MANAGEMENT ACCOUNTANT F2

CHP#2 Sources of data

Sources of data
Primary data is obtained directly from first-
hand sources by means of surveys,
observation or experimentation. It is data that
has not been previously published and is
derived from a new or original research study
and collected at the source such as in
marketing. Primary data is any data which is
used solely for the purpose for which it was
originally collected.
Secondary data is data that has been collected
or researched recently. Sources of secondary
data include the internet, libraries, company
reports, newspaper, governments and banks.
The data collected is useful as it allows the
researcher to see the other opinions on their
area of study but care must be taken that the
data is reliable and accurate. Secondary data is
data that has already been collected for some
other purpose but can also be used for the
purpose in hand.

EXAMPLE: Decide which of the following are primary data and which are secondary data.
(a) Information from clock cards when used for making up wages.

(b) Data from a government publication on the toy industry used by a

new toy shop to determine which items to stock.
(c) Expense claim forms submitted by sales representatives used to
estimate the car mileage they have travelled.

(d) Results of an election opinion poll published in a newspaper

The problem with using secondary data

Primary data (if available) is preferable to secondary data since data collected for a specific
purpose is likely to be better than data acquired for some other purpose. Some of the problems
with secondary data are:
• The data has been collected by someone else. There is no control over how it was collected. If
a survey was used, was a suitable questionnaire used? Was a large enough sample taken (was
enough data collected)? Was it a reputable organisation that carried out the data collection?
• Is the data up to date? Data quickly becomes out of date, for example, people’s consumer
tastes change and prices may fluctuate wildly.
• The data may be incomplete. Certain groups of people are sometimes omitted from the
published data. For example, do you know which groups are included in the unemployment
figures?
• What is the data? Is it actual, seasonally adjusted, estimated or a projection?

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• The reason for collecting the data may be unknown. Statistics published on motor cars may
include or exclude three wheeled cars, vans and motor caravans. Readers need to know which
categories are included in the data.
If secondary data is to be used, these questions need to be answered. Sometimes the answers
will be published with the data itself or sometimes it may be possible to contact the people
who collected the data. If not, users must be aware of the limitations of making decisions based
on information produced from secondary data. Sources of secondary data are numerous
and can be broadly categorised as of two forms – those produced by individual organisations
and those produced by the government.

Discrete data Continuous data

Discrete data is non-continuous data. Discrete
data can only take certain values for example
the number of students taking a course (there
wouldn’t be half a student). Discrete data is
counted.
An example of discrete data is the number of
goals scored by Arsenal against Chelsea in the
FA Cup Final: Arsenal could score 0, 1, 2, 3 or
even 4 goals (discrete variables = 0, 1, 2, 3, 4),
but they cannot score 1½ or 2½ goals.
Continuous data is unbroken data that has no
gaps. Continuous data can take on any value
(within a range) for example time or distance.
Continuous data is measured.
Continuous data include the heights of all the
members of your family, as these can take on
any value: 1.542 m, 1.639 m and 1.492 m for
example. Continuous variables = 1.542, 1.639,
1.492.

Internal source of information

1. Accounting system
The accounting system will collect data from source documents such as invoices, timesheets
and journal entries. The data will be sorted and analysed by the coding system by type of
expense, department, manager and job. Reports of direct and indirect costs compared to
budgets may be produced at regular intervals to help managers plan and control costs. Ad
hoc reports may be produced to help managers make specific decisions. Consider the
examples listed below:
• Sales analysed by product will help management to assess the patterns of demand for
each product.
• This same information will help plan production and inventory levels.
• In turn, production information will enable the organisation to plan its requirements for
raw materials, labour and machine hours.
• Information on material, labour and other costs will allow the organisation to set
estimated costs for its products. This will be the basis for a budgetary control and standard
costing system, as we shall see in a later chapter.

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• In the context of long-term, strategic decision making, the sales

analysis given above may help management to assess future product strategies – expand
output of those for which demand is increasing, reduce output of those for which demand is
falling.
• An aged receivables report would provide the basis for debt collection decisions taken by
a credit control manager.
• Figures for wastage rates or product reject rates may allow management to reach
decisions on the product quality aspect of the organisation’s operations.

2. Payroll system
The payroll system may provide information concerning detailed labour costs. Hours paid
may be analysed into productive and non-productive time such as training, sick leave,
holiday and idle time. Labour turnover by department or manager may be analysed and
may help management to assess the employment and motivation policies.

