth description of the competitor's background, finances, products, markets, facilities, personnel, and strategies. Appraisal of the competitor’s price list would be part of this exercise. A price list, is the company’s suggested retail price, determined by supply and demand, for its goods. Products and product advertisements often include language such as "lists for $99; our price: $79." This means that the company expects the product to sell for $99, but the seller is willing to let it go below its list price (for $79 in this example). 2. Uses and limitations of published information/data (including information from the internet) (a) Benefits of external sources There are benefits of using external data sources. (i) There is a enormous expanse of external sources of information. The ability to source information from website portals, such as Google, seem limitless. (ii) Data is easily accessible especially using the Internet. Accountants can use search engines to precisely locate narrow, and specific, areas of data required. (iii) Conflicting data is available, which is useful when formulating opinion. The amount of external data available means that accountants can carry out comparisons between ` sources and assess their usefulness. (iv) Many decisions involve external factors - such as customers and reactions of competitors - and therefore external data becomes essential when evaluating alternatives and different proposals. (v) Performance assessment requires an external focus. Internal inter-period comparison is insufficient. For instance a 5 per cent growth in sales between two years may seem strong, until compared with the industrial growth which over the same period was 8 per cent. In such case, the firm concerned has lost market share.






(b) Limitations of using external sources (i) The quality of data on the World Wide Web (www) is not controlled and therefore may not be accurate. (ii) Out-of-date data on the www is often not removed, another source of inaccuracy. (iii) Competitors’ promotional literature - advertising and price lists may be biased. (iv) External data may be formulated using a different basis - for instance the financial statements of two companies may have been produced using different financial reporting standards. A further example would be where the assets of two organisations under comparison have different ages. (v) Finding relevant information can be time consuming. When seeking a specific item of data on Google the user is often confronted with a list of hundreds-of-thousands of files to choose from. 3. Impact of general economic environment on costs/revenue The general economic environment affects a business by, in the main, the way it impacts on three dynamics (i) interest rates, (ii) inflation rates and (iii) currency exchange rates. These in turn impact on the company’s costs and market position. There are two extreme economic conditions: (i) recession and (ii) boom. (i) Recessionary, or economic weakening position In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way. Production, as measured by gross domestic product (GDP), employment, investment spending, capacity utilisation, household incomes, business profits, and inflation all fall, while bankruptcies and the unemployment rate rise. Recessions generally occur when there is a widespread drop in spending, often following an adverse supply shock or the bursting of an economic bubble (as occurred throughout the World in 2007). Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation. The usual effect of recession on business is - Domestic inflation increases which forces up cost (‘cost-push’ inflation). - Disposable income reduces, the dynamics of which often pushes down selling prices. - The market becomes much more competitive, again pushing down selling prices and pushing up marketing costs, such as promotion and advertising. - Customers lose confidence, pushing down sales revenue. - The domestic currency depreciates which increases the costs of imported resources, although helping to increase export sales. (ii) Boom, or economic strengthening position An economic boom occurs when real GDP grows faster than the historic rate of economic growth (in the UK, the historic rate is around 2.5% per year). In a boom, aggregate demand is high. Typically, businesses respond to this by increasing production and employment and may also opt to widen profit margins by raising prices. The increase in output eventually puts pressure on scarce factor resources and can lead to demand-pull inflation. This depends on how much spare capacity is available to meet demand.






The main characteristics of an Economic Boom are as follows. - A strong and rising level of aggregate demand – nearly always driven by household consumption but government spending, fixed investment and exports can also add to final demand. Exports might be boosted by a more rapid growth of world trade or a fall in the exchange rate which increases the competitiveness of the domestic traded goods sector. - Rising employment and real wages as the labour market “tightens” leading to falling unemployment and higher real incomes for those in work. Real incomes for those people in work tend to rise quickly during a boom because of rising labour demand and the opportunity to boost earnings from overtime and productivity-related pay. This increases their ‘buying potential’. - Increased demand for imported goods and services because of an increasing exchange rate for the domestic currency which leads to a propensity to import. - Government tax revenues will be rising quickly because employment and income increase leading to an improvement in government finances (the so-called “fiscal dividend” arising from a sustained expansion). This can lead to a budget surplus which might be used to reduce government debt, or finance an increase in government spending on public goods and services. It can also lead to a reduction in taxes, which increases the disposable income of consumers. - Company profits and investment increase – possibly financing a higher level of fixed capital . The extent to which a sustained expansion of national output leads to rising profits depends in part on what is happening to the exchange rate. For example when the exchange rate is falling, the profitability of exporting goods and services increases leading to a rise in profit margins and higher export orders and output at the same time. The reverse is true when the exchange rate rises. - Rising productivity – a cyclical boom is good for labour productivity because businesses are stretching to meet extra demand by using their existing, and limited, labour resources more intensively - A danger of demand-pull and cost-push inflation.

4. Sampling techniques (random, systematic, stratified, multistage, cluster and quota)

(a) Populations Before one starts collecting any data at all it is very important to know exactly what one is collecting data about! We call the group of people, or items, about what we want to obtain information the population. Clearly the population must be defined very carefully. Thus if we wish to investigate the additional number of products that sold after a television advertising campaign then our population will be all the additional products that sold in the TV region. Note this is not the same as all the products that were sold in the country. Defining the population may prove, in fact, very tricky. For instance, presumably products would have been sold regardless of the advertising campaign though our focus would need to be on the additional products. (b) Samples If our population is relatively small and easily surveyed we may exam every item in the population. If we do this we are, incidentally, taking a census. However, in practice, populations are usually too big or items too inaccessible to enable whole populations to be examined. One may have to be satisfied with examining only a part, or sample, of the total population. A sample, then, is a group of items taken from the population for examination.






(c) Sample frame A list of the entire population from which items can be selected to form a sample is called a sample frame. Creating a sample frame often proves to be a major problem. If we wanted, for instance, to take a sample of people using a particular product, it would be very difficult, if not wholly impractical, to create a list of all such people. (d) Random samples Taking a sample is not simply a matter of taking the nearest item. If worthwhile conclusions relating to the whole population are to be made from the sample, it is essential to ensure as far as possible that the sample is free from bias, which can be defined as the influence of a particular feature in excess of its true importance. The possibility of taking a sample having bias can be reduced by taking a random sample. A random sample is a sample selected in such a way that every item in the population has an equal chance of being included. This is the only method of sampling in which we can be confident that the selection method is free from bias. There are various methods of obtaining a random sample but they all depend on the selection being wholly determined by chance. Probably the best method of selection is to number all the items in the sample frame and then allow a computer to generate a series of random numbers which will identify the items to be selected for sample. While the use of a computer may be the easiest way of electing a genuine random sample, in practice a table of random numbers may be used instead. Finally, it must be clearly appreciated that a random sample is not necessarily a good cross- section of the population. Drawing the names of customers out of a hat could result in a sample containing all wealthy customers - although this is highly unlikely. Thus a random sample, too, can be one-sided and does not guarantee a sample free from bias. It simply guarantees that the method of selection is free from bias. This is a rather subtle difference, but an important one.

Example 1.2 The sample frame for the survey shows a total of 642 items and a random sample of 6 items is required. A sequence of published five-digit random numbers run as follows: 54261 90067 02374 82816 39210 73829 This sample can be selected by dividing the random digits into sets of three and selecting the first six items thus indicated, ignoring any sets with values above 642, i.e. 542 619 006 702 374 828 163 921 073 829 Thus numbers 702, 828 and 921 would be ignored, leaving items 542, 619, 006, 374, 163 and 073 comprising the random sample. End of Example 1.2






(e) Other sampling methods There are occasions when the selection of a pure random sample is not feasible. These occasions arise: (i) when such a sample would entail much expensive travelling for the samplers; (ii) when ‘hunting out’ the people or items selected would be a long and uneconomic task; (iii) when there is no sample frame - one cannot select a random sample of fair-haired; mothers, for example, since there is no sample frame for these mothers. These obstacles are overcome by using multistage, cluster and quota sampling respectively. Additionally, there is a ‘short-cut’ selection method, systematic sampling, and a method, stratified sampling, which is an improvement on simple random sampling. (f) Multi-stage sampling The objective of multi-stage sampling is purely and simply to save time and money. If a nationwide survey is needed and a sample frame exists (e.g. electoral roll) there is no theoretical objection to taking a pure random sample. However, almost certainly such a sample will be scattered the length and breadth of the country and the time and expense of sending samplers to each selected person, or item, would be prohibitive. To bring the survey within practical and economic bounds multi-stage sampling is adopted. In this method the country is first divided into a number of large areas (e.g. counties) a few of which are then selected at random. These areas are in turn divided into a number of small areas (e.g. borough districts) and a few of these are also selected at random. This procedure is continued until the areas selected are small enough to be selected at random, e.g. streets, and individuals living in these streets collectively form the sample. Note that at each stage either the size of the sample taken within each area, or each area’s probability of selection, must be in proportion to the population of that area, otherwise there will be a bias towards areas of low population. It is a feature of the multi-stage sampling method that every person initially has an equal chance of being selected - as in the case of a pure random sample. However, the method ensures that at the end the actual people, or items, selected will be concentrated in specific areas.

