FL086 Management Accounting Study Manual 2015 (1) - Copy

7/21/2019 FL086 Management Accounting Study Manual 2015 (1) - Copy

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FOUNDATION EXAM

MANAGEMENT ACCOUNTING


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F o u n d a t i o n e x a m

Management Accounting

S T U D Y M A N U A L


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ii|

Fifth edition 2015

First edition 2010

ISBN 9781472714565

Previous ISBN 9781 4453 6875 7

British Library Cataloguing-in-Publication Data

A catalogue record for this book

is available from the British Library.

Published by BPP Learning Media Ltd

All rights reserved. No part of this publication may be

reproduced or transmitted in any form or by any means or

stored in any retrieval system, electronic, mechanical,

photocopying, recording or otherwise without the prior

permission of the publisher.

The contents of this book are intended as a guide and not

professional advice. Although every effort has been made to

ensure that the contents of this book are correct at the time of

going to press, BPP Learning Media, the Editor and the Author

make no warranty that the information in this book is accurate

or complete and accept no liability for any loss or damage

suffered by any person acting or refraining from acting as a

result of the material in this book.

Every effort has been made to contact the copyright holders of

any material reproduced within this publication. If any have

been inadvertently overlooked, BPP Learning Media will be

pleased to make the appropriate credits in any subsequent

reprints or editions.

We are grateful to CPA Australia for permission to reproduce

the Learning Objectives, the copyright of which is owned by

CPA Australia.

Printed in Australia

This is printed on FSC accredited stock by an FSC accredited

printer.

BPP Learning Media Ltd 2015


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INTRODUCTION| iii

FOUNDATION EXAMS

International Education Standards

CPA Australia is a member of the International Federation of Accountants (IFAC). All foundation exam

education materials are developed in line with IFACs International Education Standards. Thesestandards provide guidance in establishing the content of professional accounting education

programs together with the associated assessment. The standards also assist in developing the

required passing standard for accounting education and competence of a professional accountant.

The foundation exams provide you with the opportunity to demonstrate your competence in areas

required for Associate membership of CPA Australia. By demonstrating this entry level knowledge you

will be well positioned to succeed at the CPA Program and ultimately attaining the CPA designation.

YOU AND YOUR STUDY PLAN

This study manual is designed to give you an understanding of what to expect in your exam as a well

as covering the fundamentals that you need to know. Exams will be based on the contents of this

study manual.

There are no specifically recommended hours of study. Each candidate brings their own level of

experience and knowledge to the foundation exams. The number of study hours required is entirely

dependent on your prior knowledge of the subject. You will need to develop your own study plan.

Refer to Preparing for foundation exams on page viii.

ADDITIONAL LEARNING SUPPORT

If you feel you have gaps in your knowledge after reviewing the study manual, there is a range of

optional additional support to assist in your exam preparation. Additional learning support caters for

different learning styles and budgets.

Please check the CPA Australia website for more information www.cpaustralia.com.au/learningsupport

STANDARDS AND LEGISLATION

The material in this study manual has been prepared based upon standards and legislation in effect as

at 1 September 2013. Candidates are advised that they should confirm effective dates of standards

and legislation when using additional study resources. Exams are based on the learning objectives

outlined within this study manual.


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iv|MANAGEMENT ACCOUNTING


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INTRODUCTION

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CONTENTS

Page

INTRODUCTION

Foundation exams iii

Chapter features vi

Preparing for your foundation exam viii

Chapter summary x

Learning objectives xii

CHAPTER

1 The nature and purpose of management accounting 1

2 Decision making and relevant costing 39

3 Budgeting 63

4 Cost behaviour and CVP analysis 99

5 Overheads, absorption and marginal costing 135

6 Overhead costing activity-based costing 171

7 Process and job costing 1918 Standard costing 233

9 Variance analysis 247

10 Capital expenditure 273

11 Inventory and pricing decisions 297

12 Performance measurement and evaluation 323

Revision questions 353

Answers to revision questions 377

Before you begin questions: answers and commentary 395

Glossary of terms 415

Index 423


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vi|MANAGEMENT ACCOUNTING

CHAPTER FEATURES

Each chapter contains a number of helpful features to guide you through each topic.

Learning

objectives

Show the referenced CPA Australia learning objectives.

Topic list Tells you what you will be studying in this chapter.

Introduction Presents a general idea of what is covered in this chapter.

Chapter summary

diagram

Summarises the content of the chapter, helping to set the scene so that you

can gain the bigger picture.

Before you begin This is a small bank of questions to test any pre-existing knowledge that you

may have of the chapter content. If you get them all correct then you may

be able to reduce the time you need to spend on the particular chapter.

There is a commentary section at the end of the Study Manual called Before

you begin: answers and commentary.

Section overview This summarises the key content of the particular section that you are about

to start.

Learning objective

reference

This box indicates the learning objective covered by the section or

paragraph to which it relates.

Definition Definitions of important concepts. You really need to know and understand

these before the exam.

Exam comments

exam

These highlight points that are likely to be particularly important or relevantto the exam. (Please note that this feature does not apply in everyfoundation exam study manual.)

Worked example This is an illustration of a particular technique or concept with a solution or

explanation provided.

Question This is a question that enables you to practise a technique or test your

understanding. You will find the solution at the end of the chapter.

Key chapter points Review the key areas covered in the chapter.

Quick revision

questions

A quick test of your knowledge of the main topics in this chapter.

The quick revision questions are not a representation of the difficulty orstyle of questions which will be in the exam. They provide you with an

opportunity to revise and assess your knowledge of the key concepts

covered in the materials so far. They are not a practice exam, but rather a

means to reflect on key concepts and not as the sole revision for the exam.

O

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INTRODUCTION

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Revision questions The revision questions are not a representation of the difficulty or style of

questions which will be in the exam. They provide you with an opportunity

to revise and assess your knowledge of the key concepts covered in the

materials so far. They are not a practice exam but rather a means to reflect

on key concepts and not as the sole revision for the exam.

Case study This is a practical example or illustration, usually involving a real worldscenario.

Formula to learn These are formulae or equations that you need to learn as you may need to

apply them in the exam.

Bold text Throughout the Study Manual you will see that some of the text is in bold

type. This is to add emphasis and to help you to grasp the key elements

within a sentence and paragraph.


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viii|MANAGEMENT ACCOUNTING

PREPARING FOR YOUR FOUNDATION EXAM

STUDY PLAN

Review all the learning objectives thoroughly. Use the topic exam weightings listed at the end ofthe learning objectives to develop a study plan to ensure you provide yourself with enough time to

revise each learning objective.

Dont leave your study to the last minute. You may need more time to explore learning objectives

in greater detail than initially expected.

Be confident that you understand each learning objective. If you find that you are still unsure after

reading the study manual, seek additional information from other resources such as text books,

supplementary learning materials or tuition providers.

STUDY TECHNIQUES

In addition to being able to complete the revision and self-assessment questions in the studymanual, ensure you can apply the concepts of the learning objectives rather than just memorising

responses.

Some exams have formulae and discount tables available to candidates throughout the exams. My

Online Learning lists the tools available for each exam under "Useful Resources".

Check My Online Learning on a weekly basis to keep track of announcements or updates to the

study manual.

TIPS FOR EXAMS

Plan to arrive at the exam centre at least 15 minutes before your exam. Allow for possible delays

with public transport or traffic.You have three hours and fifteen minutes to complete the exam. As soon as you commence the

exam your exam clock in the top right hand corner of the screen begins to count down. Watch your

time carefully.

