MA2 Managing Costs & Finance

Management Information

Data: is raw facts, figures, numbers and words relating to matters of an organization.

Information: is data processed to be meaningful and useful to an organization.

TYPES OF DATA
The data can be further classified as
➢ Primary and secondary data
➢ Quantitative and qualitative data

✓ Primary and secondary data

Primary data: is data collected for specific purpose; raw data is basically primary data. Example: list
of numbers
Secondary data: is data which have already been collected elsewhere for some other purpose, but
which can be used or adapted for the survey being conducted

✓ Quantitative data and Qualitative data

Qualitative data: is data that cannot be measured and expressed in numbers but may reflect
distinguishing characteristics. For example, the quality of labour used.
Quantitative data: is data that can be measured and expressed in numbers. Example: the standard
labour hours required to produce one unit of output.

Quantitative data can be further classified into discrete and continuous data
Discrete data: is data which only takes finite or countable number of values within given range. For
example, number of goals scored by a football player in last world cup, shoe size, etc.
Continuous data: is data, which can take on any value. They are measured rather than counted. For
example, height of all members of your family.

MANAGEMENT
▪ People in-charge of running the business
▪ For example Managers or Other Organization

M ANAGEMENT INFORMATION (MI)

• Information required by the managers for the purpose of planning, control and decision making
• Information given to people who run the business
• Information required varies according to responsibilities. For example a supervisor at a factory would
require a daily output report. A sales manager would require a weekly sales report etc.
• Information may be used for pricing, valuation of stock, determining profitability, deciding on purchase
of capital assets (fixed assets) etc.

Types of Management Information

Most organizations require the following types of Management information
➢ Financial information
▪ Measured in terms of money
▪ For example sales of $10,000 in May
➢ Non-financial information
▪ not measured in terms of money.

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▪ For example customer satisfaction, trends, quality

➢ Combination of financial and non-financial information
▪ Increase sales by $2,000 due to good quality of product

PURPOSE OF MANAGEMENT INFORMATION

Major purpose of management information is
▪ Planning
▪ Control
▪ Decision-making

Decision making in a broader concept and the planning stage and control stage also includes decision
making in it
➢ Planning: Planning involves the establishment of goals and objectives. It also involves selecting
appropriate strategies to achieve that objective.
▪ The management has to plan and manage resources that will be required to achieve the
objectives. Plan what resources are required and how they will be used.
▪ Resources can be monetary (like cash required for business) or human resources (like
employees)
▪ Managing resources means how much would be spending on which project, how many people
will be working on that project etc.

Planning involves long term planning & short-term planning.

Long term planning

It is also known as Corporate Planning involves selecting appropriate strategies for preparing long-
term plans to achieve objectives.
▪ Time span depend on organization’s industry and its environment usually for 3, 5,7,10 years.
▪ Detailed planning.
▪ Lengthy process.
▪ Decisions are taken by senior management or top-level management and approved by Board of
directors.

Short term or tactical planning

Long term plans should be sub-divided into short-term plans for operational purposes usually
converted it into one year’s planning.
▪ Time span is shorter usually one year like budgets.
▪ planning at departmental or functional level.
▪ By achieving short-term plans, organization can achieve its long-term plans.

➢ Control: When the plan is implemented, it should be evaluated by comparing actual results with plan
so that to identify derivation if any and investigate it.

Controls are at two stages:

1. Detailed operational plans compared with actual results of organization regularly, report any
variance, and take corrective actions. Management control is the process by which managers
ensure that resources are obtained and used effectively and efficiently in the accomplishment of
the organization’s objectives.
● Effectively means that resources are used to achieve the organisation’s objectives.

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● Efficiently means that the optimum (best possible) output is produced from the resources
used.
2. Review long-term plan to assess whether the objective plan is modified if required to avoid
serious damage in future.

Note: Planning is required for good control and without control, planning is useless.
➢ Decision Making: Decision-making involves a choice between different alternatives. Management
accountant provide good information for each alternative so that managers take an informed
decision. Decisions are taken at planning & control stages.