Tutorial comment If this last point is not clear imagine that you are to take a sample of one individual from two areas, the first containing 19 men and no women, and the second containing 1 woman and no men. If one of the areas is selected at random, and then an individual within that area is selected at random, there is a 50/50 chance that the area with the one woman will be selected and a certain chance that she will be the individual selected. So the initial probability of selecting a woman is 1 in 2 whereas it should be 1 in 20. This form of bias can be redressed by arranging that the first area has a 19 in 20 chance of being selected, and the second 1 in 20. End of Tutorial comment






(g) Cluster sampling Cluster sampling is akin to multi-stage sampling in so far as the country is again repeatedly subdivided into areas which are selected at random - and individuals, or items, selected at random from the final areas. However, cluster sampling is adopted when there is no sample frame from which the final sample can be selected, such as fair-haired mothers. In this type of sampling the sampler has to comb the final small area selected meticulously to find the items (say, fair-haired mothers) needed to form that particular area’s sample. Assume, for instance, we needed to form a sample of people using a competitor’s product. First, a number of small areas are selected in the same way as in multi-stage sampling. The size of these areas will to a large extent depend upon the believed density of the items being sampled, e.g. areas will be small in cities, but large for rural areas. A sampler then visits each area with the objective of finding every individual using the competitor’s product that he or she can. Cluster sampling has the same disadvantage as multi-stage sampling. Additionally in cluster sampling there will be a tendency for the less obvious items to be missed, such as reclusive individuals using the competitor’s product. However, in the absence of a sample frame, cluster sampling is often the only viable method of selecting a sample at all. (h) Quota sampling Another method of selecting a sample in the absence of a sample frame or where the cost of a random sample is prohibitive is by quota sampling. This method is similar to cluster sampling except that the sampler does not have to find all the items with a given characteristic in order to determine the sample frame, but only sample a predetermined number which is termed the quota without knowing the sample frame. Once the sampler has filled his or her quota the sample is finished. In practice a sampler’s quota is often subdivided into classes. Thus 20 per cent of the quota may be people 20 - 30 years of age, 50 per cent 30 - 40 and 30 per cent over 40. All these subdivisions are designed so that the final sample comprises as accurate a cross sample of the population being sampled as possible. Although quota sampling is relatively cheap, it does have the disadvantage of tending to be rather imprecise. Very much depends on the sampler’s skill in weighing up into just which classification a potential interviewee, or item, falls. As this is often very subjective there is plenty of room for divergent judgement. Moreover, much will depend on where the sampler looks to find his or her quota. A sample of shoppers elected solely from the shoppers in a large shopping centre located outside a town will obviously be biased - high-street shoppers will hardly be represented at all. As can be imagined, where quota sampling is to be used it is vital that the samplers are well trained so that all the potential forms of bias are minimised as far as possible. (i) Systematic sampling Systematic sampling is simply a short-cut method for obtaining a virtually random sample. If a 10 per sample (say) is required, then the sample can be selected by taking every tenth item in the sample frame, provided there is no regularity within the frame such that items 10 spaces apart have some special quality. If by mischance there happened to be some pattern in the frame that coincided with the sampling interval, the sample would be extremely biased, e.g. every tenth house in a street might have a bay window and therefore be slightly more expensive. Such a bias is not common, however, and systematic sampling can often be safely used.






(j) Stratified sampling It is important to note that none of the techniques so far mentioned is better than a pure random sample. Stratified sampling, however, is better than purely random methods and must therefore be distinguished from the others. In order to use it, however, the sampler will have to know what groups comprise the total population, and in what proportions. Example 1.4 illustrates what is involved.

Example 1.3: Systematic sampling A population frame is known and is 20,000 records A sample size has been selected of 50 records The sampling interval is therefore: 20,000/50 = 40 The first record is determined by choosing randomly a number between 1 and 40, e.g. 28, then the second record will be the 68th (28 + 40), the third will be the 108th (68 + 40) ... up to the 1,988th ( (49 x 40) + 28) record. End of Example 1.3

Example 1.4: Systematic sampling The accountant wishes to sample non-current assets which according to financial records fall into the following classification of values: Number of assets Individual asset value in this classification Proportion $ 1,000,000 - and higher 12 12/240 = 0.05 500,000 - 999,000 36 36/240 = 0.15 200,000 - 499,999 60 60/240 = 0.25 1 - 199,999 132 132/240 = 0.55 240 1.00 Sample size is determined to be 20 records Records will be stratified as follows: Number of assets Individual asset value sampled in this classification $ 1,000,000 - and higher 20 x 0.05 = 1 record 500,000 - 999,000 20 x 0.15 = 3 records 200,000 - 499,999 20 x 0.25 = 5 records 1 - 199,999 20 x 0,55 = 11 records 20 records Each record will be selected randomly from within their group, e.g. 1 record will be randomly selected from the 12 asset records held in the value group of $1,000,000 or higher. End of Example 1.4






One reason why stratified sampling is an improvement over a pure random sample is that it lessens the possibility of one-sideness. For example, using the data shown in Example 1.4, a random sample could be comprised wholly of assets of $199,000 or less. But if it were arranged that the sample should contain different proportions of each value classification, such a one-sided sample would be impossible. Presenting information

1. Written reports representing management information in suitable formats according to purpose (a) Different types of report A report is a document containing information organised in a narrative, graphic, or tabular form, prepared on ad hoc, periodic, recurring, regular, or as required basis. Reports may refer to specific periods, events, occurrences, or subjects, and may be communicated or presented in oral or written form. Reports commonly in use are: - periodic report - routine report - exception report - briefing paper (i) Periodic report A periodic report (also called a recurring report) consists of a summary of events that presents essentially the same type of information updated at regular intervals such as every day, week, month, etc. An example is a monthly operating control report highlighting budget variances that have occurred through the month. (ii) Routine report A routine report is a standard form of written communication, often based on a proforma format, reporting a routine event that has occurred. For example, when a new director is appointed to the board it may be a legal requirement for a government agency to be informed of the engagement. (iii) Exception report An exception report communicates a material deviation between expectation and actual occurrence which warrants management investigation, often immediate investigation. Only undesirable performance or result is identified, and corrective action can then be taken on a timely basis. In other words, managers are only alerted about a situation that needs their attention. With today's technology it is possible to send an 'alert' to the manager via an email or text message. Exception reporting is a concept designed to save time by only alerting interested parties to a given unusual or unexpected situation. The alternative would be to search for this information where it is mixed in with a lot of 'normal‘ data and therefore more difficult to find. (iv) Briefing paper Briefings, whether in the form of briefing notes, longer briefing papers, or oral briefings, are used to keep decision makers informed about the issues they are responsible for. In business, briefings are the principal means of communication between managers and their






directors and seniors managers. The demands of corporate management and governance these days are such that senior officials must constantly learn and retain information about an enormous range of topics and issues, which change rapidly. The only way they can do this is to rely on concise, clear, reliable briefings. Written briefings are usually done in the form of briefing papers or briefing notes. A briefing paper is a short report that quickly and effectively informs a decision-maker about an issue. A useful briefing paper distills often complex information into a short, well-structured document. Briefing papers usually deal with "issues"—subjects of debate. But briefing papers are also prepared for any topic someone needs to be informed about. It might be a policy matter, a situation, a report, action by another company—in fact, anything that management deals with. Briefing notes are typically written for those senior-level decision-makers who - have to keep track of many, often unrelated, issues, - may not be familiar with and may not have any related background - for whatever reason cannot spend time doing their own research - need a capsule version of the key points and considerations about an issue The most valuable briefing paper is clear, concise and easy to read. To succeed, a briefing note should be: - short: one to two pages, and always as short as possible - concise: a short document isn't necessarily concise; concise means every word is used as efficiently as possible - clear: simple and to the point; only what matters to the reader is included - reliable: the information in a briefing note must be accurate, sound and dependable; any missing information or questions about the information should be pointed out. (b) Principles of reporting Here we detail the principles of reporting which are as follows: (i) The data must be valid. An example of invalid data would be to present cash-flow data in which depreciation is shown as causing a reduction in the cash flow. (ii) The data must be relevant. An example of reporting irrelevant data is presenting a manager with an adverse cost variance over which he or she has no control. (iii) The data must - be acceptable - be comprehensive (iv) The report must be presented on time. Note that rapid reporting may mean a sacrifice of accuracy but that it is better to provide an approximate figure in time for corrective action than provide an accurate figure after the chance for control has been lost. (v) The number of reports and their contents should be kept to a minimum consistent with effective use. Managers have other things to do besides read reports and the probability that significant information catches a manager’s attention is greatly increased by restricting reports to just such significant information.