3. Strategic planning system

The strategic planning system may provide information relating to the organisation’s
objectives and targets. Assumptions relating to the external environment may be detailed.
Details of the organisation’s capital investment programme and product launch programme
may also be recorded here. Some of this information will be commercially sensitive and
only accessed by senior managers in the organisation.
Benefits and limitations of internal sources

Benefits Limitations
• Readily available data Data may need to be further analysed to be
• Data can easily be sorted and analysed of use to management accountants
• Reports can easily be produced when
required
• Data relates to the organization concerned

External sources of information

Businesses are finding it increasingly difficult to succeed if they ignore the external
environment which will influence their activities. The process known as environmental
scanning or environmental monitoring is becoming an increasingly important part of the
role of the management accountant. These terms are used to describe the process whereby
data is collected from outside, as well as from inside the organisation and used in the
decision making process.
The main sources of external information which we shall consider here are:
• government sources • business contacts – customers and suppliers
• trade associations and trade journals • the financial and business press and other media

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• the internet.
Government sources
There is a wealth of published statistical data covering many aspects of the nation’s economy:
population, manpower, trade, agriculture, price levels, capital issues and similar matters. Most
of this is produced by national governments.
The primary purpose of this data is to provide information for economic planning at the
national level – macroeconomics. The data serves a secondary purpose of providing industry
with useful back ground information for deciding on future policies such as raising finance. The
data is published in general terms for a type of industry or geographical area but is
not company specific.
Macroeconomics is a branch of economics dealing with the performance, structure, behaviour,
and decision-making of an economy as a whole, rather than individual markets. In contrast,
microeconomics is primarily focused on the actions of individual agents, such as firms and
consumers, and how their behaviour determines prices and quantities in specific markets.

Business contacts
Government produced information will be broadly based and general, dealing with the
economy as a whole or particular sectors or industries. An organisation may be looking for
information more focused on its own position. Its day-to-day business contacts, customers and
suppliers, can be a useful source of this information – and often it is available free.
Customers can provide information on such matters as:
• the product specification which they require
• their quality requirements
• requirements for delivery periods
• preference for packaging and distribution methods
• feedback on the above and on general aspects of customer service.

Suppliers may be able to provide information on:

• quantity discounts and volume rebates which may help the organization to decide on order
size
• availability of products and services
• alternative products or services which may be available or may become available
• technical specifications of their product.

Trade associations and trade journals

Most major industries have their own trade association. The role of these organisations
includes:
• representing their member firms in legal and other disputes
• providing quality assurance schemes for customers of member organisations

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• laying down codes of practice to be followed by their member organisations

• publishing trade journals and other information useful for the management and development
of their businesses.
There follows a very brief list of just a small selection of trade associations operating in the UK –
it is taken from an alphabetical listing of associations and shows the first few starting with the
letter A. There are hundreds more!
• Agricultural Industries Confederation
• Airport Operators Association
• Association for Payment Clearing Services APCS
• Association for Road Traffic Safety & Management
• Association of Art and Antique Dealers
• Association of British Fire Trades Ltd.
Many of these organisations publish their own industry or trade journalswhich will contain
useful news and other information for organizations operating in that industry. Trade journals
are also published by many publishing organisations. In the UK one of the best known of these
journals is The Grocer aimed at the food and drink retail sector. Again, many others
exist.

The financial press, business press and other media

In the UK, The Financial Times, the Guardian, The Times and the Daily Telegraph together with
some regional newspapers provide statistics and financial reviews as well as business and
economic news and commentary.
These include:

• the FTSE 100 Index – the stock market index of the leading 100 leading companies based on
tradeable share value
• the FT All-share Index – an index of all share prices quoted on the stock exchange.
Such information is now also widely available via electronic media. Digital television services
available on satellite or cable systems carry specialist business and financial channels and
programmes (such as Bloomberg TV) which give both national and world-wide coverage. There
is also the internet as a widely available source of up-to-date financial information.

The internet
The internet, or the World Wide Web, is a global computer network providing a variety of
information and communication tools. Internet service providers, for example Virgin, Sky, BT or
Vodafone, allow users to access websites. Many businesses trade through their websites known
as ecommerce. The internet can also be searched for all sorts of information using search
engines, such as Google or Yahoo!. Business details, product details or general information can
be searched for and information is returned.

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Weaknesses of the internet

There is no overall authority or control for what is included on the internet, this means that
anyone can produce websites, opinion can pose as fact, and information can be misleading.
Basically evaluation of a site's authority and accuracy is difficult.
Any data accessed from the internet could have been altered so there is a possibility for
inaccurate data to be used.
Much of what is available on the web is of little or no value, except perhaps to the individual
who produced it, and the sheer quantity of sites makes the search for quality that much more
difficult.
Web sites can change location and leave no "forwarding address," or disappear altogether.
Anyone who relies on certain sites for data could find their source has gone.
Most of the information on the web can be accessed for free but costs of building and
maintaining and upgrading the systems are significant and likely to increase as more networked
information becomes available.