FEATURES OF MANAGEMENT INFORMATION

➢ Reliable: It should present a correct picture of what is happening. The source of the information
should be reliable. For example if questionnaires in a survey filled out by same persons, it will not
present the correct picture of the market demand
➢ Timely: It should be in time for the decisions to be made. Information should be provided when
required.
➢ Relevant: It should be relevant according to the needs of the management. Mostly senior managers
may require summaries. Unnecessary information should not be provided to the relevant person.
➢ Complete: It should have all required information for the job. Information that is correct but excludes
something important is likely to be of little value.
➢ Accurate: No unnecessary detail but should be accurate. In certain cases, figures may be rounded
off to make reports easier. There should be no mistake. Management information is not absolutely
accurate.
➢ Clear: Information should be in understandable form, communicated properly, clearly presented and
use right communication channel. Avoid accounting jargons.
➢ Timeliness: Time period covered by reports may vary for example monthly, weekly or daily
➢ Cost effectiveness: The costs of providing the information must not outweigh the 'value added'
benefits derived from its use.

Costs of information
▪ Cost of collecting data
▪ Cost of processing data
▪ Cost of storing data
▪ Opportunity cost of management time

Benefits of information
▪ Helps in decision making
▪ Values arising from good decision
▪ Reduces unnecessary cost
▪ Adoption of better marketing strategies

SOURCES OF DATA AND INFORMATION

Data and information come from many sources - both internal (inside the business) and external.

Internal Information: Accounting records are a prime source of internal information. They detail the
transactions of the business in the past - which may be used as the basis for
planning for the future (e.g. preparing a financial budget or forecast).

A lot of internal information is connected to accounting systems-but is not directly part of them. Example:

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- Records of the people employed by the business (personal details; what they get paid; skills and
experience; training records)
- Data on the costs associated with business processes (e.g. costing for contracts entered into by
the business)

- Data from the production department (e.g. number of machines; capacity; repair record)
- Data from activities in direct contact with the customer (e.g. analysis of calls received and missed
in a call centre)

External Information:
As the term implies, this is information that is obtained from outside the business. There are several
categories of external information:
➢ Information relating to way a business should undertake its activities: E.g. businesses need to
keep records so that they can collect taxes on behalf of the government. So a business needs to
obtain regular information about the taxation system (e.g. PAYE, VAT, Corporation Tax) and what
actions it needs to take. Increasingly this kind of information (and the return forms a business needs
to send) is provided in digital format. Similarly, a business needs to be aware of key legal areas (e.g.
environmental legislation; health & safety regulation; employment law). There is a whole publishing
industry devoted to selling this kind of information to businesses.
➢ Information about the markets in which a business operates: This kind of external information is
critically important to a business. It is often referred to as "market" or "competitive intelligence".

Most of the external information that a business needs can be obtained from marketing research.
Marketing research can help a business do one or more of the following:
1. Gain a more detailed understanding of consumers’ needs – marketing research can help firms to
discover consumers’ opinions on a huge range of issues, e.g. views on products’ prices, packaging,
recent advertising campaigns.
2. Reduce the risk of product/business failure – there is no guarantee that any new idea will be a
commercial success, but accurate and up-to-date information on the market can help a business
make informed decisions, hopefully leading to products that consumers want in sufficient numbers to
achieve commercial success.
3. Forecast future trends – marketing research can not only provide information regarding the current
state of the market but it can also be used to anticipate customer needs future customer needs. Firms
can then make the necessary adjustments to their product portfolios and levels of output in order to
remain successful.