(vi) Estimates must never be included in a report unless validly based. (c) Report-writing technique Note the following aspects of the technique of report-writing. (i) Length. The shorter a report the better, provided all the relevant data is given. Brevity not only saves time, it also improves clarity. (ii) Paragraphs. Decide before you start writing what each paragraph will contain. This will aid logical writing. (iii) Style. Keep sentences short. Good reports state facts and opinions tersely. (iv) Technical jargon. The reader of the report must always be borne in mind, and jargon that would not be clearly understood should not be used. The report writer should always be aware of the level of sophistication of the reader. (v) Assumptions. Some reports require assumptions to be made. The bases of the assumption must be made clear. (vi) Support figures. If the subject matter allow, figures should be given to support comments made. (vii) Presentation of data. When presenting data the possible use of tables and graphs should be considered. Figures should be presented wherever possible in a comparative form. (d) The structure of a full and comprehensive report The typical structure of a full and comprehensive, ad hoc or specially commissioned report will be as follows:

Title Author Date

Contents Sections and sub-sections

Introduction Terms of reference. Aims and objectives. Methods used in the investigation. Necessary background information. Definitions of abbreviations. Summary of what the report contains

Main body Logical section with clear headings. Includes figures/tables/diagrams/ charts

Conclusions Draws together. Stresses important factors. Suggests areas for further research.

Recommendations Logically linked to findings in the body of the report.

Appendices Referred to in the appropriate section of the report. Numbered and listed in the contents.






2. Information using tables, charts and graphs (bar charts, line graphs, pie charts and scatter graphs) It is a psychological fact that some data presented in narrative form, or all data presented in a higgley- piggledly fashion, is far harder to understand than data presented in a clear, orderly and visual manner. Consequently, the next step after deciding the contents of a report, and the figures to be used in it, is to lay the figures out in an orderly manner so that they are more easily comprehended. Figures can be presented in a number of different ways, including the use of - tables, - line graphs, - bar charts, - pie charts, and - scatter graphs. (a) Tables Since a piece of paper, or computer screen, is two-dimensional, the most effective layout is almost always one of columns and rows. Such a layout is termed a table. To illustrate the superiority of a table over, say, a simple narrative statement of figures, look at the following table of data and try to describe its contents using words. While a table is obviously far clearer than a narrative form of presentation its construction calls for considerable care. The construction of a table is in many ways a work of art. It is not enough just to have columns and rows, a badly constructed table can be as confusing as a mass of data presented in narrative form.

Table 1.2 Ashley Furniture Company: Sales of tables and chairs Unit sales analysed by region and colour (000s) T = Tables; C = Chairs

2008 2009 2010 2011

Region T C T C T C T C

Western 4 8 6 10 8 16 12 20

Eastern 8 16 8 14 6 16 12 24

Total 12 24 14 24 14 32 24 44

Colour

Red 4 6 2 8 0 4 6 10

White 5 12 6 10 6 18 12 20

Blue 3 6 6 6 8 10 6 14

Total 12 24 14 24 14 32 24 44

Source: Ashley Furniture Company’s sales invoices: 2008 - 2011






(i) Principles of table construction The following principles should be observed when constructing a table. - A table must be constructed so that it achieves its objective in the best manner possible. - A decision must be made as to which columns of figures should be adjacent to each other. - Another decision is how totals should be shown. Should percentages be ` included? - The table should be simple. A table with too much detail or which is too complex is much harder to understand, and so defeats its own objective. - The table must have a comprehensive, explanatory title. - The source must be stated. All figures come from somewhere and a statement of the source must be given, usually as a footnote. - Units must be clearly stated, i.e. thousands, multiples of ten, or whatever. - The headings to columns and rows must be unambiguous. It is very important that there should be no doubt about the meaning of a heading. - Totals should be shown where appropriate. - Distinctive rulings should be used as appropriate. Distinctive rulings (double lines, heavy single lines) enable different areas of a table to be relatively isolated from each other so that the user’s eye is drawn to the figures that the person constructing the table wants him or her to see as a particular sub-group. - Footnotes should be used to qualify or clarify the table. More often than not the figures in a table are influenced by some factor which is not discernable from the table itself, e.g. that the figures are only accurate to the nearest thousand. (ii) Advantages of tabular layout Compared with the narrative form, the tabular presentation has several distinct advantages, quite apart from being more readily intelligible. Primarily, these are: - it enables any desired figures to be located more quickly; - it enables comparisons between different categories to be made more easily; - it reveals patterns within the figures which cannot be seen in the narrative form, e.g. Table 1.2 reveals that the most popular chair is white; - it takes up less space, or is far less dense.






(b) Line graphs Tables, as we have seen, make data easier to understand. A further gain in this respect can often be obtained by representing the data visually. Such a gain stems from a psychological fact - that people, not being computers, are able to see spatial relationships much better than numerical relationships. For example, in comparing sales of A with sales of B in the following table, what conclusions do you draw? It takes a certain amount of study to see that the sales of A increase each year by more units than sales of B. But this is obvious at once when the same data is shown visually by using a graph (see Figure 1.8).

Tables 1.3 Sales of A and B: 2006 - 2011

Sales (units)

2006 2007 2008 2009 2010 2011

A 1121 1233 1356 1492 1641 1805

B 292 321 353 387 428 470

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2006 2007 2008 2009 2010 2011

Sales A Sales B

Figure 1.8: Graphs of sales of A and B: 2006 - 2011

Sales $’000






(i) Principles of graph construction Graph construction, like table construction, is in many ways an art. However, like tables again, there are a number of basic principles to be observed. These are given below. - The correct impression must be given. Since graphs depend upon visual interpretation, they are open to every trick of optical illusion. Note for example, the difference between the impressions gained from the graphs in Figure 1.9. These are one and the same graph, but the scales have been constructed differently - The graph must have a clear and comprehensive title. - The independent variable should always be placed on the horizontal (‘x’) axis. Careful examination will generally show that the figures relating to one variable would be quite unaffected by changes in the other variable. The variable that will not be affected is called the independent variable and should be placed on the horizontal axis. Note that chronological time is always the independent variable and so is always on the horizontal axis. - The vertical scale should always start at zero. Again this is done to avoid giving the wrong impressions. If it is not practical to have the whole of the vertical scale running from zero to the highest required figure, then the scale may be such that it covers only the relevant figures provided that zero is shown at the bottom of the scale and a definite break in the scale is shown (see Figure 1.10).

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Sales A Sales B

0 200 400 600 800

1000 1200 1400 1600 1800 2000

Sales A Sales B

Figure 1.9: Effect of using different scales for the same graph

Sales $’000

Sales $’000






- Axis should be clearly labelled. Labels should clearly show both (a) the variable and (b) the units, e.g. ‘Sales’ and ‘$’000s’, ‘litres’ and ‘’000s’. - Curves must be distinct. The purpose of the graph is to emphasise pattern or trend. This means that the curve must be distinct. If two or more curves are graphed, there must be no possibility of the curves being confused. To avoid such possibility colour, or different kinds of dotted lines, can be used to distinguish the curves. Where there are two or more curves it is important that it must be very clear which data each curve represents. - The graph must not be overcrowded with curves. Too many curves on a graph make it difficult to see the pattern formed by any one curve and so the whole point of graphical presentation is lost. - The source of the graph must be given. The source of the graph must always be given so that the user of the graph can, if he or she wishes, refer to the actual figures on which the graph is based. This is often done as a footnote.

48000

50000

52000

54000

56000

58000

60000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Sales

Sales

0

Figure 1.10: Graph showing break to zero

Sales $






(c) Bar charts Bar charts are diagrams in which figures are represented by lengths of bars. Since bar charts are similar to graphs, virtually the same principles of construction apply - though note that there should ever be a ‘break to zero’ in bar charts. (i) Simple bar charts In simple bar charts the data is represented by a series of bars the height (or length) of each bar indicating the size of the figure represented (see Figure 1.11) (ii) Component bar charts Component bar charts are ordinary bar charts except that the bars are divided into component parts. This sort of chart is constructed when each total figure is build up from two or more component figures. They can be of two kinds: - Component bar chart (actuals). In these charts the overall height of the bars and the individual component lengths represent actual figures (see Figure 1.12). - Percentage component bar chart. In these charts the individual component lengths represent the percentage each component forms of the overall bar total (see Figure 1.13). Note that a series of such bars will all be the same height, i.e. 100 per cent.

