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F2 MANAGEMENT ACCOUNTING

PART A: NATURE AND PURPOSE OF COST AND MANAGEMENT ACCOUNTING | 1: Information For Management

1 Information

1.1 Data vs. Information

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

Information is data that has been processed in such a way that it is meaningful to the person whoreceives it. It is sometimes referred as processed data .Information is anything that is communicated. It is important to help us plan and control our businessactivities.

1.2 Desirable Qualities of Good Information

(a) Relevance Useful to the user; Keeps to the point and not misleading(b) Completeness Provides a complete picture required by user(c) Accuracy True and fair; Objective and verifiable (but no need for pointless accuracy)(d) Clarity Understandable; Clear presentation(e) Confidence Reliable; Trusted; Responsible; Certain (assumptions should be clearly stated)(f) Communication Passes to the right person(g) Comm. Channel Using the most suitable method for planning and control(h) Volume Clear and concise; Avoid unnecessary description and details(i) Timing Provided as soon as possible when required, for necessary actions to be taken(j) Cost Benefit of the information must exceed the cost of obtaining them

1.3 Why is Information Important?

Information helps management to:(a) Plan and control(b) Make decisions about the use of resources (e.g. materials, labour and cash)(c) Communicate and co-ordinate business activities(d) Report to external parties (e.g. banks, shareholders, government; stakeholders)

1.4 What Type of Information is Needed (Examples)

Financial Information:Profit and Loss Account

Balance SheetCash-flow Statement (Budget)

Non-Financial Information:Number of EmployeesCustomers and Suppliers Information Production Specification, Formula, Recipe, etc.

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F2 MANAGEMENT ACCOUNTING

PART A: NATURE AND PURPOSE OF COST AND MANAGEMENT ACCOUNTING | 1: Information For Management

2 Planning, Control and Decision Making

2.1 Objectives of Organisation

An objective is the goal of an organisation. To achieve an objective, there must be a strategy, which is thecourse of action that might enable an organisation to achieve its purpose.

There are 2 types of organisation:Profit Making OrganisationObjective is to:

Maximise Profits and RevenueMaximise Shareholders Value Maximise Market ShareMinimise Costs

Non-Profit OrganisationObjective is to:

Provide goods and services (that is not normally attractive to businessmen)Minimise costs so that goods and services are affordable

2.2 Planning and Control

Information for management is likely to be used for planning, control and decision making.Organisations should have an implemented planning process which establishes objectives and haveappropriate strategies to achieve them. These corporate objectives will embrace both long-term strategicplans and short-term operational aims.

(i) Strategic Planning [Responsibility of Board of Directors]The process of deciding on:

Objectives of the organisationChanges in the objectivesResources used to attain the objectivesPolicies to govern acquisitionUse and disposition of resources

(ii) Tactical Planning (Management Control) [Responsibility of Managers]Efficient and effective use of resources (Optimum output from input resources)Resources (4Ms):

Manpower Training, posting, career advancement, staff retentionMaterial Acquisition, planning, usage, storageMachine Model to acquire, technology, maintenance and repairMoney Sources of finance, cost of capital. Required return

(iii) Operational Planning [Responsibility of Supervisors]Ensure specific tasks are carried outConcerns with day-to-day activitiesVery detailed planning

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PART A: NATURE AND PURPOSE OF COST AND MANAGEMENT ACCOUNTING | 1: Information For Management

2.3 Management Control Systems

A system which measures and corrects the performance of activities of subordinates in order to make surethe objectives of an organisation are being met and plans devised to attain them are carried out.

2.4 Types of InformationStrategic Tactical OperationalFrom both internal and external Primarily internal Almost entirely internal

Summarised at high level Summarised at low level Highly detailed (raw data)

Relevant to the long term Relevant to the short and middleterm

Related to immediate term

Deals with whole organisation Describes or analyses activitiesor departments

Task-specific

Prepared on ad hoc basis Prepared routinely and regularly Prepared constantly, or veryfrequently

Quantitative and qualitative Based on quantitative measures Largely quantitative

Cannot provide completecertainty

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PART A: NATURE AND PURPOSE OF COST AND MANAGEMENT ACCOUNTING | 1: Information For Management

3 Financial Accounting and Cost and Management Accounting

3.1 Financial Accounts vs. Management Accounts

Financial Accounting Management AccountingReports the past Deals with the past, present and future

Required by law and standards (limited liabilitycompanies)

Not subjected to rules

Is published Is confidential

Pre-determined format Designed to suit managements needs

External users like shareholders, creditors Internal for directors and managers

Subjected to audit Need not be audited

Prepared for entire business Departmental reporting

Is general Is detailed in specific areas

Expressed in monetary terms Not always expressed in monetary terms

Concerned with historical cost reporting Concerned with cost that are useful for decisionmaking

Reporting of overall performance Reporting for individual responsibility

3.2 Cost Accounts

Cost accounting is part of management accounting.

Cost accounting is concerned with:Preparing statements (e.g. budget, costing)

Cost data collectionApplying costs to inventory, products and services

Management accounting is concerned with:Using financial data and communicating it as information to users

3.2 Purpose of Costing

(a) Ascertainment of cost (e.g. of goods, services, departments)(b) Planning(c) Decision making

(d) Control(e) Performance evaluation

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F2 MANAGEMENT ACCOUNTING

PART A: NATURE AND PURPOSE OF COST AND MANAGEMENT ACCOUNTING | 1: Information For Management

4 Report Writing and Planning

Points of a good report:(a) Information should be relevant to user(b) Precise and focus on objectives(c) Clear structure and sequence(d) Short and sharp sentences and paragraphs(e) Avoid technical jargons(f) Use standard report format

Typical layout:

To:

From:

Date:

Title/Subject:

(Introduction)

(Body)

(Conclusion)

__________Signature

[Appendix attached behind]