CHAPTER 1 ACCOUNTING FOR MANAGEMENT Flashcards
What defines both data and information
- Data’ means facts. Data consists of numbers, letters, symbols, raw facts, events and transactions which have been recorded but not yet processed into a form suitable for use.
- Information is data which has been processed in such a way that it is meaningful to the person who receives it (for making decisions).
- The terms are often used interchangeably but as data is converted into information, some detail is eliminated and replaced by summaries easier to understand
- Information is provided to management to assist with planning and control
the attributes of good information
- Acronym ACCURATE is used
- Accurate
o Degree of accuracy required depends on the reason why info is needed, for example the cost of a unit of output may need to be accurate to the nearest pence. - Complete
o Managers should be given all the info they need, but without excess
A complete control report on variances should include all standard and actual costs necessary to aid variance calculations - Cost effective
o Value of information should exceed the cost of producing it
If a decision backed by information is different from what it would’ve been without, then the value equates to the money saved as a result
This relates to marginal cost versus marginal benefit where initially the benefits of producing reports will increase rapidly, however a point may come whereby ‘information overload’ causes benefits to decline and even become negative if management are overwhelmed with distracting information. - Understandable
o Use of technical language must be limited, and accountants must always be careful about the way which info is presented to non financial management. - Relevant
o Information contained within a report should be relevant to its purpose and redundant parts removed, e.g. sales team will not need to know he breakdown of overheads relating to a selling price. - Authoritative
o Information should be trusted and provided from reliable sources - Timely
o Info should be provided to a manager in time for decisions to be made - Easy to use
o We must always think about the person using the info and their needs
what is the mission statement and its 4 key elements
What is the mission statement
- Describes the overall aims of an organisation, what it is trying to accomplish, and its whole purpose
4 key elements
- Purpose – why does it exist and who for
- Strategy – what does the business provide and how is it
- Policies and culture – how does the business expect staff to act and behave
- Values – what are the core principles of the business
characteristics of a mission statement
Characteristics
- Should express the aims and objecives that managers should work towards
- Usually a brief statement
- General of entity culture
- States aims and business areas which it intends to operate
- Open ended, does not include commercial terms like profit
- Not time assigned
- Guides direction of management strategy
what are each of the managerial processes; planning, decision making and control
Planning
- Set objectives for achievement
- Identify way in which objectives can be achieved
- Make a decision as to how objectives can be achieved based on information provided
- It helps to know past decisions so what is achievable in the future can be decided
- Can be either short term (tactical planning) or long term (strategic planning)
- During the planning process the aims and objectives as an outcome should be SMART (specific, measurable, achievable, relevant, timed)
o By following the smart hierarchy a business should be able to produce plans that lead to ‘goal congruence’ throughout departments
Decision making
- Involves considering information that has been provided and making an informed decision
- Mostly involves making a choice between 2 or more alternatives where information is needed to compare the courses of action
- The first part of decision making is planning, the second is control
Control
- Info relating to the actual results of an organisation is reported to managers who use it to take control measures and amend original budgets/plans
- Internally sourced info produced largely for control purposes is called ‘feedback’
what is the general managerial process
The managerial process
- Input -> system-> output -> plan/budget -> control ->
- Management prepare a plan, put into action by managers with control over input resources (labour, money etc). output from operations is reported back to management and results are compared against the plan in control reports. Managers take corrective action where appropriate
what are the 4 levels of planning
- There are 3 different levels known as ‘planning horizons’ which differ according to time span and seniority of managers responsible
- Strategic planning
o Long term or corporate planning
Considers longer term tends to be 5 years plus and the whole organisation
Senior managers formulate goals and strategies - Tactical planning
o Takes strategic plan and breaks it down into manageable chunks e.g. shorter term plans for individual areas of the business - Operational planning
o Involves making day to day decisions and how to deal with issues that might arise
o All managers will be involved
what is responsibility accounting
Responsibility accounting
- Is based on identifying individual parts of a business which are the responsibility of a single manager
- Responsibility centre
o An individual part of a business whose manager has personal responsibility for its performance
what are cost centres
Cost centres
- A production or service location, function, activity or item of equipment whose costs are identified and recorded
- CC managers need to have information about the costs that are incurred and charged to their centres
- The performance of a cost centre manager is judged on the extent to which cost targets have been achieved
what are revenue centres
Revenue centres
- The part of the organisation that earns sales revenue. Similar to a cost centre but only revenues and not costs are recorded
o Revenue centres are generally associated with selling activities that can be traced back to its manager and the relevant centre, where a manager might have a sales target to reach
what are investment centres
- Managers of investment centres are responsible for investment decisions as well as decisions affecting costs and revenues
o Managers are therefore accountable for the performance of capital employed as well as profits
o Performance is measured in terms of profit earned relative to capital invested, known as ROCE return on capital employed
o An example could be the UK and European divisions of a multinational company
what is financial accounting
Financial accounting
- Involves recording financial transactions of an organisation and summarising them in periodic financial statements for external users who wish to analyse and interpret the financial position of the organisation
- Main duties of the financial accountant include
o Maintain the bookkeeping system of the nominal ledger, payables control account, receivables control account, and to prepare financial statements as required by law and accounting standards
- Information produced by the financial accounting system is usually insufficient for the needs of management for decision making
cost and management
- Managers usually want to know about the costs and profits of individual products and services, and to attain this details are needed for cost, revenue, profit and investment centres
- Cost accounting is a system for recording data and producing info about costs for products produced by an organisation and/or the services it provides
o Involves evaluation of resources used within the enterprise
o Techniques employed are designed to provide financial info about performance and future direction
o Cost accounting and management accounting are often used to mean the same thing, cost accounting is its essential foundation
how is non financial information used
Non financial information
- Info provided by cost accounting is financial by nature, and is important in relation to financial objectives, but managers also need non financial information
o At a strategic level, management need to know abut developments in their markets and in the economic situation, as well as competitors/new technologies etc
o At a tactical level, issues surrounding products/services, customer satisfaction, employee morale are useful KPIs
o At an operational level, lead time for delivering products/services, immediate faults within a sales/technological process
differences between management and financial accounting
Differences between management and financial accounting
- Management accounting
o For internal use e.g. management
o Purpose to aid planning and decision making
o No legal requirements
o Management have autonomy over presentation and priorities
o Financial and non financial info
o Historical and forward looking
- Financial accounting
o For external use e.g. shareholders, government
o Purpose to record financial performance in a period and at period end
o Limited companies legally required to produce financial accounts
o Format should follow accounting standards
o Nature of info financial
o Mainly a historical record