0

5

10

15

20

25

30

35

40

2007 2008 2009 2010 2011

Sales of raincoats Units ‘000

Figure 1.11 U-Wear Plastics: Sales of plastic raincoats Barcodes






Looking at the bar charts for U-Wear’s Company, the ‘actuals’ chart shows that blue coats were popular between 2007 - 2011 but indeed failed to sell at all in 2011. The chart also shows that the drop in sales of blue coats in 2011 caused the total sales to fall. In the ‘percentage’ chart it can be seen that in 2008 and 2009 the blue coats compensated in percentage terms (and the ‘actual’ chart shows this in absolute terms, too) for the drop in sales of red. In 2011 the percentage dominance was shared equally between yellow and red.

Units ‘000

Figure 1.12: Component bar chart (actuals) U-Wear Plastics: Sales of plastic raincoats

0

5

10

15

20

25

2007 2008 2009 2010 2011

Blue coat Yellow coat Red coat

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011

Blue coat Yellow coat Red coat

Figure 1.13: Component bar chart (percentages) U-Wear Plastics: Sales of plastic raincoats

Units






- Multiple bar charts In a multiple bar chart the component figures are shown as separate bars adjoining each other, The height of each bar represents the actual value of the component figure (see Figure 1.14). (iii) Choice of bar charts Obviously, the choice of chart will depend on the circumstances of its creation. Essentially: - Simple bar charts should be used where changes in total only are required; - component bar charts (actuals) should be used where changes in totals and an indication of the size of each component figure are required; - percentage component bar charts should be used where changes in the relative size only of component figures are required; - multiple bar charts should be used where changes in the actual values of the components figures only are required, and the overall total is of no particular importance. Note that component and multiple bar charts can really only be used where there are not more than three or four components. More components make the chart too complicated to enable worthwhile visual impressions to be gained. Where a large number of components have to be shown, a pie chart is more suitable. We consider pie charts next.

Units ‘000

Figure 1.14: Multiple bar chart U-Wear Plastics: Sales of plastic raincoats

0 2 4 6 8

10 12 14 16 18

2007 2008 2009 2010 2011

Red coat Yellow coat Blue coat






(d) Pie charts A pie chart is a circle divided by radial lines into sections (like slices of a pie, hence the name) so that the area of each section is proportional to the size of the figures represented (see Figure 1.15). It is, therefore, a convenient way of showing the size of the component figures in proportion to each other and to the overall total. To construct a pie chart, then, it is only necessary to construct angles at the centre of the ‘pie’ in proportion to the figures concerned. Using a more complicated example we will revisit the data provided in Table 1.2. for the year 2011. This is shown in Figure 1.16. Use of a pie chart A pie chart is particularly useful when it is desired to show the relative proportions of the figures that go to make up a single overall total. Unlike, bar charts, its effectiveness is not limited to three or four component figures but can extend up to seven or eight, though it tends to diminish after that. Pie charts, however, cannot be used effectively where a time series of figures is involved, as a number of different pie charts are not easy to compare. Again, note that changes in the overall totals should not be shown by changing the size of the ‘pie’. (e) Scattergraphs A scattergraph is a graph with a scale for each variable and upon which variable values are plotted in pairs.

Red coats Yellow coats Blue coats

Figure 1.15: Pie chart: U-Wear Plastics: Sales of plastic raincoats 2007 - 2011






Red table White table Blue table

Western Eastern

Figure 1.16: Bar charts: Ashley Furniture Company Sales; Tables and Chair 2011

Red chairs

White chairs

Blue chairs

Western Eastern

TABLES: 2011

CHAIRS: 2011

Red table

White table

Blue table

Red chair

White chair

Blue chair

Western Eastern

TABLES AND CHAIRS: 2011






(i) Scattergraph construction In order to see how a scattergraph is constructed and used, the two sets of figures shown in Table 1.4 will be used. Step 1 Prepare the graph so that the scale of the independent variable lies along the horizontal axis and the scale for the dependent variable lies on the vertical axis (see Figure 1.17). Step 2 Plot each pair of figures as a single point ( or coordinate) on the graph. Thus in Table 1.4, in 2007, the $2,000 advertising and $60,000 sale form such a pair and therefore a point is plotted on the graph where the $2,000 line from the horizontal scale meets the $60,000 line from the vertical scale.

Table 1.4 CAS Company Sales and advertising expenditure: 2007 - 2011

Year Advertising ($000) Sales ($’000)

x y

2007 2 60

2008 5 100

2009 4 70

2010 6 90

2011 3 80

0

20,000

40,000

60,000

80,000

100,000

120,000

0 2,000 4,000 6,000 8,000 Advertising expenditure ($)

Sales ($)

Figure 1.17: Scattergraph of Table 1.4 data






That is really all there is to a scattergraph. (ii) Purpose of a scattergraph The basic purpose of a scattergraph is to enable us to see whether there is any pattern among the points. In Figure 1.17 it is clear there is some pattern, as the points tend to rise from left to right. The more distinct a pattern is, the more closely the two variables are related in some way. (iii) The irrelevance of time There is one point in connection with scattergraph construction that is vital to appreciate, and that is that time does not enter into the graph at all (unless, that is, we are looking to see if there is a relationship between time and another variable). In the case of our illustrative example we are concerned about the relationship between advertising and sales, not when these amounts occurred. Thus the points on the scattergraph have no time significance whatever, the years in Table 1.4 merely linking specific advertising expenditure to specific sales achievements. (iv) Line of best fit If we now draw a straight line on the graph in such a way as to fit the best pattern of the points by drawing it so that it lies as close to all the points as possible, then we have the line of best fit (see Figure 1.18). This line is a valuable aid to understanding the relationship between the two variables, and the nearer the points lie to it the more valuable it is.

0

20,000

40,000

60,000

80,000

100,000

120,000


Sales ($)

Figure 1.18: Scattergraph of Table 1.4 data with line of best fit added






(v) Estimates from a scattergraph Once the line of best fit has been drawn, our scattergraph can be used for estimating simply by reading off from the line the sales value corresponding to any level of expenditure on advertising. Suppose $5,000 were to be spent on advertising; it can be seen from the line of best fit that this value is associated with sales of $90,000 (see Figure 1.19). Therefore $90,000 is the estimated sales to be obtained from an advertising of $5,000. (vi) The reliability of estimates You may not be very happy with this estimate. You may have noticed from the scattergraph that the same level of sales are also associated with $6,000 of advertising. How reliable, you may ask, is the estimate of $90,000? The answer is ‘Not very’. The relationship here between advertising and sales is just not close enough for estimates to be made with great accuracy. Yet it is true that the best estimate we can make about sales, given $5,000 of advertising, is that they will be $90,000, i.e. any other figure estimated for sales would be subject to even more error than the $90,000. (vii) Limitations of scattergraphs You may have realised by now that scattergraphs have two serious limitations. These are: (1) Uncertainty as to the correct position of the line of best fit. If the best estimates are to be made from the line of best fit, it must obviously be drawn in the correct place. So far this has depended on the judgement of the person constructing the graph.

0

20,000

40,000

60,000

80,000

100,000

120,000


Sales ($)

Figure 1.19: Scattergraph of Table 1.4 data with line of best fit added showing the coordinate of $5,000 advertising and $50,000 sales






(2) Lack of a measure of the closeness of the relationship. Since the reliability of an estimate depends heavily on the closeness of the relationship between variables, the lack of any measure of the closeness limits the value of scattergraphs considerable.






Diagnostic Test

The nature, source and purpose of management information

Questions


Some questions in our Diagnostic Tests are more difficult than you will experience in the exam. It is

good to practice difficult questions because then easier questions

really are easy!






Question 1 The following statements relate to financial accounting or to cost and management accounting: (i) The main users of financial accounting information are external to an organisation. (ii) Cost accounting is part of financial accounting and establishes costs incurred by an organisation. (iii) Management accounting is used to aid planning, control and decision making. Which of the statements are correct? A (i) and (ii) only B (i) and (iii) only C (ii) and (iii) only D (i), (ii) and (iii) Question 2 Which of the following statements are correct? (i) Operational information is required frequently by its main users. (ii) Strategic information is mainly used by senior management in an organisation. (iii) Monthly budget reports are examples of tactical information. A (i) and (ii) only B (i) and (iii) only C (ii) and (iii) only D (i), (ii) and (iii) Question 3 Which of the following is NOT correct? A Financial accounting information can be used for internal reporting purposes. B Cost accounting can be used for inventory valuation to meet the requirements of internal reporting only. C Management accounting provides appropriate information for decision-making, planning, control and performance evaluation. D Routine information can be used for both short-term and long-term decisions. Question 4 Which of the following would be best described as a tactical plan? A Monitoring actual sales to budget. B Comparing cost levels with those of a competitor's. C Setting a contract price for a one-off contract. D Reviewing the costs for a period just completed and investigating as appropriate.