ANSWERING MULTIPLE CHOICE QUESTIONSFoundation exams are a series of 100 multiple choice questions. Each question will contain four

possible options.

Step 1

Attempt every question. Read the question thoroughly. You may prefer to work out the

answer before looking at the options, or you may prefer to look at the options at the

beginning. Adopt the method that works best for you.

Step 2

Read the four options and see if one matches your own answer. Be careful with

numerical questions, as some options are designed to match answers that incorporate

common errors. Check that your calculation is correct. Have you followed the

requirement exactly? Have you included every step of the calculation?

Step 3

You may find that none of the options matches your answer.

Re-read the question to ensure that you understand it and are answering the

requirement

Eliminate any obviously wrong answers

Consider which of the remaining answers is the most likely to be correct and select the

option


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INTRODUCTION

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Step 4 If you are still unsure, you can flag the question and continue to the next question. Some

questions will take you longer to answer than others. Try to reduce the average time per

question, to allow yourself to revisit problem questions at the end of the exam.

Revisit unanswered questions. A review tool is available at the end of the exam, which

allows you to Review Incomplete or Review Flagged questions. When you come back to a

question after a break you often find you are able to answer it correctly straight away. Youare not penalised for incorrect answers, so never leave a question unanswered

COMPUTER-BASED EXAM NAVIGATIONYour computer-based exam has the following functions:

Navigation

You can select your answer by: clicking on the circle to the left of the option, or typing the letter

corresponding to the option.

To move through the exam, you use the 'Next' or 'Previous' buttons on the bottom of the

screen. The function of each button is selected by your mouse, or with a combination of

keyboard keys. For example, you can select the 'Next' button by clicking it with the mouse, orby typing ALT + N.

The 'Next' button moves you from one screen to the next screen. If you wish to go back and

view the screen you just viewed, click the 'Previous' button or type ALT + P.

Select for review

There is a flag in the upper right corner of your exam screen labelled 'Fag for Review'. You mark

an exam question to review at a later time by clicking on this flag. The flag will appear filled-in

once it is selected. You may mark any exam question for later review, whether you select an

answer or not.

Review Screen

After finishing the last exam question, you will see a review screen. This lists every examquestion. If you clicked the 'Flag for Review' flag on a question screen, that question appears on

the Review Screen marked with the flag filled in.

If you skipped any exam questions, these will be labelled as 'Incomplete' even if you did not

select them for review.

From the Review Screen you can choose to:

1. review all of the questions in the exam by clicking 'Review All';

2. individually select more questions for review (click on the flags corresponding to the

questions);

3. review all questions marked as incomplete by clicking 'Review Incomplete';

4. begin reviewing the selected questions by clicking 'Review Flagged'; or

5. exit by clicking 'End Review' this will also end your exam.


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CHAPTER SUMMARY

This summary provides a snapshot of each of the chapters, to help you to put the Study Manual into

perspective.

CHAPTER 1 THE NATURE AND PURPOSE OF MANAGEMENT

ACCOUNTINGThis introductory chapter sets the scene for your forthcoming studies of Management Accounting. It

explains the differences between financial, cost and management accounting and explains the role of

the management accountant.

It also introduces two key activities of the management accountant: decision making and performance

measurement and evaluation.

CHAPTER 2 DECISION MAKING AND RELEVANT COSTINGOne of the most important things that a management accountant does is to provide the information

that enables a business to make decisions about its activities. This involves ascertaining the relevant

costs of the business, which are its future costs and cash flows. The chapter goes on to consider

choice of product (product mix) decisions, make or buy decisions and outsourcing.

CHAPTER 3 BUDGETINGA budget is a quantitative statement, for a defined period of time (often a year) which usually includes

planned revenues, expenses, assets, liabilities and cash flows. When organisations draw up budgets

they have stated objectives and intentions, and the actual results can then be compared with the

budget and differences identified and analysed. This chapter explains the background of budgeting

and then teaches you how to prepare and operations budget and a cash budget.

CHAPTER 4 COST BEHAVIOUR AND CVP ANALYSISThis chapter introduces the different types of cost and also discusses cost behaviour. It then moves on

to cost-volume-profit analysis, which is based on cost behaviour principles; this is necessary so that the

appropriate decision-making information can be provided to management.

CHAPTER 5 OVERHEADS, ABSORPTION AND MARGINAL COSTINGThere are some costs incurred by organisations that have to be allocated out to the various units

produced, so that a cost per unit can be produced. This chapter examines the different types of

overheads and introduces two methods of accounting for them: absorption and marginal costing. It

ends with a comparison between the two.

CHAPTER 6 OVERHEAD COSTING ACTIVITY-BASED COSTINGActivity-based costing (ABC) has been developed relatively recently to suit modern business and

accounting practices. It provides a modern alternative to traditional methods such as absorption

costing, which tend to allocate too great a proportion of overheads to high volume products. ABC

involves the identification of those factors, known as cost drivers, which cause the costs of an

organisations major activities.

CHAPTER 7 PROCESS AND JOB COSTING

Costing systems are used to cost goods or services, and the method used depends on the way inwhich the goods or services are produced. Within the context of your syllabus, the two most important

are process costing, used when it is not possible to identify separate units of production, and job

costing, where work is undertaken to a particular customers specific requirements.


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CHAPTER 8 STANDARD COSTINGIn business, standards are applied to the costs of products and services. An organisation will expect

the standards that it sets (for example for the amount of materials to be used in production, or for the

amount of workforce time involved) to be met. If they are not, a variance analysis will be carried out,

which identifies where they have not been met.

CHAPTER 9 VARIANCE ANALYSISThe actual results achieved by an organisation during the reporting period are frequently different

from those expected. Variance analysis identifies where these differences from the expected occur. It

is important to realise that in some situations a favourable (ie positive) variance on one aspect of

production will be cancelled out by an adverse (ie negative) variance on another aspect. Hence

businesses produce operating statements, which reconcile the expected and the actual results, by

means of all the variances, so management can see the complete picture.

CHAPTER 10 CAPITAL EXPENDITUREDecisions about capital expenditure require different thought processes from those about revenue

expenditure. Capital expenditure often involves the expenditure of larger sums of money, and thisusually happens over a longer period of time. Because of this, there are sometimes elements of

uncertainty, such as interest rates or the revenue to be gained from a project, and this chapter

introduces the different means of assessing the value of capital expenditure.

CHAPTER 11 INVENTORY AND PRICING DECISIONSManufacturing businesses in particular are very concerned to retain the right amount of stock, or

inventory. They do not want to tie too much cash up in the purchase and holding of stocks of goods or

components, but nor do they want to run the risk of not being able to fulfil an order from a customer

because they do not have the stock or cannot get it quickly enough. This chapter examines systems

for maintaining inventory and controlling its levels, and also looks at different approaches to pricing.

CHAPTER 12 PERFORMANCE MEASUREMENT AND EVALUATIONThis chapter is concerned with performance indicators, i.e. the ways of assessing how a business, or a

division, or a particular product within a catalogue, is performing. The central theme here is

responsibility accounting, the system of accounting that divides revenue and costs into area of

personal responsibility in order to monitor and assess the performance of each part of an

organisation.


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LEARNING OBJECTIVES

MANAGEMENT ACCOUNTING

CPA Australia's learning objectives for this Study Manual are set out below. They are cross-referencedto the chapter in the Study Manual where they are covered.This exam covers an understanding of developments in management accounting and the tools

management accountants use to cost products and services, and to develop and manage budgets. It

also covers performance management and control; planning and assessment of project alternatives;

and an understanding of the nature, functions, structures and operations of management.