TYPES OF SOURCE OF INFORMATION

▪ Journal: Journal articles are primary information resources. Journals are published on a regular
basis. Each journal title focuses on a specific area or discipline. They describe research - the
generation of new knowledge - and focus on very specific topics.
▪ Newspapers: Newspapers are primary sources of information. They are an excellent source when
looking for current and up-to-date information.
▪ Websites: W ebsites are useful sources of current information and for an overview on a topic. Check
our evaluating websites page to ensure the information you find is reliable.
▪ Statistics: Statistics are primary information. They can be very useful for looking at patterns and
trends.
▪ Trade association: A trade association, also known as an industry trade group, business
association or sector association, is an organization founded and funded by businesses that
operate in a specific industry. An industry trade association participates in public relations activities

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such as advertising, education, political donations, lobbying and publishing, but its main focus is
collaboration between companies, or standardization.
▪ Government Authorities: Official states are supplied by many governments. For example, In UK,
The Annual Abstract of statistics, The United Kingdom National Accounts, Social Trends, etc.
▪ Economic Environment: The economic environment has important influence on local and national
level. The forecast state of the economy will influence the planning process for organisations which
operates within it. In the time of boom, the overall planning problem will be to identify the demand,
whereas in times of recession, the emphasis will be on cost effectiveness, continuing profitability,
survival and competition.

M ANAGEMENT ACCOUNTING VERSUS FINANCIAL ACCOUNTING

Management Accounting:
To provide management with information to help them manage resources efficiently and make sensible
decisions. There are no specific rules for management accounting. Depends on needs of organizations

Cost Accounting:
“Cost accounting involves applying a set of principles, method and techniques to determine and analyse
costs within the separate units of a business”.

Financial Accounting:
To provide accurate financial information for the company accounts which will be used by the senior
management (Balance Sheet and Profit and Loss) and external parties (e.g. investors). Data used to
prepare management accounts & financial accounts are same but analysed differently.

Management accounts Financial accounts

• Internal user • External user
• It can be prepared daily, weekly, monthly or • Prepare after a defined period mostly yearly
periodically.
• No legal requirement to prepare it. • Companies have legal requirement to prepare
it.
• No specific format. Format is decided by • Have pre-determined formats. Format is
management. defined by IAS, IFRS, and Law.
• It is about activities of organization • It is about whole organization
• It includes financial & non-financial information • It is mostly financial information
• Historical, current & future planning of business. • Historical and current picture of business
• Help in planning, control & decision making

ROLE OF MANAGEMENT ACCOUNTANT

The role of a management accountant assists the managers to manage by
▪ Provide information for planning;
▪ Supplying performance reports for controlling;
▪ Tailoring the accounting system to the organisational structure and thus reinforcing the objectives of
the organizational framework;
▪ Preparing the budgets that assist in providing the motivation to employees.

Limitations of Management Accounting Information

1. If any feature of management information is not present then this will be limit the usefulness of
information.

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2. It does not need to be accurate down to every penny/paisa. Management accounting information is
not absolutely accurate it is just accurate.
3. Decisions taken will depend on how frequently the reports are produced. For example of a report
comparing actual with budgeted is produced every month, information regarding any problems that
are found will be useful in the next month not in the current month.
4. If managers do not communicate with the cost and management accountant, the information provided
by the accountant might not be the type or of the format that the manager requires
5. When comparisons are being made between different time periods, care has to be taken that price
changes are taken into consideration.
6. Even if the information provided by the cost and management accountant is timely and reliable, if it is
incomplete, it will not be of any use.
7. Most managers are not accountants so the cost accountant should ensure that the information that
he/she is giving to the manager doesn’t contain any accountancy jargon and explains matters in non-
accountancy terms wherever possible so that it is understood by the manager
8. If the non-financial factors are not considered, a correct picture might not be obtained.

RESPONSIBILITY ACCOUNTING:
An accounting system under which responsibilities; like revenue and cost, are assigned to managers
(responsible persons);

Responsibility Centre: a function or department of an organization that is headed by a manager and the
manager has direct responsibility for its performance is known as a responsibility centre.

Responsibility centres are usually divided into different categories. Here describes cost centre, revenue
centre, profit centre and investment centre.

➢ Cost Centre: A cost centre is a production or service location, function, activity or item of equipment
for which costs are accumulated.
▪ A unit of an organization to which costs can be separately attributed
▪ If a manager is responsible for costs attributable to his area of business, it means that the
manager is responsible for a cost centre.
▪ Each cost centre will have a cost code and so all items of expenditure will be recorded according
to the correct cost code.