A

A

A

A






Question 5 An interviewee selected for a survey has the following characteristics: Characteristic: (i) Sex = female (ii) Marital status = single (iii) Height = 1.7 metres (iv) Weight = 70 kg Which of these would be described as attributes? A Characteristics (i) and (ii) only B Characteristics (iii) and (iv) only C All four characteristics D None of these characteristics Question 6 Identify the discrete variable or variables among the following. Variable: (i) Number of customer complaints per month (ii) Number of overtime hours per week (iii) Level of temperature in the accounts office (iv) Output of refined oil A (i) only B (i) and (ii) only C (i), (ii) and (iv) only D All four Question 7 A management accountant is selecting a sample of material requisitions for checking. The material requisitions are numbered sequentially. The first material requisition is selected randomly and is number 23. She then selects material requisition numbers 44, 65, 86 and 107 to complete the sample. This type of sample is called A Systematic B Cluster C Stratified D Simple random

A

A

A






Question 8 A marketing manager is electing a sample of the company’s customers for a market-research exercise. The customers have been sorted into five groups according to their annual sales value: Annual sales Number of customers up to $20,000 62 More than $20,000 up to $50,000 102 More than $50,000 up to $100,000 54 More than $100,000 up to $150,000 51 More than $150,000 38 The manager then selects a 15% random sample from each of the five groups of customers. This type of sample is called A Simple random B Cluster C Multi-stage D Stratified Question 9 A sample of non-managerial employees have been interviewed to appraise the cost-benefit effectiveness of the company’s training policy. To ensure that the sample contained the correct proportion of employees, a stratified sample was used based on salary levels. Accordingly the employees were divided into five strata: Annual salary level Number of employees up to $20,000 500 More than $20,000 up to $30,000 1,200 More than $30,000 up to $40,000 1,600 More than $40,000 up to $50,000 1,225 More than $50,000 475 The human-resources staff interviewed a sample of 250 people in total. How many of those interviewed had an annual salary of up to $30,000? A 25 B 60 C 85 D 88 Question 10 What is 318.668 to two decimal places? A 318.66 B 318.67 C 318.60 D 319.00

A

A

A






The following information is to be used for questions 11 and 12. The marketing team of a company wishes to carry out a national survey of the television viewing habits of its customers. To reduce travelling costs the country was first divided into local government areas. A sample of 15 local areas was then selected at random. Within each of these local government areas, 5 districts were selected, again using random techniques. Interviewers will visit a random selection of 20 customers who have invoice addresses in each of the districts selected. Question 11 What sampling method is the company using? A Simple random B Systematic C Stratified D Multi-stage Question 12 How many customers will be interviewed? A 100 B 300 C 1,500 D 3,900 Question 13 In a particular sample survey, interviewers are provided with a set of specifications of the number of people of various kinds that they are required to interview: Male Female Total School age 120 120 240 At work 420 680 1,100 Retired 360 820 1,180 The interviewers are free to select their own respondents, as long as they interview the stated number of each type. What sampling method is being used? A Cluster B Multi-stage C Quota D Stratified

A

A

A






Direct materials $166,500

Production overhead

$74,000

Direct labour $129,500

z

x y

Question 14 The following pie chart represents the total cost of sales for one month: How large are the following angles? x y z A 152° 124° 84° B 160° 120° 80° C 162° 126° 72° D 166° 122° 72° Question 15 A component bar chart showed the number of each employees at each grade in a company on 31 December each year. The data were as follows: Grade Number of employees 2010 2011 1 100 75 2 285 325 3 900 1,100 4 6,000 7,250 5 3,315 3,350 10,600 12,100 The bar for 2010 was 21.2 cm high. Assuming that the bar scale per employee remains consistent between 2010 and 2011, how high was the component for grade 3 employees in the bar chart for 2011? A 1.8 cm B 2.0 cm C 2.2 cm D 2.4 cm

A

A






Question 16 Which of the following statements is incorrect? When a graph is constructed: A the vertical scale should always start from zero B the independent variable should always be placed on the vertical axis C chronological time is never a dependent variable D the impact of a graph can be distorted by changing the scales of an axis Question 17 Which of the following statements is incorrect? A If a table shows: ‘People in X: 100’ and also ‘People in X and Y: 500’ then this is ‘double counting’ B The objectives of a table is a major consideration when deciding which columns of figures should be adjacent to each other C The narrative form of data presentation reveals patterns within the figures which cannot easily be seen in a table D If, in one part of a table, figures are given to one decimal place, this implies that all the figures in the table are accurate to one decimal place. Question 18 An accountant has drawn up the following table: Which of the following statements, concerning this table are correct? A The table is well presented B The table suffers from at least three weaknesses C The table suffers from at least five weaknesses D The tables suffers from more than five weaknesses

Casting Weight of metal Foundry hours

Up to 4 kg 60 210

Up to 10 kg 100 640

All greater weights 110 800

Others 20 65

290 2,000

A

A

A






Question 19 The following statements have been made concerning the choice of bar chart. (i) Simple bar charts should be used where changes in total only are required. (ii) Component bar charts (based on actuals) would be used where changes in totals and an indication of the size of each component figure are required. (iii) Component bar charts (based on percentages) would be used where changes in totals and an indication of the size of each component figure are required. (iv) Multiple bar charts should be used where changes in the percentage values of the component figures only are required, and the overall total is of no particular importance. Which of the above statements are correct: A (i) only B (i) and (ii) only C (i), (ii) and (iii) only D All four Question 20 An accountant has constructed the following graph: Which of the following statements, concerning this graph are correct? A The graph is well presented B The graph suffers from at least three weaknesses C The graph suffers from at least five weaknesses D The graph suffers from more than eight weaknesses

500 400 300 200 100 .

50 40 30 20 10 .

2007 2008 2009 2010 2011

Product ‘A’

Product ‘B’

Source: ABC Company

Sale

s

A

A






Question 21 The IQs of a group of six people were measured, and they then sat a certain examination. Their IQs and examination marks were as shown in the following table. Using data from the table the following scattergraph was constructed and a line of best fit inserted Using this data, the following are the best estimates: Marks of candidate The IQ of a candidate with IQ of 130 who obtained a mark of 40 A 75 80 B 80 93 C 75 101 D 80 103

Person IQ Exam marks

A 110 70

B 100 60

C 140 80

D 120 60

E 80 10

F 90 20

0

10

20

30

40

50

60

70

80

90

0 20 40 60 80 100 120 140 160

Exam

mar

ks

IQ

A







Diagnostic Test

The nature, source and purpose of management information

Answers






Answer 1 B Answer 2 D Answer 3 B Cost accounting can be used for inventory valuation to meet the requirements of both external financial reporting and internal reporting. Answer 4 C Setting a contract price is a tactical decision. The measures in A, B and D are not planning decisions; they are all monitoring and control activities. Answer 5 A An attribute is a characteristic or property which cannot be quantified - for example there is no degree of ‘femaleness’, or of ‘singleness’. On the other hand, height and weight can be quantified and are known as variables. Answer 6 B A discrete variable is one which can only take on one of a specified set of values, such as customer complaint or hour, therefore variables (i) and (ii) are discrete. Variables (iii) and (iv) can take on any value and are therefore continuous variables. Answer 7 A This method is described as systematic sampling, whereby every 21st item is selected after a random start. Answer 8 D It is a stratified sample because the population of customer is divided into strata (layers).

Remember, your grass really is pretty green ….

“Now I know we had no money, but I was rich as I could be In that coat of many colours, my Momma made for me.” Dolly Parton Singer of “Coat of Many Colours”

Q

Q

Q

Q

Q

Q

Q

Q






Chapter 2 Cost Classification



The contents for this tutorial are continued on the next screen Click here








General principles of cost accounting

1 Definition of cost accounting CLICK

2 Why have cost accounting? CLICK

3 Objectives of cost accounting CLICK

4 Advantages of cost accounting CLICK

Cost classification 1 What is a cost? CLICK

2 Cost centres, cost objects and cost units CLICK

3 Classification of costs CLICK

4 Coding systems CLICK

Cost behaviour

1 Variable costs CLICK

2 Fixed costs CLICK

3 Semi-variable costs CLICK

4 Stepped fixed costs CLICK

5 Variable cost patterns CLICK

6 Separating fixed and variable elements CLICK

Responsibility accounting 1 Control, responsibility and authority CLICK

2 Responsibility accounting CLICK

3 Profit centre CLICK

4 Investment centre CLICK

5 Cost centre CLICK

6 Revenue centre CLICK

7 Principles of responsibility accounting CLICK

8 The role of the management accountant CLICK


Answers CLICK

In this tutorial Cost classification







Build-up of costs for a manufactured product (cost unit) CLICK

Production cost - Product A CLICK

Classification of costs CLICK

Linear and curvilinear variable costs CLICK

Illustration of a curve which is not linear CLICK

The Accountant’s relevant range CLICK

Two ways of plotting fixed costs CLICK

Semi-variable costs CLICK

Step costs CLICK

Variable cost patterns CLICK

Cost functions which do not exactly fit the five main patterns CLICK

Historic data pairing Units with Associated total costs CLICK

Example of a ‘Scattergraph’ CLICK

Aspects concerning cost behaviour CLICK

A structure for ‘Responsibility accounting’ - The company in this example manufactures and markets textile and designer products