Topics

CHAPTER(S)

WHERE

COVERED

LO1. Conceptual issues and behavioural implications

LO1.1 Explain the historical development of management accounting 1

LO1.2 Analyse the key differences between financial, cost and management

accounting1

LO1.3 Describe how management accounting creates value 1

LO1.4 Analyse the current influences on management accounting 1

LO1.5 Explain the range of theories that underpin management accounting

and how they have an influence on practice1

LO1.6 Outline the core parts of management accounting systems and how

they enable strategic management1

LO1.7 Analyse the roles of management accountants in cross-functional

teams1

LO1.8 Identify and explain appropriate internal controls for management

and accounting systems in a range of situations12

LO1.9 Explain how organisational behaviour can impact the creation of

organisational value1

LO1.10 Describe the increasing awareness of sustainability and its relationship

to management accounting1

LO2. Decision making

LO2.1 Apply the steps in the decision making process 1

2.1.1 define the problem

2.1.2 identify the decision making criteria

2.1.3 develop alternatives

2.1.4 analyse alternatives

2.1.5 select an alternative

LO2.2 Apply relevant information guidelines for short-term alternative choice

operating decisions2

LO2.3 Identify the quantitative and qualitative criteria involved in accepting a

project

10

LO2.4 Analyse the challenges posed by differences between a project and

an organisations risk profiles10

LO2.5 Explain the impact of cash flows and risks on project decision making 2, 10


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Topics

CHAPTER(S)

WHERE

COVERED

LO3. Budgeting

LO3.1 Identify and analyse the human behavioural challenges to the

budgeting process in organisations

3

LO3.2 Explain the nature of budgets and the reasons that organisations use

budgets3

LO3.3 Prepare an operations budget 3

LO3.4 Prepare a cash budget 3

LO4. Cost behaviour

LO4.1 Describe the nature of costs and their behaviour 2, 4

LO4.2 Apply relevant techniques to separate costs into their fixed and

variable components 3, 4

LO4.3 Apply the principles of cost-volume-profit analysis in organisations 4

LO5. Overhead costing product and service costing

LO5.1 Explain key methods of departmental overhead allocation 5

LO5.2 Explain the concepts underpinning product costing in organisations 5

LO5.3 Develop different product costing statements involving production

resource costs5

LO5.4 Evaluate the difference between direct production costs and indirect

overhead costs5

LO5.5 Apply the principles of absorption and variable costing to product

costing analysis5

LO6. Overhead costing activity based costing

LO6.1 Identify and apply the principles of activity based costing to allocate

overheads in organisations6

LO7. Process and job costing

LO7.1 Explain the differences between job and process costing techniques 7

LO7.2 Apply costing principles to job costing and process costing

organisations

7

LO8. Standard costing

LO8.1 Explain how standard costing can be used to assist in cost control and

efficientresource allocation8

LO9. Variance analysis

LO9.1 Define and describe a variance 9

LO9.2 Explain the causes of variances and associated corrective actions 9

LO9.3 Calculate a variance 9


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Topics

CHAPTER(S)

WHERE

COVERED

LO10.Capital expenditure

LO10.1 Analyse capital expenditure decisions in organisations using relevanttools and techniques

10

LO10.2 Apply capital expenditure analysis to project planning and managinguncertain scenarios through scenario analysis

10

LO11.Inventory and pricing decisions

LO11.1 Evaluate the principles of just-in-time 11

LO11.2 Apply the economic order quantity formula to determine orderquantities for inventory management

11

LO11.3 Establish and apply the appropriate approach for long-term pricingdecisions

11

LO12.Performance measurement and evaluation

LO12.1 Explain the characteristics and purpose of performance measurementsystems 12

LO12.2 Analyse the different types of financial performance measures andtheir limitations

12

LO12.3 Describe the key characteristics of the Balanced Scorecard and itsadvantages over traditional performance measurement systems

12

LO12.4 Outline the characteristics of reward systems and the circumstances inwhich they can be tied to performance measures

12

Exam topic weightings

1 Conceptual issues and behavioural implications 7%

2 Decision making 13%

3 Budgeting 10%

4 Cost behaviour 15%

5 Overhead costing product and service costing 13%

6 Overhead costing activity-based costing 5%

7 Process and job costing 5%

8 Standard costing 5%

9 Variance analysis 5%10 Capital expenditure 5%

11 Inventory and pricing decisions 5%

12 Performance measurement and evaluation 12%

TOTAL 100%


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1

CHAPTER 1THE NATURE AND PURPOSEOF MANAGEMENT

ACCOUNTINGLearning objectives Reference

Conceptual issues and behavioural implications LO1

Explain the historical development of management accounting LO1.1

Analyse the key differences between financial, cost and management accounting LO1.2

Describe how management accounting creates value LO1.3

Analyse the current influences on management accounting LO1.4

Explain the range of theories that underpin management accounting and how they

have an influence on practice

LO1.5

Outline the core parts of management accounting systems and how they enablestrategic management

LO1.6

Analyse the roles of management accountants in cross-functional teams LO1.7

Explain how organisational behaviour can impact the creation of organisational value LO1.9

Describe the increasing awareness of sustainability and its relationship to managementaccounting

LO1.10

Decision making LO2

Apply the steps in the decision making process LO2.1

define the problem LO2.1.1identify the decision making criteria LO2.1.2

develop alternatives LO2.1.3

analyse alternatives LO2.1.4

select an alternative LO2.1.5

Topic list

1 The management accounting function

2 Financial accounting and management and cost accounting

3 Planning, control and decision-making4 Information

5 Management accounting systems

6 Design of management accounting systems

7 Developments in management accounting

8 Sustainability and management accounting


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INTRODUCTION

This chapter provides an introduction to Management Accounting.

We begin this first chapter by looking at the role of the management accounting function.

We then examine the differences between management accounting and financial accounting and

introduce cost accounting.

The chapter goes on to look at the importance of information provided by the management

accountant in planning, control and decision making. It also briefly looks at the design and

development of management accounting systems.

This chapter discusses the limitations of some of the traditional methods of management accounting,

and considers how recent developments in management accounting attempt to overcome these

limitations.

Finally we examine the management accountant's role in the creation of organisational value and the

relationship between sustainability and management accounting.The chapter content is summarised in the diagram below.

The nature andpurpose of

management accounting

InformationPlanning, controland decisionmaking

Managementaccountingsystems

Financial accounting and costand management accounting

Design of managementaccounting systems

Developments in managementaccounting

The managementaccounting function

Presentation ofinformation tomanagement


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THE NATURE AND PURPOSE OF MANAGEMENT ACCOUNTING | 3

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BEFORE YOU BEGIN

If you have studied these topics before, you may wonder whether you need to study this chapter infull. If this is the case, please attempt the questions below, which cover some of the key subjects in the

area.If you answer all these questions successfully, you probably have a reasonably detailed knowledge ofthe subject matter, but you should still skim through the chapter to ensure that you are familiar witheverything covered.

There are references in brackets indicating where in the chapter you can find the information, and youwill also find a commentary at the back of the Study Manual.

1 What are the differences between financial accounts and management accounts? (Section 2.2)

2 What are the differences between cost accounting and management accounting? (Section 2.3)

3 Explain the link between an organisation's objectives and its strategy. (Section 3.2)

4 Identify steps involved in the decision making process. (Section 3.6.1)

5 What are the three types of management activity identified by Anthony (Section 3.7)

(Management Control Systems, 1972)?