Strengths of the internet

One of the web's strongest assets is its ability to provide current, timely and localised
information.
The web's interactive capabilities provide functions not possible through standard print
sources. Businesses often provide instant messaging or ‘chat now’ panels which enable
customers to query products before ordering online.
The system of links on a website can bring related materials and information together far more
seamlessly and effectively than is possible in print. You can often find ‘related links’ on a
website that will take you to another site to be able access more information.
The web offers flexibility regarding where and when its information can be accessed.
The biggest advantage of the internet is the wealth of information you can access at the click of
a button.

Benefits and limitations of external sources

Internal information is produced by the company itself so the users are aware of any limitations
in its quality or reliability. External information is not under the control of the organisation –
the users may not be aware of any limitations in its quality.
Benefits limitations
• Wide expanse of external sources • Data may not be accurate
of information • Finding relevant information
• Easily accessible especially using can be time consuming
the internet
• More general information available
• Can source specific information

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needs
General economic environment
The economic environment will have an impact on the costs and revenues of a business both
nationally and internationally. The impact of changing interest rates, exchange rates, inflation
and general economic activity will impact on the productivity and profitability of businesses.
Interest rates affect the cost of borrowing money. If interest rates rise this can impact
businesses by increasing the cost of overdrafts and loans they use for financing business
activities and also impact consumers as general living costs, for example mortgage repayments,
will increase. Inflation refers to a rise in a broad price index representing the overall price
level for goods and services in the economy. When the general price level rises, each unit of
currency will be able to purchase fewer goods and services. Inflation reflects a reduction in the
purchasing power per unit of money. Inflation may discourage investment and savings.
An exchange rate is expressed in terms of the quantity of one currency that can be exchanged
for one unit of the other currency. It can be thought of as the price of a currency. Exchange
rates between different countries can affect the level of international trade. Receivable or
payable balances in foreign currencies are open to risk if exchange rates change; prices may
need to be revised in response to an exchange rate movements and investment in overseas
subsidiaries may be positively or negatively affected by a change in the value of the money.
The general state of the economy will impact on businesses – is the economy in a boom or bust
period? Businesses will need to consider the general economic state and how it is forecast to
change when forecasting productivity and pricing strategies.

Sampling techniques
The purpose of sampling is to gain as much information as possible about the population by
observing only a small proportion of that population i.e. by observing a sample.
The term population is used to mean all the items under consideration in a particular enquiry.
A sample is a group of items drawn from that population. The population may consist of items
such as metal bars, invoices, packets of tea, etc; it need not be people.
For example:
• in order to ascertain which television programmes are most popular, a sample of the total
viewing public is interviewed and, based on their replies, the programmes can be listed in order
of popularity with all viewers.
• during the quality control procedures in a manufacturing business, a sample of the product is
taken for testing.
There are three main reasons why sampling is necessary:
(1) The whole population may not be known.
(2) Even if the population is known the process of testing every item can be extremely costly in
time and money, for example, gaining information about the popularity of TV programs by
interviewing every viewer.

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(3) The items being tested may be completely destroyed in the process, for example in order to
check the lifetime of an electric light bulb it is necessary to leave the bulb burning until it breaks
and is of no further use.

The characteristics of a population can be ascertained by investigating only a sample of that

population provided that the following two rules are observed:
(1) The sample must be of a certain size. In general terms the larger the sample the more
reliable the results will be.
(2) The sample must be chosen in such a way that it is representative of the population.

There are several methods of obtaining a sample and these are considered in turn.

Random sampling
A simple random sample is defined as a sample taken in such a way that every member of the
population has an equal chance of being selected. The normal way of achieving this is by
numbering each item in the population.
If 10% of a population of 200 is the required sample size then 20 numbers from a table of
random numbers can be taken and the corresponding items are extracted from the population
to form the sample e.g. in selecting a sample of invoices for an audit. Since the invoices are
already numbered, this method can be applied with the minimum of difficulty.
This method has obvious limitations when either the population is extremely large or, in fact,
not known. The following methods are more applicable in these cases.

Systematic sampling
If the population is known to contain 50,000 items and a sample of size 500 is required, then 1
in every 100 items is selected. The first item is determined by choosing randomly a number
between 1 and 100 e.g. 67, then the second item will be the 167th, the third will be the 267th...
up to the 49,967th item.
Strictly speaking, systematic sampling (also called quasi-random) is not truly random as only the
first item is selected randomly. However, it gives a very close approximation to random
sampling and it is very widely used.
There is danger of bias if the population has a repetitive structure. For example, if a street has
five types of house arranged in the order, A B C D E A B C D E... etc, an interviewer visiting every
fifth home would only visit one type of house.