CLICK

Terms used in ‘Responsibility Accounting’ and the role of the management accountant CLICK


in this tutorial: Cost classification


COST REPORTS Benefits of identifying and understanding costs CLICK

BRIEF CRAM Classification of costs CLICK

BRIEF CODES HELP HIM Features of a strong coding system CLICK

CATCH Problems with using the high-low method of cost estimation

CLICK






Chapter 3 Accounting for materials











Principles and concepts of inventory control

1 Utilisation of inventory CLICK

2 Inventories are an investment CLICK

3 The need for flexibility CLICK

4 Benefits of holding high inventories of raw materials CLICK

5 Balance between costs and benefits CLICK

Procedures and documents necessary for the ordering, receiving and issuing of materials from inventory

1 Inventory control CLICK

2 Features of an effective system of inventory control. CLICK

3 Materials purchase cycle (diagram provided). CLICK

4 The Purchase Requisition and purchase order. CLICK

5 Receiving orders. CLICK

6 Objectives of effective inventory-keeping CLICK

7 Speedy receipt and issue of materials CLICK

8 Full identification and fast location of materials CLICK

9 Information on quantities on quantities held CLICK

10 Perpetual inventory CLICK

11 Accounting for materials (a) documents used (b) the flow of accounts

CLICK

12 Materials and inventory reports CLICK

Optimal reorder quantities 1 Re-order quantity (ROQ) (Including the assessment of quantity discounts)

CLICK

2 When inventory is gradually replenished CLICK

3 Inventory levels: (a) Re-order level (ROL) (b Maximum inventory level (c) Minimum inventory level (d) Average inventory investment

CLICK

Issuing , pricing and inventory valuation

1 There are two aspects concerning the issuing and pricing of materials

CLICK

2 Issuing from stores CLICK

3 Pricing of issues to work (products) CLICK


Answers CLICK

In this tutorial Accounting for materials







Management of materials inventory (stock) CLICK

The materials order-purchases cycle CLICK

Purchase Invoice-Payment System CLICK

Computer database Purchase Order-Invoice-Payment System CLICK

Cost accounting for materials CLICK

Inventory pricing and valuation methods CLICK

Method used for pricing: FIRST IN, FIRST OUT (FIFO) CLICK

Method used for pricing: LAST IN, FIRST OUT (LIFO) CLICK

Method used for pricing: WEIGHTED AVERAGE COST (AVCO) CLICK

Method used for pricing: PERIODIC WEIGHTED AVERAGE PRICE CLICK

Method used for pricing: STANDARD COST PER KG CLICK


in this tutorial: Accounting for materials


PRAISE Benefits of holding high levels of inventory (stocks) CLICK

TOSS Disadvantages of holding high levels of inventory (stocks) CLICK

LOAD UP SACKS Efficient stores layout CLICK

SMART Advantages of using ‘raw materials’ sub-stores CLICK

SHALE Disadvantages of using ‘raw materials’ sub- stores CLICK

DO LOSE The costs of holding inventory CLICK

RIP Costs of acquiring inventory (purchase-ordering costs) CLICK

SHOVE Problems when using EOQ formula CLICK

SCOPE Advantages of using FIFO materials pricing CLICK

VICE Disadvantages of using FIFO materials pricing CLICK

COST Advantages of using LIFO materials pricing CLICK

COVERS Disadvantages of using LIFO materials pricing CLICK

FIT Advantages of using cumulative weighted average materials pricing

CLICK

DRAT Disadvantages of using cumulative weighted average materials pricing

CLICK






Chapter 4 Accounting for labour











Methods used to relate input labour costs to work done

1 Purpose of recording labour times CLICK

2 Attendance times and time booking CLICK

3 Methods of booking time (i) time sheets, job cards and (iii) job tickets

CLICK

Remuneration methods 1 Time based schemes CLICK

2 Time or day rate CLICK

3 High day rate CLICK

4 Piece rate: (i) straight piece rate, (ii) piece rate with guaranteed minimum and (iii) differential piece rate.

CLICK

5 Premium bonus schemes, including an understanding of ‘Standard hour’

CLICK

6 Group incentive scheme CLICK

7 Profit sharing schemes CLICK

8 Co-partnership schemes, including share option scheme

CLICK

9 Fringe benefits CLICK

10 Labour costs requiring special cost accounting treatment: (a) Overtime and shift premiums. (b) Idle time (normal and abnormal) (c) Bonuses (d) Holiday pay

CLICK

Labour cost accounting

1 Payroll preparation CLICK

2 Flow of cost accounts CLICK

3 Journal and ledger entries to record labour cost inputs and outputs

CLICK

Measuring the utilisation of labour 1 Various reports of labour cost and utilisation CLICK

2 The use of inflation indices CLICK

3 The concept of labour efficiency CLICK

4 The labour turnover index CLICK

5 Causes and costs of labour turnover CLICK


Answers CLICK

In this tutorial Accounting for labour







Typical Weekly Time Sheet (manual system) CLICK

Typical Job Card CLICK

Remuneration schemes CLICK

Direct and indirect labour costs CLICK

Labour costs requiring special accounting treatment CLICK

Accounting for labour costs CLICK

Labour reports CLICK

Labour efficiency CLICK

Labour turnover: An overview CLICK


in this tutorial: Accounting for labour


SPASM Causes for idle time in a manufacturing system CLICK

SEE WE QUICK Ways of improving manufacturing labour efficiency CLICK

DID WALK Reasons for ‘voluntary’ labour quits CLICK

FIRE Causes for involuntary labour quits CLICK

COST MATTER Cost of labour turnover CLICK

That is always our problem, not how to get control of people, but how all together we can get control of a situation. Mary Parker Follett Mary Parker Follett (1868 – 1933) was an American social worker, management consultant and pioneer in the fields of organisational theory and organisational behavior. She also authored a number of books and numerous essays, articles and speeches on democracy, human relations, political philosophy, psychology, organisational behavior and conflict resolution.

Mary Parker Follett






Chapter 5 Accounting for overheads











Overhead cost classification 1 Different treatment of direct and indirect expenses

CLICK

2 Definition of overhead costs CLICK

3 Different types of overhead costs CLICK

4 Collection of overhead costs CLICK

5 Classification of overhead costs. CLICK

The system of determining production overhead absorption rates

1 Procedures involved in determining production overhead absorption rates

CLICK

2 Allocation of costs to cost centres CLICK

3 Apportionment of costs to cost centres CLICK

4 Reapportionment of service cost centres to production cost centres

CLICK

5 Absorption of production centre overhead costs by products

CLICK

6 Re-apportionment of service cost centre overhead (in more detail)

CLICK

7 The reason for, calculations and implications of under/over absorption of overhead costs for the profit figure.

CLICK

8 Treatment of non-production costs - Administration overhead - Selling overhead - Distribution overhead - Other classifications of overhead costs

CLICK

Overhead cost accounting 1 Collection and analysis of overheads CLICK

2 Plant register and depreciation CLICK

3 Overheads requiring special attention CLICK

4 Ledger and journal entries for manufacturing overheads incurred and absorbed

CLICK


Answers CLICK

In this tutorial Accounting for overheads







Overhead absorption CLICK

Example of accounting for the under-absorption of overhead costs

CLICK

Typical Plant Register

CLICK

Accounting treatment of overhead costs

CLICK

Accounting for overhead costs

CLICK


in this tutorial: Accounting for overheads







Chapter 6 Absorption and marginal costing











Concept of contribution 1 The concept of contribution CLICK

Distinctions between absorption costing and marginal costing

2 Marginal costing CLICK

3 Distinctions between the two techniques – absorption and marginal costing

CLICK

4 Absorption costing income statement CLICK

5 Marginal costing income statement CLICK

6 Reasons why the two profits might be different CLICK

7 Method of reconciling the two profits CLICK

8 Advantages of using absorption costing CLICK

9 Advantages of using marginal costing CLICK


Answers CLICK

In this tutorial Absorption and marginal costing


Treatment of fixed production overhead costs

CLICK

Use of absorption costing versus marginal costing

CLICK

Summary of marginal costing

CLICK

Overview of overhead costs and treatments of production overhead costs

CLICK


in this tutorial: Absorption and marginal costing






Chapter 7 Job, batch, unit and process

costing











Methods of cost accounting 1 Specific order costing CLICK

2 Continuous operation costing CLICK

Job costing 1 Definition of Job CLICK

2 The costing procedure CLICK

Batch costing 1 The batch CLICK

2 The procedure CLICK

Unit costing CLICK

Process costing 1 Discrete and continuous units CLICK

2 Important features of process costing CLICK

3 Differences between job and process costing CLICK

4 Aspects of process costing CLICK

5 Accounting complications CLICK

6 Equivalent units CLICK

7 Loss, scrap and waste in production CLICK

8 Opening work in progress (OWIP) CLICK

9 OWIP - Weighted average method CLICK

10 OWIP - First in, first out (FIFO) method CLICK

11 Summary of process costing approach CLICK

Joint and by-products costing 1 Classifications of joint- and by-products CLICK

2 Accounting for joint-products CLICK

3 By-Products CLICK

Diagnostic questions

Questions CLICK

Answers CLICK

In this tutorial Cost accounting methods







Modes of production and associated methods of cost accounting CLICK

Example of a job cost preparation CLICK

Simple process situation CLICK

Debits and credits of a process account. (Opening work-in-process excluded) CLICK

