ACCOUNTING FOR MANAGEMENT

CHAPTER 1

Learning outcomes

At the end of this lesson, you should be able to:

(a) Describe the purpose and role of cost and management accounting within an organisation.

(b) Compare and contrast financial accounting with cost and management accounting.

(c) Outline the managerial processes of planning, decision making and control.

(d) Explain the difference between strategic, tactical and operational planning.

(e) Distinguish between 'data' and 'information'.

(f) Identify and explain the attributes of good information.

Definition of Management Accounting

Management accounting, also called Managerial accounting, is a branch of accounting that creates

statements, reports, and documents that help management in making better decisions related to

their business’ performance.

The nature, source and purpose of management information

1. Information

1.1 Data and information

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

and so forth.
Information is data that has been processed in such a way as to be meaningful to the person who

receives it. Information is anything that is communicated.

1.2 Qualities of good information

(a) Relevance. Information must be relevant to the purpose for which a manager wants to use it.

In practice, far too many reports fail to 'keep to the point' and contain irrelevant paragraphs which

only annoy the managers reading them.

(b) Completeness. An information user should have all the information they need to do their job

properly. If they do not have a complete picture of the situation, they might well make bad

decisions.

(c) Accuracy. Information should be sufficiently accurate because using incorrect information

could have serious and damaging consequences.

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

cannot use it properly. Lack of clarity is one of the causes of a breakdown in communication. It is

therefore important to choose the most appropriate presentation medium or channel of

communication.

(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.

(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. An office manager might be made

responsible for controlling expenditures in the office, and given a budget expenditure limit for the

year. As the year progresses, the manager might try to keep expenditure in check but unless they

are told throughout the year what is the current total expenditure to date, they will find it 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 enormous mountain of information, even if it is all

relevant, cannot be handled. Reports to management must therefore be clear and concise and, in

many systems, control action works basically on the 'exception' principle.

(h) Timing. Information which is not available until after a decision is made will be useful only

for comparisons and longer-term control, and may serve no purpose even then. 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. There are occasions when using one particular method of

communication will be better than others. For example, job vacancies should be announced in a

medium where they will be brought to the attention of the people most likely to be interested.

The channel of communication might be the company's intranet, a national or local newspaper, a

professional magazine, a job centre, an online recruitment website or school careers office. Some

communication may suit electronic mail. Other information may best be communicated by

telephone or word of mouth. A formal report may be the best format for comprehensive

information that includes graphics and figures.

(j) Cost. Information should have some value, otherwise it would not be worth the cost of

collecting, distributing and storing it. The benefits obtainable from the information must also

exceed the costs of acquiring it, and whenever management is trying to decide whether or not to

produce information for a particular purpose a cost/benefit study ought to be made.

Types of Information in Business

Most organisations require the following types of information.

Financial

Non-financial

A combination of financial and non-financial information.

Example: Financial and non-financial information

Suppose that the management of ABC Co have decided to provide a canteen for their employees.

(a) The financial information required by management might include canteen staff costs, costs of

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

(b) The non-financial information might include management comment on the effect on

employee morale of the provision of canteen facilities, details of the number of meals served each

day, meter readings for gas and electricity and attendance records for canteen employees.

Purpose/Uses of Management Information

Information for management is likely to be used for planning, control and decision making.

1. Planning

Planning involves the following:

 Establishing objectives

Selecting appropriate strategies to achieve those objectives

2. Control

Control involves comparing the plans set out by the business with the results actually

achieved. There are two stages in the control process.

(a) The performance of the organisation as set out in the detailed operational plans is compared

with the actual performance of the organisation on a regular and continuous basis. Any deviations

from the plans can then be identified and corrective action taken.

(b) The corporate plan is reviewed in the light of the comparisons made and any changes in the

parameters on which the plan was based (such as new competitors and government instructions)

to assess whether the objectives of the plan can be achieved. The plan is modified as necessary

before any serious damage to the organisation's future success occurs.

3. Decision making

Management is decision taking. Managers of all levels within an organisation take decisions.

Decision

making always involves a choice between alternatives and it is the role of the management

accountant

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

Anthony's view of management activity

R N Anthony, a leading writer on organisational control, has suggested that the activities of

planning, control and decision making should not be separated since all managers make planning

and control decisions. He has identified three types of management activity.

a. Strategic planning

Strategic plans are those which set or change the objectives or strategic targets of an organisation.

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

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

assets.

b. Tactical/Management control

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

control is concerned with decisions about the efficient and effective use of an organisation's

resources to achieve these objectives or targets.

c. Operational control

Operational control is the task of ensuring that specific tasks are carried out effectively and

efficiently.

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

control.

Illustration

Consider the following.

(a) Senior management may decide that the company should increase sales by 5% per annum for

at least five years – a strategic plan.

(b) The sales director and senior sales managers will make plans to increase sales by 5% in the

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

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

– a tactical plan (management control).

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

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

Management control systems

A 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 an organisation are being met

and the plans devised to attain them are being carried out.

The management function of control is the measurement and correction of the activities of

subordinates

in order to make sure that the goals of the organisation, or planning targets, are achieved.

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

▪ Planning: deciding what 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.

Types of information

Information within an organisation can be analyzed into the three levels assumed in Anthony's

hierarchy: strategic; tactical; and operational.

Strategic information

Strategic information is used by senior managers to plan the objectives of their organisation, and

to assess whether the objectives are being met in practice. Such information includes overall

profitability, the profitability of different segments of the business and capital equipment needs.

Strategic information therefore has the following features.

• It is derived from both internal and external sources.

• It is relevant to the long term.

• It deals with the whole organisation (although it might go into some detail).

• It is often prepared on an 'ad hoc' basis.

• It is both quantitative and qualitative.

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

Tactical information

Tactical information is used by middle management to decide how the resources of the business

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

information includes productivity measurements (output per man hour or per machine hour),

budgetary control or variance analysis reports, and cash flow forecasts.

Tactical information therefore has the following features.

• It is primarily generated internally.

 • It is summarised at a lower level.

• It is relevant to the short and medium term.

• It describes or analyses activities or departments.

• It is prepared routinely and regularly.

• It is based on quantitative measures.

Operational information

Operational information is used by 'front-line' managers such as foremen, supervisors, or head

clerks to ensure that specific tasks are planned and carried out properly within a factory or office

and so on.

Operational information has the following features.

• It is derived almost entirely from internal sources.

• It is highly detailed, being the processing of raw data

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

• It is task-specific and largely quantitative.

Difference between Financial accounting and Cost and Management accounting

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

accounted for, and provide information about profits and so on for shareholders and for other

interested parties.

Management accounting systems provide information specifically for the use of managers within

an organisation.
Cost Accounting

Cost accounting is concerned with the following.

• Preparing statements (eg budgets, costing)

• Cost data collection

• Applying costs to inventory, products and services

 Practice Questions

Practice Question 1

Practice Question 2

Practice Question 3

Practice Question 4
 Assignment

Attempt Revision Kit Questions 1.5- 1.10