6 What are the basic elements of a management control system? (Section 3.8)

7 What is the difference between data and information? (Section 4.1)

8 List the qualities of good information. (Section 4.2)

9 What are the main features of a report?(Section 4.5)

10 What are the risks of using traditional management accounting methods? (Section 5.4)

11 What are the components of a management accounting system? (Section 5.2)

12 Define and explain Just-In-Time (JIT).(Section 7.1)

13 Define and explain Total Quality Management (TQM). (Section 7.2)14 Define and explain Kaizen. (Section 7.3)


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1 THE MANAGEMENT ACCOUNTING FUNCTION

Section overview

The role of the management accounting function as an information provider has developedwith advances in technology. To assess the effectiveness of the management accounting

function, a clear understanding is needed of its objectives and activities, so that

appropriate measures of performance can be determined.

We will now look at the role and objectives of the management accounting function and how its

performance should be measured.

1.1 ROLE OF THE MANAGEMENT ACCOUNTING FUNCTIONThe role of the management accountant is to provide information to decision makers, and to provide

advice based on that information. The information provided by management accounting covers all

areas of strategy and operations, and includes information to assistwith planning, control and

decision-making by management.

The role of the management accountant today is more concerned with providing complex analysis

and information to support business management than with providing routine reports, since much

routine work is now computerised. At the same time the areas covered by management accounting

have extended to include strategic information and non-financial information, and information to

support risk management. Developments in technology have also made it easier to provide

accounting information to non-financial managers.

1.1.1 THE DEVELOPMENT OF MANAGEMENT ACCOUNTING INFORMATION

In the 1950s Simons identified three attributes of what could by now be called managementaccounting information:

It should be useful for scorekeeping to see how well the organisation is doing overall and to

monitor performance.

It should be attention-directing to indicate problem areas that need to be investigated.

It should be useful for problem-solving to provide a means of evaluating alternative responses

to the situations in which the organisation finds itself.

Management accounting information is therefore used by managers for a number of purposes:

To make decisions.

To planfor the future. Managers have to plan and they need information to do this. Much of this is

provided by management accounting systems.

To monitor the performanceof the business. Managers need to understand how they are

performing against goals and targets.

To measure profits and put a value on inventory.

To implement processes and practices that focus on effective and efficient use of organisationalresources to support managers to enhance customer and stakeholder value (IFAC 2002)

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1.2 ROLE OF THE MANAGEMENT ACCOUNTANT IN CROSS-

FUNCTIONAL TEAMSIn some organisations, the cost and management accounting function may be organised as a

functional section or department within the organisation. However, because management accountants

provide information to other managers, it has become fairly common to include management

accountants within cross-functional teams, or to assign them to work with non-accounting functions. Across-functional team is a small group of individuals, with different expertise, taken from many

different parts and levels of an organisation, which comes together to work towards a common

purpose or goal. The size of each team will vary according to the scale and complexity of the project.

Cross-functional teams are typically formed on the assumption that a small group is better for a

particular task than either individuals acting alone or in a large, permanently structured group.

Benefits of cross-functional teams include:

improved coordination and integration of systems or activities

problem-solving across traditional functional or organisational boundaries

facilitate innovation and product/service developmentIn addition to contributing their technical expertise as accounting and finance experts and their

functional expertise as information providers, management accountants have a key role to play in

helping maximise the potential of a cross-functional team by:

providing, collecting and assessing critical team information;

helping establish goals and set priorities;

assisting with problem-solving and decision-making, through the application of decision-making

models and other techniques

ensuring the team maintains an organisation-wide perspective.

1.3 DEFINING OBJECTIVES OF THE MANAGEMENT ACCOUNTINGFUNCTIONThe objectives of the management accounting function should depend on the information needs of

the 'internal customers' the managers within an organisation who need information to help them to

run the business. The overall objective should be the provision of quality service and decision making

information. This broad objective can be analysed into a number of sub-objectives.

SUB-OBJECTIVE DETAIL

The provision of good

informationThis requires supplying information that fulfils the following criteria.Information must be relevant to the needs of users. This involves identifyingthe users of information and the reasons why they need it. Information can

only ever be relevant if it has a purpose and a use.Information should be reliable. It should be sufficiently accurate for itspurpose.For example it should be free from material error and should not betaken from an unreliable source. Unless information is reliable, managementwill not have sufficient confidence to use it.

Information should be timely, which means that it should be provided in timefor the purpose for which it is intended. Information has no value if it isprovided too late. Some information, such as information provided for controlpurposes, may lose value with time.

Information should be clear, comprehensibleand appropriatelycommunicated, since it will lose its value if it is not clearly communicated tothe user in a suitable format and medium. A large amount of managementaccounting information should be accessible immediately and on-line toauthorised managers.

The provision of a value-for-

money service

The costs of management accounting should be justified by the benefits thatthe function provides to the organisation, and the level of service and thequality of information provided.

The availability of informed

personnel

Users will expect management accounting staff to be available to answerqueries and resolve problemsas and when required.

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1.4 MANAGEMENT ACCOUNTING FUNCTION ESTABLISHING

ACTIVITIESOnce the objectives have been defined, the activities that the function should carry out to achieve its

objectives must be established. This is why it is necessary to answer the question:

'What information do we want, or might we want?'

The specific information that a management accounting system needs to provide (and the timing or

accessibility of this information) will vary between organisations, according to factors such as the

nature of their business and their size. The management accounting function should be organised and

staffed so that it is able to provide the information expected from it.

A follow-up question is:

'What type and size of function do we need to provide this information, and what will it cost?'

Management, as users of information, should therefore understand what information they are getting,

and what it is costing to get it.

1.5 MANAGEMENT ACCOUNTING FUNCTION IDENTIFYINGPERFORMANCE MEASURESThe performance of the management accounting function should be measured according to its

objectives and its specified activities. Suitable specific performance measures might be as follows:

a. Measures relating to thequality of the information provided.

Quality measures may be based on

the judgement of users, such as opinions about whether the information provided is useful, timely

and reliable.

b. Measures relating tovalue for money. The cost of the function should be measurable. It may be

possible to compare the cost with other information provision services within the organisation or in

different organisations. The benefits are not so easy to assess, but management need to be

satisfied that they are getting value for money.

c. Measures relating to theavailability of accounting staff

to assist management, such as the

amount oftime the accounting staff spend with managers in other functions, and the speed of

their response to requests for information, advice or assistance.

d. Measures relating toflexibility, such as delivery in accordance with the service levels agreed with

business units to meet needs for ad-hocreporting.

e. Ratings provided fromuser satisfaction surveys would provide extremely useful measures of

performance. 'Users' are the 'internal customers' for the management information.

f. Measure of management accounting service:

i. Timeliness of reports

ii. Attendance/contribution at management meetings/forums

iii. Management accounting involvement in strategic projects


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2 FINANCIAL ACCOUNTING AND MANAGEMENT

AND COST ACCOUNTING

Section overview Financial accounting systems ensure that the assets and liabilities of a business are properly

accounted for, and provide information about profits and historical financial performance to

shareholders and to external stakeholders such as ATO and ASIC; and other interested

parties including interest groups, potential shareholders, unions and NGOs.

Management accounting systems provide information specifically for the use of managers

within an organisation. Corporate Performance Management (CPM) software and Business

Intelligence (BI) software are management accounting tools used by management

accountants.

Cost accounting is part of management accounting. The purpose of cost accounting is to

determine the cost of products and services.

2.1 FINANCIAL ACCOUNTS AND MANAGEMENT ACCOUNTSFinancial accounting systems ensure that the assets and liabilities of a business are properly

accounted for. They are used to provide information to shareholders and other interested parties in

the form of (published) financial statements. Management accounting systems provide information

specifically for the use of managers within an organisation.