OWIP completed and to be completed CLICK

Debits and credits of a process account CLICK

A joint and by-product process system CLICK

Relationship of joint/by-products and scrapped materials or products CLICK

The traditional ‘Cost-Plus’ pricing approach CLICK

The technique of Target Costing CLICK

Costs and expenditures on the product-life cycle CLICK


in this tutorial: Cost accounting methods


QUEST PRIZE Principles of ‘Total Quality Management (TQM)’ CLICK






Chapter 8 Service/operation costing











The nature of non-manufacturing operations

1 Classification of non-manufacturing operations CLICK

2 The application of costing principles to non-manufacturing operations

CLICK

3 Costing methods and systems used in non-manufacturing operations

CLICK

Service costing 1 What are service organisations? CLICK

2 Characteristics of service costing CLICK

3 Framework for classifying service organisations for costing purposes

CLICK

4 Specific features of services CLICK

5 Cost unit measures CLICK

Operation costing

1 Operational costing used for manufactured units CLICK

2 Operational costing used for provision of services CLICK


Questions CLICK

Answers CLICK

In this tutorial Service/operation costing


Service Costing

CLICK

Operation Costing

CLICK


in this tutorial: Service/operation costing






Chapter 9 Alternative cost accounting











Activity Based Costing (ABC)

1 The concept of ABC CLICK

2 Four main steps CLICK

3 The ABC procedure CLICK

4 A five-level hierarchy of costs CLICK

5 Three types of cost driver CLICK

6 When is ABC relevant? CLICK

7 Assessment of the ABC approach CLICK

Target Costing

1 The concept of Target Costing CLICK

2 Method of Target Costing CLICK

3 Target costing procedure CLICK

4 Ways of cost reduction CLICK

5 New product development CLICK

6 Assessment the target costing approach CLICK

Life -Cycle Costing (LCC)

1 The concept of Life-Cycle Costing (LCC) CLICK

2 Traditional cost accumulation systems CLICK

3 Principles of Life-Cycle Costing (LCC) CLICK

4 Assessment the Life-Cycle Costing (LCC) approach CLICK

Total Quality Management (TQM)

1 Quality issues CLICK

2 Definition: Quality CLICK

3 The traditional approach to quality management CLICK

4 Quality costs CLICK

5 Total Quality Management (TQM) CLICK


Questions CLICK

Answers CLICK

In this tutorial Alternative cost accounting







The main distinction between traditional overhead absorption and ABC

CLICK

The traditional ‘Cost-Plus’ pricing approach

CLICK

The technique of target costing

CLICK

New-product target costing CLICK

Costs and expenditures on the product-life cycle

CLICK

An overview of Life-Cycle Costs CLICK


in this tutorial: Alternative cost accounting


QUEST PRIZE Principles of ‘Total Quality Management (TQM)’ CLICK

"Who are you to judge the life I live? I know I'm not perfect and I don't live to be. But, before you start pointing fingers, make sure your hands are clean." Bob Marley Robert "Bob" Marley was lead singer and guitarist for the ska and reggae bands The Wailers and Bob Marley & The Wailers. Marley's music was highly influential, not only in the world of reggae which he largely defined, but also introducing the Rastafarian movement to a worldwide audience. Many of his songs featured the struggles of the powerless and the poor, as well as preaching Rastafarian themes such as brotherhood and peace for all mankind. His songs, including I Shot the Sheriff, No Woman, No Cry and Redemption Song, rocketed up the charts. Following his death in 1981, Marley's posthumously released album, Legend, became reggae's best-selling album of all time, selling 20 million copies worldwide.






Chapter 10 Budgeting











Nature and purpose of budgeting

1 Why organisations use budgeting CLICK

2 The planning and control cycle in an organisation CLICK

3 Administrative procedures used in the budgeting process

CLICK

4 The stages in the budgeting process (including sources of relevant data, planning and agreeing draft budgets and purpose of forecasts and how they link to budgeting)

CLICK

Budget preparation

1 Principal budget factor CLICK

2 Functional budgets CLICK

3 Sales budget CLICK

4 Production budget CLICK

5 Materials budget CLICK

6 Labour budget CLICK

7 Plant utilisation budget CLICK

8 Production overhead budget CLICK

9 Selling and Distribution Budget CLICK

10 Administration costs CLICK

11 Research and Development Budget CLICK

12 Cash budget CLICK

13 Master Budget CLICK

14 Management of the budget CLICK

15 Comprehensive example CLICK

Flexible budgets

1 Fixed budgets CLICK

2 Flexible budgets CLICK


Questions CLICK

Answers CLICK

In this tutorial Budgeting







The budget planning and control cycle CLICK

Types of budget and their inter-relationships CLICK

The four main stages making up the budgetary control procedure CLICK

Data sources for a budgeting information system CLICK

Interrelationships of functional budgets CLICK

Production budget (spreadsheet) CLICK

Selling Cost Budget (spreadsheet) CLICK

Cash budgeting: Receipts and payments model CLICK

The 6 Steps for cash budgeting CLICK

Master Budgeted Income Statement CLICK

Fixed budget used for control CLICK

Example of a simple cost comparison statement CLICK

Fixed and flexible budgets (spreadsheet) CLICK


in this tutorial: Budgeting


BUDGET PLAN Advantages of budgetary control CLICK

BASICS Role of Budget Officer CLICK

Quiz Question: Is money the root of all evil? Answer: Not according to the Bible. It says, “The love of money” is the root of all evil. (1 Timothy, 6:10)






Chapter 11 Statistical techniques











Forecasting techniques 1 Forecasting in budgets CLICK

2 Terms used in statistics CLICK

Correlation analysis 1 Equation of the straight line CLICK

2 The need to establish a straight-line causal relationship

CLICK

3 The coefficient of correlation CLICK

4 The normal equation and calculation CLICK

5 Coefficient of determination (r2) CLICK

Regression analysis 1 Computing regression lines CLICK

2 Using the two equations CLICK

3 Points to watch for CLICK

4 Using the regression line CLICK

Time series analysis 1 What is a time series? CLICK

2 Graphical presentation CLICK

3 Elements of a time series CLICK

4 Isolating the trend: linear methods CLICK

5 Isolating the trend: moving averages CLICK

6 Seasonal variation CLICK

7 Residual variation CLICK

8 Cyclical variation CLICK

9 Seasonally adjusted time series CLICK

10 Additive and multiplicative methods of measuring seasonal variation

CLICK

11 Forecasting with the use of time series CLICK

12 Dangers of using statistical forecasting methods CLICK

In this tutorial Statistical techniques - 1 of 2








Index numbers 1 General Principles CLICK

2 The percentage relative index CLICK

3 The weighted (or aggregate) index CLICK

4 The weights CLICK

5 Laspeyre and Paasche indices CLICK

6 Price relative index CLICK

7 Chain base index numbers CLICK

8 Adjusting historic values CLICK

9 Concluding thoughts CLICK

Product life-cycle model

1 The concept of product-life cycle CLICK

2 Stages of the product life-cycle CLICK

3 Portfolio approach CLICK

4 Forecasting the shape and stage of the product life-cycle

CLICK

Spreadsheets 1 The Spreadsheet CLICK

2 A spreadsheet program CLICK

3 Blank spreadsheet CLICK

4 Contents of a spreadsheet file CLICK

5 Uses of a spreadsheet CLICK

6 Benefits in using spreadsheets in budgeting CLICK

7 Dangers inherent in using spreadsheets in budgeting CLICK

8 Using spreadsheets as ‘What if? simulation models CLICK

9 Spreadsheets used for budgeting CLICK

10 Spreadsheets used for cash budgeting CLICK

11 Spreadsheets used to formulate and present income statements

CLICK

12 Spreadsheets used to present analytical measures and ratios

CLICK

13 Spreadsheets used to present visual information CLICK


Answers CLICK

In this tutorial Statistical techniques - 2 of 2







Interpolation v extrapolation CLICK

Semi-fixed total cost line CLICK

Types of correlation CLICK

CAS Company: Irrecoverable debts ($’000): 2008 - 2011 CLICK

CAS Company: Irrecoverable debts ($’000): 2008 - 2011: Annual trend line Method: Semi-averages CLICK