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➢ Revenue Centre
▪ A centre, which raises revenue and has no responsibility for costs.
▪ Manager of revenue centre is accountable only for revenues.
▪ For example department which obtains grants and donations for a charity, sales department

➢ Profit Centre: A profit centre is a part of a business accountable for both cost and revenue.
▪ If a manager is responsible for costs as well as income attributable to his area of business, it
means that the manager is responsible for a profit centre
▪ A profit centre manager is likely to be a senior person in the organization who influences over
both revenue and cost.
▪ A profit centre is likely to cover a large area of operations
▪ A profit centre might be an entire division within the organization or there may be a separate profit
centre for each product, brand, service etc.
▪ There are likely to be several cost centres within a profit centre.

➢ Investment Centre: It refers to a profit centre with an additional responsibility for capital investment.
▪ Manager of investment centre has the responsibility for profit in relation to capital invested in his
area.
▪ Mostly used in public sector organizations where the organization is required to make a particular
level of profit in relation to their fixed assets (return on capital employed)
▪ Several profit centres might share the same capital items e.g. same building, stores etc. So an
investment centre is likely to include several profit centres.

Cost codes: After classifying cost, a coding system can be applied to make it easier to manage the cost
data. It can be manual or computerized. Each cost is identified through its unique code. Some possible
characteristics on which costs are separated are:
▪ Nature of cost (material, labour, overheads), It is known as subjective classification.
▪ Type of cost (direct and indirect)
▪ Cost centre or cost units to which cost should be related (known as subjective classification)

Features of good coding system: An effective and efficient coding system should include the following
features:
▪ Code must be easy to use and well communicated.
▪ Unique code
▪ Coding system must allow for expansion
▪ Codes should be flexible
▪ It should be comprehensive system ( suitable code )
▪ Codes should be time-saving
▪ Codes should be error free
▪ Regularly updated codes
▪ Code numbers should be issued from a single central point ( standardisation)
▪ Dots, dashes. Colon etc. should be avoided in codes
▪ They should be uniform ( length or structure)
▪ Not confusing.

TYPES OF CODES

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➢ Composite codes: In costing, the first three digits in the composite code 211392 might indicate the
nature of the expenditure ( subjective classification ) and the last three might indicate the cost centre
of cost unit to be charged ( objective classification)

So the digit 211 might refer to 2 materials, 1 raw material, 1 timber

This would indicate to anyone familiar with the coding system that the expenditure was incurred on
timber. The digit 392 might refer to: 3 direct cost, 9 factory alpha, 2 assembly department.
This would indicate the expenditure was to be charged as a direct material cost to the assembly in
factory alpha.

➢ Sequence (or progressive) codes: Numbers are given to items in ordinary numerical sequence, so
that there is no obvious connection between an item and its code.
000042 4cm nails
For example:
000043 Office staplers
000044 Hand wrench

➢ Group classification codes: These are an improvement on simple sequence codes, in that a digit
(often the first one) indicates the classification of an item. For example:

4NNNNN Nails
5NNNNN Screws
6NNNNN bolts

NOTE: ‘N’ stands for another digit; NNNNN indicates there are five further digits in the code.

➢ Faceted codes: These are refinement of group classification codes, in that each digit of the code
gives information about an item.
➢ Significant digit codes: These incorporate some digit(s) which is (are) part of the description of the
item being coded. For example:
5000 Screws 5060 60mm screws
5050 50mm screws 5070 75mm screws

➢ Hierarchical codes: This is a type of faceted code where each digit represents a classification, and
each digit further to the right represents a smaller subset than those to the left. For example:
32 = round headed screws 3 = screws
322 = steel (round headed ) screws and so on 31 = flat headed screws

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A coding system does not have to be structured entirely on any one of the above systems. It can mix
the various features according to the items which need to be coded.

Advantages of coding system

▪ A code is usually briefer than a description, thereby saving clerical time in a manual system and
storage in a computerised system
▪ A code is more precise than a description and therefore reduces a ambiguity
▪ Coding facilitates data processing.

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