Management information provides a common source from which information for two groups of

people is drawn.

a. Financial accountsare prepared for individuals externalto an organisation: for example

shareholders, customers, suppliers, regulatory authorities, employees.

b. Management accounts are prepared for internaluse by managers of the organisation.

Much of the data used to prepare financial accounts and management accounts are the same but

differences between the financial accounts and the management accounts arise because the data are

analysed differently. In addition, management accounting systems draw on a wider range of data,

including non-financial data, data from external sources, and data relating to the future.

2.2 FINANCIAL ACCOUNTS VERSUS MANAGEMENT ACCOUNTSManagement accountants and financial accountants perform different parts of the accounting

function. The table below shows the differences between the two areas of accounting.

FINANCIAL ACCOUNTS MANAGEMENT ACCOUNTS

Financial accounts detail the performance of anorganisation over a defined period and the state ofaffairs at the end of that period. Financial accountsprovide information to third parties.

Management accounts are used to aid managementrecord, plan and control the organisation's activities andto help the decision-making process. The information inmanagement accounts can measure the organisation'sactivities against its strategic objectives.

Limited liability companies must, by law, preparefinancial accounts.

There is no legal requirement to prepare managementaccounts.

The format of published financial accounts isdetermined by local law, by International AccountingStandards and International Financial Reporting

Standards. In principle the accounts of differentorganisations can therefore be easily compared.

The format of management accounts is entirely atmanagement discretion: no strict rules govern the waythey are prepared or presented. Each organisation can

devise its own management accounting system andformat of reports.

Financial accounts concentrate on the business as awhole, aggregating revenues and costs from differentoperations, and are an end in themselves.

Management accounts can focus on specific areas of anorganisation's activities. Information may be producedto aid a decision rather than as the end product of adecision.

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FINANCIAL ACCOUNTS MANAGEMENT ACCOUNTS

Most financial accounting information is of amonetary nature.

Management accounts incorporate non-monetarymeasures. Management may need to know, for example,tons of aluminium produced, monthly machine hours, ormiles travelled by sales staff.

Financial accounts present an essentially historicpicture of past operations.

Management accounts are both an historical record anda future planning tool.

Question 1: Management accounts

Which of the following statements about management accounts is/are true?

I There is a legal requirement to prepare management accounts

II The format of management accounts is largely determined by law

III They serve as a future planning tool and are not used as a historical record

A III only

B I and II only

C II and III only

D none of the statements are correct(The answer is at the end of the chapter)

2.3 COST ACCOUNTSThe terms 'cost accounting' and 'management accounting'are often used interchangeably. It is not

correct to do so. Cost accounting is part of management accounting. Cost accountingprovides

source datafor the management accountant to use.

Cost accountingis concerned with:

Preparing cost estimates of new and current products

Cost data collection

Measuring inventory costs including raw materials, work-in-progress and finished goods, and the

costs and profitability of products and services.

Management accounting on the other hand is concerned with:

Interpretation and assessment of financial, accounting and operational data, and communicating

it as information to users, for example as financial targets or performance measurements.

2.3.1 USES OF COST ACCOUNTS

Cost accounting is used to measure:

a. The costof goods produced or services provided.

b. The costof a department or business unit.c. The revenuesearned from a product, service, department or business unit, or the organisation in

total.

d. Theprofitabilityof a product, a service, a department, or the organisation in total.

e. Selling priceswith some regard for the costs of sale.

f. The value of inventories of goods(raw materials, work in progress, finished goods) that are still

held in store at the end of a period, thereby aiding the preparation of a statement of financial

position of the company's assets and liabilities.

g. Future costsof goods and services, based on given assumptions about what will happen in the

future. Costing is an integral part of budgeting, because budgets are detailed financial plans.

h. How actual costs compare with budgeted costs.If an organisation plans for its revenues andcosts to be a certain amount, but they actually turn out differently, the differences (variances) can

be measured and reported. Management can use these reports as a guide to whether corrective

action, or 'control' action, is needed to sort out aproblem. This system of control is often referred

to as budgetary control or variance analysis.


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Cost accounting systems arenot restricted to manufacturing

operations, although they are probably

more fully developed in this area. Service industries, government departments and non-profit making

organisationsall make use of cost accounting information. Within a manufacturing organisation, the

cost accounting system should be applied not only to manufacturing but also to administration, selling

and distribution, research and development and all other departments and functions.

3 PLANNING, CONTROL AND DECISION-MAKING

Section overview

Management information is used for planning, control and decision making.

Long-term planning, also known as corporate or strategic planning, involves selecting

appropriate strategies to prepare a long-term plan to attain the organisation's objectives.

Robert N Anthony (Management Control Systems, 1972) has categorised management

activities and decision-making into strategic planning, management control andoperational control.

Amanagement control system is a system which measures and corrects the performance of

activities of subordinates.

Information within an organisation can be analysed into the threelevels of Anthony's

hierarchy: strategic; tactical; and operational information.

3.1 PLANNINGPlanning forces management to think ahead systematically in both the

short term

and thelong term

.

Planning involves the following:

Establishing overall objectives.

Selecting appropriate strategies to achieve those objectives.

Setting targets for each strategy.

Formulating detailed plans for achieving those targets.

When expected changes are gradual, planning occurs in a fairly stable environment, and routine

budget planning procedures may be used.

3.2 OBJECTIVES OF ORGANISATIONS

Definitions

A visionis a succinct statement of an organisation's future aspirations.

A missionstatement sets out an organisation's fundamental purpose.

An objective is the aim or goal of an organisation.

A strategy is a possible course of action that might enable an organisation to achieve its objectives.

Organisations often start by setting out their vision. This is a succinct statement of the organisation's

future aspirations e.g. Microsoft's vision is 'to help people and businesses throughout the world

realise their full potential'.

A mission statement is then created, setting out the organisation's fundamental purpose andincluding references to its strategy, standards of behaviour and values.

The mission sets the overall direction of the organisation and the organisation's goals and more

detailed objectives then follow from this. The strategies identified as a result of the planning process

are designed to achieve these objectives.

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Note that in practice, the terms objective, goal and aim are often used interchangeably.

The twomain types

of organisation that you are likely to come across in practice are as follows:

Profit making

Non-profit making

It is often assumed that the main objective of profit making organisations is tomaximise profits

. A

secondary objective of profit making organisations might be growth, for example by increasing theoutput and sales of its goods/services. Instead of maximising profit, an organisation may seek to

maximise the wealth of its shareholders. Unfortunately, the aim of profit maximisation may encourage

decisions that compromise the long term viability of the business in the attempt to maximise

immediate profit outcomes.

The main objective of non-profit making organisations is usually to provide goods and services. A

secondary objective of these organisations might be to minimise the costs involved in providing the

goods/services.

The stated objectives of an organisation might include one or more of the following:

Maximise profits

Maximise revenue

Maximise shareholder value

Increase market share

Minimise costs

Management accounting techniques often assume one of these objectives when recommending a

course of action to management. Remember however that decisions have consequences for the

longer term as well as the short term, and decisions to maximise profit may have high associated risks.

3.3 LONG-TERM STRATEGIC PLANNING

Management accounting contributes to long-term strategic planning. Long-term

planning, also knownascorporate planning

, involves selecting appropriate strategies to attain the organisational

objective, and integrating these strategies into an overall long-term corporate or strategic business

plan.

The time span covered by a long-term plandepends on the organisation, the industryin which it

operates and the particularenvironment

involved. Typical periods for a strategic business plan are 2,

5, 7 or 10 years although longer planning periods may be used.

Long-term strategic planning consists of four basic elements:

assess the organisation and its environment

determine the corporate objectives

devise strategies for achieving these objectives

create a corporate plan

The diagram below provides an overview of the process and shows the link between short-term and

long-term planning.

3.4 SHORT-TERM TACTICAL PLANNINGThe corporate or strategic planserves as the long-term frameworkfor the organisation as a whole.

For operational purposes it is necessary to convert the corporate (strategic) plan into a series ofshort-

term plans, usually covering one year, which relate to business units, functionsor departments . The

annual process of short-term planning should be seen as stages in the progressive fulfilment of the

corporate plan. Each short-term plan steers the organisation towards its long-term objectives. It istherefore vital that, to obtain the maximum advantage from short-term planning, some form of long-

term plan exists.


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The management accounting function supports the short-term planning process, for example by

providing information for setting targets and standards, and helping to establish the assumptions on

which the short-term plan is based, such as growth rates, costs, efficiency savings and cost inflation.

THE

ASSESSMENTSTAGE

THEOBJECTIVESTAGE

THEEVALUATION

STAGE

THECORPORATEPLAN

The planning process

Assess the

externalenvironment

Assess the

organisation

Assess the

future

Assess

expectations

Evaluatecorporateobjectives

Consideralternative

ways of achievingobjectives

Agree acorporate

plan

Productionplanning

Resourceplanning

Productplanning

Research anddevelopment

planning

Detailed operation plans which implement the corporate plan on a monthly,quarterly or annual basis. Operational plans include short-term budgets,

standards and objectives.

SHORT-TERMPLANNING

LONG-TERMSTRATEGYPLANNING

3.5 CONTROLAs well as providing information for planning, management accounting also provides information to

assist with monitoring and control. There are two stages in the control process.

a. The planned performanceof the organisation (set out as targets or expectations in the detailedoperational plans) is compared with the actual performanceof the organisation on a regular and

continuous basis. Significant deviations from the plans can then be identified and appropriate

corrective action can be taken where possible.

b. The corporate (strategic)plan is reviewedin the light of the comparisons made and any changes

in the parameters on which the plan was based, (such as new competitors, government instructions

and so on), to assess whether the objectives of the plan can be achieved. The plan is modified to

ensure the organisation's future success.

Effective control is not practical without planning, and planning and control are interrelated. Targets

and objectives will not be achieved without monitoring and control measures when needed.

An established organisation should have a system of management reporting that produces controlinformation in a specified format at regular intervals.

Smaller organisations may rely on informal information flows or ad-hocreports being produced as

required.


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3.6 DECISION-MAKINGA function of management is decision-making. Managers at all levelswithin an organisation make

decisions, both long termand short term, and routineand occasional. It is the role of the

management accountant to provide information so that management can reach an informed decision.

Decision making always involves a choice between alternative courses of action. For example, when

comparing actual results against a target, if actual results are poor, management needs to decidewhether corrective action should be taken. This may involve considering the different ways in which

control may be applied, and choosing the preferred course of action from the available alternatives.

Budgeting decisions involve a choice between different ways of using the organisation's scarce

resources (such as cash, equipment and manpower).

It is vital that management accountants understand the decision-making process so that they can

supply the appropriate type of information.

3.6.1 DECISION-MAKING PROCESS

It is possible to analyse the decision-making process into a sequence of steps. These apply whether

the decision is taken immediately, or whether the matter is carefully considered before a decision isreached. These steps are shown below:

Define the problem

Implement the decision.

Identify decision-making criteria(goals & objectives)

Develop alternative solutions/opportunities which might

contribute towards achievingthem.

Collective and analyse relevantdata about each alternative.

Select an alternativeState the expected outcomeand check that the expectedoutcome is in keeping with

the overall goals or objectives.

PLANNING

The sequence of steps can be applied to form decision making. Note the role of relevant and reliable

information is critical to the decision making process.

Define the problem.A decision is made only when a problem is recognised. If a manager isunaware that a problem exists, they will not feel the need to make any decision. A workflow fordecision making has been set out above.

Identify the decision-making criteria. Having recognised that there is a problem for which adecision must be made, the next step is to recognise the decision-making criteria. What are we

trying to achieve? In the planning process, the criteria may be to maximise profits over the next 12months, given the available resources and subject to limitations on the risks that should be taken.The criterion for control decisions may be to reduce excessive spending. In managementaccounting, the decision-making criterion is often to maximise profitability, but as explainedearlier, consideration must be given to the longer term and risk.

2.1

s

2.1.1

2.1.2

2.1.3

2.1.4

2.1.5


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Develop alternatives. The next step is to recognise different ways in which the problem might beresolved in a way that is consistent with the decision-making criteria. For a simple decision, theremay be just two alternatives 'Do it', or 'Don't do it.' However there may be a number of differentalternatives, and the process of developing alternatives involves:

recognising the range of possible options and

from these, selecting a small number of alternatives for evaluation.

Analyse the alternatives. Each of the alternatives should be analysed and evaluated. If thedecision-making criterion is to maximise short-term profit, each alternative should be evaluatedfinancially, to estimate the profit that would result from choosing that alternative. Although amanagement decision is often based on financial considerations, other non-financial factors mayalso be considered if they are a part of the decision-making criteria.

Select an alternative. A decision involves selecting one alternative from the two or more that havebeen analysed. The recommended choice should satisfy the goals of the organisation.

These steps in the decision-making process should be apparent in later chapters, when specific

management accounting techniques for analysis are described.

3.7 ANTHONY'S (1972) VIEW OF MANAGEMENT ACTIVITYAuthor Robert N Anthony (Management Control Systems, 1972) divided management activities into

three levels: strategic planning, management controland operational control. This is sometimes

known as the Anthony hierarchy.

a.Strategic planning

is 'the process of deciding on the objectives of the organisation, on changes in

these objectives, on the resources required to attain these objectives, and on the policies that are

to govern the acquisition, use and disposition of these resources'.

b. Management controlis 'the process by which managers assure that resources are obtained and

used effectively and efficiently in the accomplishment of the organisation's objectives'.

c.Operational control

is 'the process of assuring that specific tasks are carried out effectively and

efficiently'.

A management accounting system provides information to management for strategic planning and

management control, and for some aspects of operational control.

3.7.1 STRATEGIC PLANNING

Strategic plansare those which set or changethe objectives, or strategic targets, of an

organisation. They would include such matters as the selection of products and markets, the required

levels of company profitability and the purchase and disposal of subsidiary companies or major non-

current assets.

3.7.2 MANAGEMENT CONTROL

While strategic planning is concerned with setting objectives and strategic targets, management

control

is concerned with decisions aboutthe efficient and effective use of an organisation s

resourcesto achieve these objectives or targets.

(a) Efficiencyin the use of resources to achieve optimum output from the inputresources used. It

relates to the combinations of labour, land and capital (for example, how much production work

should be automated) and to the productivity of labour, or material usage.

(b) Effectiveness in the use of resources to create the outputs that are in line with the intended

objectivesor targets.

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3.7.3 OPERATIONAL CONTROL

The third, and lowest tier, in Anthony's hierarchy of decision making, consists of operational control

decisions. Operational control is about ensuring that specific tasksare carried out effectively and

efficiently. Just as 'management control' plans are set within the guidelines of strategic plans,

'operational control' plans are set within the guidelines of both strategic planning and management

control. Consider the following:

a. Senior management may decide that the company should increase sales by five per cent per

annum for at least five years a strategic plan.

b. The sales director and senior sales managers will make plans to increase sales by five per cent in

the next year, with some provisional planning for future years. This involves planning direct sales

resources, advertising, sales promotion and so on. Sales quotas are assigned to each sales territory

a tactical plan(management control).

c. The manager of a sales territory specifies the weekly sales targets for each sales representative.

This is operational planning.Individuals are given tasks which they are expected to achieve.

Although we have used an example of selling to describe operational control, it is important to

remember that this level of planning occurs in all aspects of an organisation's activities, even non-

standard activities, such as repair work or answering customer complaints.

The scheduling of unexpected or ad-hocwork must be done at short notice, which is a feature of

much operational planning. In the repairs department, for example, routine preventive maintenance

can be scheduled, but breakdowns occur unexpectedly and unplanned repair work must be done 'on

the spot' by a repairs department supervisor.

3.8 MANAGEMENT CONTROL SYSTEMSA

management control system

is a system which measures and corrects the performance of activities

of subordinates in order to make sure that the objectives of the organisation are being met and the

plans devised to attain them are being carried out.

The basic elements of a management control system are as follows:

Planningwhat to do and identifying the desired results.

Recording the plan which should incorporate standards of efficiency or targets.

Carrying out the plan and measuring actual results achieved.

Comparing actual results against the plans.

Evaluating the comparison, and deciding whether further action is necessary.

Where corrective action is necessary, this should be implemented.

Information to assist with this process is needed for recording the plan, comparing actual results

against the plan and evaluating the comparison. The information is often financial or partially financial

in nature, although it will include non-financial information too. This is why management accounting,

by providing information of both a financial and non-financial nature, should be an integral part of a

management control system.

3.9 TYPES OF INFORMATIONInformation within an organisation can be analysed into the threelevels assumed in Anthony's

hierarchy: strategic; tactical; and operational information.

3.9.1 STRATEGIC INFORMATION

Strategic informationisused bysenior managersto plan the objectives of their organisation, and to

assess whether the objectives are being met in practice. Examples of such information include overallprofitability, the profitability of different segments of the business, capital equipment needs and so

on.


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Strategic information

therefore has the following features:

It is derived from bothinternal

andexternal

sources.

It is summarised at a high level, and is directed at senior management.

It is relevant to the long term.

It deals with the whole organisation.

It is often prepared on an d hocbasis. It is both quantitativeand qualitative.

It cannot provide complete certainty, given that the future cannot be predicted.

3.9.2 TACTICAL INFORMATION

Tactical informationisused bymiddle managementto decide how the resources of the business

should be employed, and to monitor how they are being and have been employed. Such information

includes productivity measurements(output per direct labour hour or per machine hour), budgetary

control

orvariance analysis reports

, andcash flow forecasts

.

Tactical information

has the following features:

It is primarily generated internally. It is summarised at a

lower level

and is directed at middle management as well as more senior

management.

It is relevant to the short and medium term.

It describes or analyses activities or departments.

It is prepared routinely andregularly

.

It is based largely on quantitativemeasures.

It allows the monitoringof business performance against goals.

3.9.3 OPERATIONAL INFORMATIONOperational informationisused by front-line managers, such as foremen and supervisors, to ensure

that specific tasksare planned and carried out properly. In the payroll office, for example, information

at this level will relate to day-rate labour and will include the hours worked each week by each

employee, the rate of pay per hour, details of deductions, and for the purpose of wages analysis,

details of the time each person spent on individual jobs during the week. In this example, the

information is required weekly, but more urgent operational information, such as the amount of raw

materials being input to a production process, may be required daily, hourly, or in the case of

automated production, second by second.

Operational information

has the following features:

It is derived almost entirely from internalsources. It is highly detailed, being the processing of raw data.

It relates to the immediate term, and is prepared constantly, or very frequently.

It is task-specific and largely quantitative.

4 INFORMATION

Section overview

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

Information is data that has been processed so as to be meaningful.

Good information is relevant, complete, accurate and clear. It inspires confidence, is

appropriately communicated, its volume is manageable, it is timely to produce and it costs

less to produce than the benefits it provides.


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4.1 DATA AND INFORMATION

Definitions

Datais the raw material for data processing. Data relates to facts, events and transactions.

Information is data that has been processed so as to be meaningful to the person who receives it.

Information is knowledge communicated or received concerning facts or circumstances.

Information is sometimes referred to as processed data. The terms 'information' and 'data' are often

used interchangeably. It is important to understand the difference between these two terms.

For example, researchers who conduct market research surveys might ask members of the public to

complete questionnaires about a product or a service. These completed questionnaires are data; they

are processed and analysed in order to prepare a report on the survey. This resulting report is

information and may be used by management for decision-making purposes.

Management accounting systems provide information, and the quality of the management accounting

system depends on the quality of the information that it provides.

4.2 QUALITIES OF GOOD INFORMATIONGood information is relevant, complete, accurate and clear. It inspires confidence, is appropriately

communicated and its volume is manageable. It is timely and its cost to produce is less than the

benefits it provides.

Let us look at those qualities in more detail.

a. Relevance. Information should have a purpose; otherwise there is unlikely to be sufficient benefit

from processing data to justify the cost of providing it. Information must be relevant to the purpose

for which a manager wants to use it.

b. Completeness. Information users should have all the information they need to do the job properly.If they do not have a complete picture of the situation, they might well make bad decisions.

c. Reliability. Information should be reliable. This means that it should be sufficiently accuratefor its

purpose. Using incorrect information could have serious and damaging consequences. However,

there is no need to go into unnecessary detail. Where there is some uncertainty about the accuracy

or reliability, for example when making forecasts about the future, the nature of the uncertainty

should be fully understood, so that the information is used and treated with caution.

d. Clarity.Information must be clear to the user. If the user does not understand it properly they will

not be able to use it properly. Lack of clarity is one of the causes of a breakdown in

communication. It is therefore important to choose the most appropriate presentation medium or

channel of communication.

e. Confidence.Information must be trusted by the managers who are expected to use it. However

not all information is certain. Some information has to be certain, especially operating information,

for example, related to a production process. Strategic information, especially relating to the

environment, is uncertain. However, if the assumptions underlying it are clearly stated, this might

enhance the confidence with which the information is perceived. Having confidence in information

depends on other qualities of the information reliability, relevance and clarity.

f. Communication. Within any organisation, individuals are given the authority to do certain tasks,

and they must be given the information they need to do them. For example, an office manager

might be made responsible for controlling expenditure in the office, and given a budget

expenditure limit for the year. As the year progresses, they might try to keep expenditure in check

but unless they are told throughout the year what current total expenditure is to date, they will findit difficult to judge whether they are keeping within budget or not.

g. Volume. There are physical and mental limitations to what a person can read, absorb and

understand properly before taking action. An inappropriate amount of information, even if it is all

relevant, cannot be handled. Reports to management must therefore be clearand conciseand in


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many systems, control action works basically on the 'exception

principle, withreports

only being

produced if there is an issue that needs to be brought to management attention or investigated

further .

h. Timing. Information should be timely. If it is not available until after a decision is made, it will be

useful only for comparisons and longer-term control. Information prepared too frequently can be a

serious disadvantage. If, for example, a decision is taken at a monthly meeting about a certain

aspect of a company's operations, information to make the decision is only required once a month,and weekly reports would be a time-consuming waste of effort.

i. Channel of communication.Information should be communicated or should be accessible

through appropriate channels of communication. There are occasions when using one particular

method of communication will be better than others. Some internal memoranda may be better

sent by 'electronic mail'. Some information is best communicated informally by telephone or

word-of-mouth, whereas other information ought to be formally communicated in writing or

figures. Electronic methods of data transmission, data storage and data access are integral parts of

most management accounting systems.

j.Cost

. Information should have some value, otherwise it would not be worth the cost of collecting

and filing it. The benefits obtainable from the information must also exceed the costs of acquiringit. Whenever management is trying to decide whether or not to produce information for a

particular purpose, for example, whether to computerise an operation or to build a financial

planning model, a cost/benefit analysis ought to be undertaken.

k. Comparability. Information needs to be measured and reported in a similar manner so that

meaningful comparisons can be made over time.