The distinction between additive and multiplicative seasonal variation measurement models CLICK

CAS Company: Irrecoverable debts ($’000): 2008 - 2011: Annual trend line Method: Semi-averages and the use of extrapolation CLICK

Product Lifecycle Model CLICK

A lifecycle portfolio CLICK

Blank Excel Spreadsheet CLICK


in this tutorial: Statistical techniques

Snowflakes are one of nature's most fragile things, but just look what they can do when they stick together. Vesta M Kelly






Chapter 12 Capital budgeting and capital

investment appraisal











The capital budgeting process

1 The capital budgeting cycle CLICK

2 Types of capital expenditure CLICK

3 Working capital CLICK

4 Distinction between capital and revenue expenditure

CLICK

5 Capital expenditure forecast CLICK

6 Capital expenditure committee CLICK

7 Capital expenditure decision CLICK

8 Authorisation of capital projects CLICK

9 Capital expenditure control CLICK

The approach to project appraisal

1 Evaluation of alternative investments CLICK

Capital investment appraisal techniques

1 Introduction CLICK

2 Cash flows and their timing CLICK

3 Main evaluative criteria CLICK

4 Three project scenarios CLICK

Payback method 1 The payback method of investment appraisal CLICK

2 Calculation of the payback period for each project (in years and months)

CLICK

3 The limitations and strengths of the payback method

CLICK

Discounted cash flow techniques

1 Two discounted cash flow techniques CLICK

2 The difference between simple and compound interest rates

CLICK

3 Discounted cash flow DCF) CLICK

DCF - net present value method

1 Net present value method: computation CLICK

2 Net present value interpretation CLICK

In this tutorial Capital budgeting and capital investment appraisal

1 of 2









DCF - Internal rate of return (IRR)

1 The internal rate of return (IRR) method of investment appraisal

CLICK

2 Calculation of the internal rate of return (IRR) CLICK

3 Using annuities to calculate the IRR CLICK

NPV or IRR? 1 The arguments in favour of IRR CLICK

2 The problems associated with IRR CLICK

3 The arguments in favour of NPV over other methods of appraisal

CLICK


Questions CLICK

Answers CLICK

In this tutorial Capital budgeting and capital investment appraisal

2 of 2


: The ‘rolling’ capital budget system CLICK

The Capital budgeting process CLICK

8 steps for developing an investment strategy CLICK

Capital investment appraisal techniques CLICK


in this tutorial: Capital budgeting and capital investment appraisal






Chapter 13 Budgetary control and behavioural aspects











Budgetary control and reporting

1 Profit control is a management technique CLICK

2 Control, responsibility and authority CLICK

3 Control and the accountant CLICK

4 A supportive, not a punitive, system CLICK

5 Controllable and uncontrollable costs CLICK

6 Guideline for reporting costs CLICK

7 Significance of variances CLICK

8 Departmental control reports CLICK

9 Variances between flexed budget, fixed budget and actual sales, cost and profits

CLICK

Behavioural aspects of budgeting

1 Motivation in budgeting CLICK

2 The dysfunctional consequences of performance measures

CLICK

3 Impact of targets upon motivation CLICK

4 Top down, bottom up approaches to budgeting CLICK

5 Advantages and disadvantages of a participative approach to budgeting

CLICK

6 Management incentive schemes CLICK


Questions CLICK

Answers CLICK

In this tutorial Budgetary control and behavioural aspects


Illustrative departmental operating statement CLICK


in this tutorial: Accounting for labour






Chapter 14 Standard costing










Standard costing principles 1 The system of standard costing and variance analysis

Click

Setting the standards and budgets

1 Classification of standards Click

2 Responsibility for developing standards Click

3 Setting standard costs Click

The monitoring system 1 The duration of the control period Click

2 Collecting and analysing results Click

3 Comparing results with budget and standards Click

Calculating variances

1 Variance analysis Click

2 Illustrative example Click

3 Material cost variance analysis Click

4 Labour cost variance analysis Click

5 Variable overhead cost variance analysis Click

6 Fixed overhead cost variance analysis Click

7 Sales variance analysis Click

Standard costing operating control statements

1 Format of an operating report Click

2 Standard marginal costing Click

3 Worked example of standard marginal costing Click

Investigating selected variances

1 Investigation is required Click

2 Which variances to investigate? Click

3 Possible causes of variances Click

Taking control action

1 Negative feedback control Click

2 Positive feedback control Click

Evaluation of standard costing and variance analysis

1 Evaluation of standard costing and variance analysis

Click

Working backwards from variances

1 Working backwards from variances Click

Diagnostic questions Questions Click

Answers Click

In this tutorial Standard costing








Typical standard costing and variance analysis system CLICK

Example of a ‘unit standard cost’ CLICK

Basic variances CLICK

Materials cost variances CLICK

Labour cost variances CLICK

Variable overhead cost variances CLICK

Fixed overhead cost variances CLICK

Example of an Operating Control Report (using absorption costing) CLICK

Example of an Operating Control Report (using marginal costing) CLICK

Possible causes of sales and cost variances CLICK


in this tutorial: Standard costing


BIAS Classification of standards

CLICK

MERITS Purposes of using standard costing and variance analysis

CLICK

END BASIS Problems associated with conventional standard costing and variance analysis

CLICK






Chapter 15 Performance measurement











Performance measurement overview

1 Purpose of mission statements and their role in performance measurement

CLICK

2 The impact of economic and market conditions on performance measurement

CLICK

3 Impact of government and other regulation on performance measurement

CLICK

Performance measurement – application

1 Measures of financial performance (profitability, liquidity, activity and gearing) and non financial measures

CLICK

2 Perspectives of the ‘balanced scorecard’ (BSC) CLICK

3 Critical success factors (CSFs) CLICK

4 Economy, efficiency and effectiveness CLICK

5 Unit costing CLICK

6 Performance measures in process costing environments

CLICK

7 Performance measurement in service industries CLICK

Cost reductions and value enhancement

1 Cost control CLICK

2 Cost reduction CLICK

Monitoring performance and reporting

1 Problems in measuring performance (for all types of enterprise)

CLICK

2 Importance of non-financial performance measures

CLICK

3 Relationship between short-term and long-term performance

CLICK

4 Measurement of performance in service industry situations

CLICK

5 Measurement of performance in non-profit seeking and public sector organisations

CLICK

6 The role of benchmarking in performance measurement

CLICK

7 Reporting CLICK


Questions CLICK

Answers CLICK

In this tutorial Performance management







Overview of the ‘Hierarchy of Objectives’

CLICK

Relationship between mission - goals - objectives - critical success factors and performance measures.

CLICK

Economic objectives of Government CLICK

Financial performance analysis CLICK

The ROCE Pyramid CLICK

Different levels of current ratio CLICK

Financial performance analysis CLICK

Kaplan and Norton’s ‘Balanced scorecard’ CLICK

Value for Money CLICK

Decision areas and time periods CLICK


in this tutorial: Performance management


IS GNP FIT? Economic factors that influence business decisions CLICK






Screen Number

Chapter 1

The nature, source and purpose of management information 33

Diagnostic Test: Questions 88

Diagnostic Test: Answers 97

Chapter 2

Cost classification 103

Diagnostic Test Questions 150

Diagnostic Test Answers 162

Chapter 3

Accounting for materials 169



Chapter 4

Accounting for labour 231



Chapter 5

Accounting for overheads 282



Chapter 6

Absorption and marginal costing 333



Chapter 7

Job, batch, unit and process costing 359



Chapter 8

Service/operation costing 430



Chapter 9

Alternative cost accounting 457



Chapter 10

Budgeting 490



Contents - 1 of 2


The contents are continued on the next screen Click here

This free sample shows part of

Chapter 1





Screen Number

Tutorial 11

Statistical techniques 585



Tutorial 12

Capital budgeting and capital investment appraisal 694



Tutorial 13

Budgetary control and behavioural aspects 765



Tutorial 14

Standard costing 799



Tutorial 15

Performance measurement 856



Contents - 2 of 2








Sorry... But that link will not work in this free sample copy.

To buy the full Examination Text version, complete with all links, for your ACCA F2/FMA studies, please go to www.TonySurridge.co.uk.

The full Examination Text consists of: - Pages 992 - Activities with answers 64 - Diagrams/charts/tables 131 - Examples 48 - Mnemonics 34 - Diagnostic Questions and Answers 437

“Dedicated to the Accountancy and Finance Profession”


http://www.tonysurridge.co.uk/ecommerce/Exam+Material�
