Chapter 1 - Management Information

PART A:
CHAPTER 1: MANAGEMENT INFORMATION

Definitions
Financial accounting – The recording, processing, and reporting of financial information to produce financial
statements.
Management accounting – The preparation of financial and non-financial information to support
management activities.
Cost accounting – Focuses on identifying costs (a monetary valuation or assessment) of resources and their
allocation to products, services, inventory or other items. It is a function of management accounting.
Differences between management accounting and financial accounting:

Aspect Management Accounting Financial Accounting
Users of Shareholders, banks, creditors, potential
Internal management only
information investors, tax authorities, government
It is required by law. Presentation and content
Requirement to
Voluntary, no requirement to produce. governed by law and generally accepted
produce
accounting practices.
It can take any form—no legal Presentation regulated by law (e.g. Companies
Format of
requirements. Best practices are Acts) and the profession through accounting
information
developed and used. standards.
Financial and non-financial,

A summary of mainly (past) historical financial
Content predominantly current with future
information with supporting notes.
predictions (e.g. in budgets).
More detailed (e.g. costs and revenues

Level of detail As prescribed by legislation, etc.
by department, product).
As frequently as needed by
Frequency of Usually annually (more frequently for certain
management: Quarterly, monthly,
preparation types of "public interest" companies).
weekly, daily, or on demand
Purpose of Used to plan, control and make

Stewardship and investment decisions.
information decisions.
Standard costs, relevant costs, Historical costs (as modified by the revaluation of
Bases of
marginal costs, absorption costs. certain fixed assets and fair values as required by
valuation
Other bases may also apply. financial reporting standards).
Determine whether the statement describes management accounting or financial
accounting.
Statement Management accounting or Financial accounting
No legal requirement for organisations to prepare them Management accounting
Accounts primarily for shareholders Financial accounting
Use of future information and forecasts Management accounting
Reporting standards determine presentation Financial accounting
Prepared as required by management Management accounting
Qualities of good information:

Mnemonic: ACCURATE
1. Accurate. Certainly accurate enough for managers to use confidently.
2. Complete. Missing information can be very serious.
3. Cost-beneficial. There is little point having information which costs more to provide than any benefit that
arises from it.
4. User-targeted. The information should be what users need. For example, senior managers often have to be
planning for the future so need forward-looking information.
5. Relevant. Too much information causes information overload and might mean that important matters are
overlooked.
6. Authoritative. What is the information’s source and reliability? Just because you find something by
‘Googling’ the internet does not mean the information is correct.
7. Timely. The information should be received quickly enough to be of use to the decision-maker.
8. Easy-to-use. The information should be well-set out and described.
The main managerial processes

Managers require information for three essential activities:
Planning Managers plan a course of action for the future.
 Setting objectives, such as a sales target for a product
 Selecting the best method of achieving the objectives.
 Plans can be financial, like a budget.
Control Managers use information to check how the organisation performs compared to their plans.
 Comparing actual results with planned results (variance)
 Reviewing strategic plans when circumstances change.
Decision- Managers use information to help them make decisions about the organisation:
making  Preparing information for investment decisions (such as whether to invest in new
plant and equipment)
 Making decisions on actions to take: how much of the product to make, what price to
set, how to reduce costs etc.
The different levels of planning

Different types of planning and decisions are taken at each different levels in the management hierarchy.
These levels have been identified by Robert Anthony as:
 strategic planning
long-term plans (e.g. 5 to 10 years) for the business e.g. what new offices to open? / what new products to
launch?
 tactical planning
medium-term, more detailed, plans – usually involving producing budgets for the next year e.g. how many
staff to employ next year?
 operational planning
short-term planning and decisions e.g. which supplier to choose for a purchase next week. Day to day.
Management
Description
Level
Strategic Senior managers carry out strategic management. It is concerned with making significant
strategic decisions for the organisation, such as setting business objectives and deciding on
corporate strategy.
Strategic management decisions often involve long-term planning.
Tactical Tactical management is carried out by middle managers and relates to business control and
the allocation of resources. It involves developing plans, often medium-term, for
implementing strategic managers' directions.
It includes tasks such as annual budgeting and other medium-term planning, implementing
the plans when approved by senior management, and monitoring actual performance
against them, ensuring that day-to-day operations lead towards achieving long-term
strategic goals.
Operational Junior managers or supervisors usually carry out operational management. It is concerned
with the implementation of tactical plans and with the management of short-term, detailed
day-to-day operations.
Operational management is the lowest level of management.
The role of a trainee accountant in a cost and management accounting system:

1. Recording transactions. For example, making posting to the ledgers.
2. Extracting information and presenting it for management use. For example, a comparison of budget and
actual figures for a period.
3. Investigating financial matters. For example, looking into an over-run in a cost.
4. Helping with budget preparation.
5. Helping and supervising more junior staff.
The Limitations of Cost and Management Accounting Information:

1. Difficulty making future estimates.
2. Often quantitative and financial only, but undoubtedly matters such as quality and customer service levels
will be important.
3. Can be difficult for a manager with no financial training to understand.
4. Often too inward-looking. For example, perhaps it does not give information about competitors’ selling
prices.
CHAPTER 1 QUESTIONS
1. Which of the following statements about qualities of good information is false?
A. It should be relevant for its purposes
B. It should be communicated to the right person
C. It should be completely accurate
D. It should be timely (2 marks)
2. The sales manager has prepared a manpower plan to ensure that sales quotas for the forthcoming year are
achieved. This is an example of what type of planning?
A. Strategic planning
B. Tactical planning
C. Operational planning
D. Corporate planning (2 marks)
3. Which of the following statements about management accounting information is/are true?
i. They must be stated in purely monetary terms.
ii. Limited companies must, by law, prepare management accounts.
iii. They serve as a future planning tool and are not used as an historical record.
A. (i), (ii) and (iii)
B. (i) and (ii)
C. (ii) only
D. None of the statements is true (2 marks)
4. Which of the following statements is/are correct?

i. A management control system is a term used to describe the hardware and software used to drive a
database system which produces information outputs that are easily assimilated by management.
ii. An objective is a course of action that an organisation might pursue in order to achieve its strategy.
iii. Information is data that has been processed into a form meaningful to the recipient.
B. (i) and (iii)
C. (ii) and (iii)
D. (iii) only (2 marks)
5. Good information should have certain qualities. Which of the following are qualities of good information?
i. Complete
ii. Extensive
iii. Relevant
iv. Accurate
B. (i), (iii) and (iv)
C. (ii) and (iv)
D. All of them (2 marks)
6. Monthly variance reports are an example of which one of the following types of management
information?
A. Tactical
B. Strategic
C. Non-financial
D. Operational (2 marks)
7. Which of the following statements is/are correct?
i. Information for decision-making should incorporate uncertainty in some way
ii. The data used to prepare financial accounts and management accounts are the same
A. (i) is true and (ii) is false
B. (ii) is true and (i) is false
C. Both are true
D. Both are false (2 marks)
8. Which of the following processes occurs at the business planning stage?

A. Obtaining data about actual results
B. Taking corrective action
C. Comparing actual performance with budget
D. Establishing objectives (2 marks)
9. Which of the following statements is correct?

A. Management accounting systems provide information for use in fulfilling legal requirements
B. Management accounting systems provide information for the use of decision-makers within an
organisation
C. Management accounting systems provide information for use by shareholders
D. Management accounting systems provide information for use by tax authorities (2 marks)
10. Which of the following would be data rather than information?

A. Sales increase/decrease per product in last quarter
B. Total sales value per product
C. Sales made per salesman as a percentage of total sales
D. Sales staff commission as a percentage of total sales (2 marks)

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PART A:

CHAPTER 1: MANAGEMENT INFORMATION

Differences between management accounting and financial accounting:

Financial and non-financial,

More detailed (e.g. costs and revenues

Purpose of Used to plan, control and make

Qualities of good information:

The main managerial processes

The different levels of planning

The role of a trainee accountant in a cost and management accounting system:

The Limitations of Cost and Management Accounting Information:

4. Which of the following statements is/are correct?

8. Which of the following processes occurs at the business planning stage?

9. Which of the following statements is correct?

10. Which of the following would be data rather than information?

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