Question 2: Value of information

Managers receive a monthly performance report indicating that costs in the previous month were 15%

more than expected. Which one of the following would be the most appropriate response by

management to this information?

A Control action should be taken to deal with the problem and reduce costs by 15%.

B The overspend indicates that planning targets will not be met, and forecasts should be revised.

C The reasons for the overspend may be controllable; therefore they should be investigated with a

view to reducing the overspend as much as possible.

D The reasons for the overspend may be controllable or uncontrollable; therefore they should be

investigated with a view either to reducing the overspend as much as possible or revising forecasts

or targets.

(The answer is at the end of the chapter)

4.3 WHY IS INFORMATION IMPORTANT?Information is important for management because it provides awareness and understanding of an

issue. By helping management to makebetter-informed decisions

, information should contribute

significantly to better-quality decision-making. Consider the following problems and what

management needs to solve these problems.

a. A company wishes to launch a new product. The company's pricing policy is to charge cost plus

20%. What should the price of the product be?

b. An organisation's widget-making machine has a fault. The organisation has to decide whether to

repair the machine, buy a new machine or hire a machine. What does the organisation do if its aim

is to control costs?

c. A company is considering offering a discount of 2% to those customers who pay an invoice within

seven days of the invoice date and a discount of 1% to those customers who pay an invoice within

eight to fourteen days of the invoice date. How much will this discount offer cost the company?


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In solving these and a wide variety of other problems, management needs information.

a. In problem (a) above, management would need information about the cost of the new product.

b. Faced with problem (b), management would need information on the cost of repairing, buying and

hiring the machine.

c. To calculate the cost of the discount offer described in (c), information would be required about

current sales settlement patterns and expected changes to the pattern if discounts were offered.The successful management of anyorganisation depends on information: organisations in the public

sector, such as hospitals and local authorities and other non-profit making organisations such as

charities and clubs need information for decision making and for reporting the results of their activities

just as multi-nationals do. For example, a local government authority needs to know what resources

are being used to deliver services to residents. A tennis club needs to know the cost of undertaking its

various activities so that it can determine the amount of annual subscription it should charge its

members.

4.4 WHAT TYPE OF INFORMATION IS NEEDED?Managers require a mixture of financial and non-financial information.

Worked Example: Financial and non-financial information

Assume that the management of ABC Co have decided to provide a cafeteria for their employees.

a. The financial informationrequired by management might include cafeteria staff costs, costs of

subsidising meals, capital costs, costs of heat and light and so on.

b. Thenon-financial information might include comment on the effect on employee morale of the

provision of cafeteria facilities, details of the number of meals served each day, meter readings for

gas and electricity and attendance records for cafeteria employees.

ABC Co could now combine financial and non-financial information to calculate the average cost to

the company of each meal served, thereby enabling them to predict total costs depending on thenumber of employees in the work force.

4.4.1 NON-FINANCIAL INFORMATION

Management accounting is mainly concerned with the provision of financial information to aid

planning, control and decision making. However, the management accountant cannot ignore non-

financial influences and should qualify the information provided with non-financial matters as

appropriate.

Non-financial information may relate to matters such as quality, speed, flexibility, creativity, motivation,

customersatisfaction

andcompetitive advantage

.

4.5 PRESENTATION OF INFORMATION TO MANAGEMENT

Reports

Information may be communicated by word of mouth, but in many organisations, especially larger

organisations, formal reports are an important method of communication. Financial information in

particular is often presented in the form of reports, because managers cannot always easily and

quickly understand financial details, and need to have the information presented to them in a

structured way. Management accountants need to be skilled in writing and presenting formal reports.

Main features of a report TITLE

Most reports are usually given a heading to show that it is a report.


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C

H

A

P

T

E

R

WHO IS THE REPORT INTENDED FOR?

It is vital that the intended recipients of a report are clearly identified. For example, if you are

writing a report for Joe Rafter, it should be clearly stated at the head of the report.

WHO IS THE REPORT FROM?

If the recipients of the report have any comments or queries, it is important that they know who to

contact.

DATE

We have already mentioned that information should be communicated at the most appropriate

time. It is also important to show this timeliness by giving your report a date.

SUBJECT: REPORT HEADING

What is the report about? Managers are likely to receive a great number of reports that they need

to review. It is useful to know what a report is about before you read it! A report should therefore

have a clear heading or title.

SUB-HEADINGS

Unless they are very brief, reports should be divided into sections, each with a clear sub-heading.

The first heading may be an introduction (explaining the purpose of the report), followed by an

executive summary (setting out both the purpose and the findings of the report). The final sub-

heading may be for a summary, conclusion or recommendation.

APPENDIX

In general, information is summarised in a report and the more detailed calculations and data are

included in an appendix at the end of the report.

5 MANAGEMENT ACCOUNTING SYSTEMS

Section overview

Management accounting systems developed from cost accounting systems. They are used

for scorekeeping, directing management attention and problem solving.

We start this section by briefly looking at how management accounting systems have developed, and

we consider the implications of systems not developing quickly enough to keep pace with changes in

the business world.

5.1 THE DEVELOPMENT OF MANAGEMENT ACCOUNTINGManagement accounting has developed gradually over time, and has changed in nature. Originally,

cost accounting systems were used to record costs and report costs to management in manufacturing

industries, so that product costs and profitability could be better managed. Historically manufacturing

costs were a larger proportion of total costs, and a larger proportion of total manufacturing costs

consisted of direct materials and direct labour costs, than is found in many modern manufacturing

industries. Manufacturing costs were 'driven' by direct labour hours worked or machine hours

operated.

Cost and management accounting information was also used for planning, particularly for annual

budgeting. Budgetary control reports were produced regularly, typically every month, to informmanagement about actual performance and how this compared against the budget targets.

Some industries produced standard products in large quantities, so that standard costing systems

could be operated for budgeting and also for control reporting (standard costing variance reports).

1.1


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A significant development in management accounting was the use of marginal costing, and the

separation of costs into fixed and variable costs. Marginal costing concepts were applied to planning

and other aspects of decision-making. Management accounting systems became more relevant and

reliable in providing information to management for decision-making, through the application of

concepts and techniques such as relevant costs and discounted cash flow analysis.

More recently, management accounting systems have developed quite rapidly, in a variety of different

ways. Service industries and non-manufacturing activities became more important for many

companies, and management accounting systems were developed within service industries, and also

for activities such as marketing and distribution.

Management accounting techniques have also been developed to analyse costs in different ways,

particularly overhead costs, and techniques such as activity based costing and customer profitability

analysis have emerged.

The importance of information for strategic planning has also been recognised, and management

accounting has expanded from the provision of information at the management control level to

information provision for strategic planning and control. Management accounting systems must now

gather non-financial as well as financial information, and information from external as well as internal

sources. Corporate Performance Management (CPM) and Business Intelligence (BI) software are

examples of such systems.

There have also been changes in manufacturing techniques, such as Total Quality Management and

Just-in-Time (JIT) production. As manufacturing management has changed, the information to

support management management accounting

Documents

FL086 Management Accounting Study Manual 2015 (1) - Copy