Stratified sampling
If the population under consideration contains several well defined groups (called strata or
layers), e.g. men and women, age groups, different sizes of metal bars, etc, then a random
sample is taken from each group. This is done in such a way that the number in each sample is

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proportional to the size of that group in the population and is known as sampling with
probability proportional to size (pps).
For example, in selecting a sample of people in order to discover their leisure habits, age could
be an important factor. So if 20% of the population are over 60 years of age 65% between 18
and 60 and 15% are under 18, then a sample of 200 people should contain 40 who are over 60
years old, 130 people between 18 and 60 and 30 under 18 years of age, i.e. the
subsample should have sizes in the ratio 20 : 65 : 15. This method ensures that a representative
cross-section of the strata in the population is obtained, which may not be the case with a
simple random sample of the whole population.
This method is often used by auditors to choose a sample to confirm receivables’ balances. In
this case a greater proportion of larger balances will be selected.

Multi-stage sampling
This method is often applied if the population is particularly large, for example in selecting a
sample for a national opinion poll of the type carried out prior to a general election. The
process involved here would be as follows:
Step 1 The country is divided into areas (counties) and a random sample of areas is taken.
Step 2 Each area chosen in Step 1 is then subdivided into towns and cities or boroughs and a
random sample of these is taken.
Step 3 Each town or city chosen in Step 2 is further divided into roads and a random sample of
roads is then taken.
Step 4 From each road chosen in Step 3 a random sample of houses is taken and the occupiers
interviewed.

Cluster sampling
This method is similar to the previous one in that the country is split into areas and a random
sample taken. Further sub-divisions can be made until the required number of small areas have
been determined. Then every house in each area will be visited instead of just a random sample
of houses. In many ways this is a simpler and less costly procedure as no time is wasted finding
particular houses and the amount of travelling by interviewers is much reduced.

Quota sampling
With quota sampling the interviewer will be given a list comprising the different types of people
to be questioned and the number or quota of each type e.g. 20 males, aged 20 to 30 years,
manual workers; 15 females, 25 to 35, not working; 10 males, 55 to 60, professional men, etc.
The interviewer can use any method to obtain such people until the various quotas are filled.
This is very similar to stratified sampling, but no attempt is made to select respondents by a
proper random method, consequently the sample may be very biased.

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Sampling methods compared

The objective of a sample is to collect data upon which an opinion can be formed, and a
conclusion drawn in respect of the population of which the sample is representative.
Ideally the sample would be chosen at random, and would be large enough so as to be
representative of the population. Unfortunately both of these aspects introduce costs which
are often unacceptably high.
Alternatives to the truly random sampling method have been outlined above. They are all
concerned with minimising costs whilst maintaining the representative nature of the sample
compared to the population.
In order to use these alternatives it is often necessary to have some knowledge of the
population. Systematic sampling should not be used if the population follows a repetitive
pattern. Quota sampling must be used with caution. The data collector may introduce bias
because they choose how to fill the quota.

EXAMPLE 1
The essence of systematic sampling is that:
A each element of the population has an equal chance of being chosen
B members of various strata are selected by the interviewers up to predetermined limits
C every nth member of the population is selected
D every element of one definable subsection of the population is selected

EXAMPLE 2
A sample is taken by dividing the population into different age bands and then sampling
randomly from the bands, in proportion to their size. What is such a sample called?
A Simple random
B Stratified random
C Quota
D Cluster

EXAMPLE 2
In a survey on the opinions of employees in a large company headquarters, one of the following
is a cluster sample. Which is it?
A Staff are randomly selected from each department in proportion to departmental size
B Staff are selected from the list of employees, taking every nth name
C A sample, which is as representative as possible of the composition of the staff in terms of
gender, age and department, is taken by stopping appropriate staff in the corridors and
canteen
D One department is selected and all the staff in that department are surveyed

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EXAMPLE 3
Associate with each of the following sampling methods A – F the most
appropriate example from the list 1– 6, given below.
A Simple random sample
B Stratified random sample
C Cluster sample
D Systematic sample
E Quota sample
F Multistage sample

Examples
(1) One city is chosen at random from all cities in the United Kingdom, then the electoral
register is used to select a 1-per-1,000 sample.
(2) Names picked from a hat.
(3) Every 10th person is chosen randomly from each ward in a hospital.
(4) One secondary school in a town is selected at random, then every pupil in that school is
surveyed.
(5) One person in ten is chosen from an alphabetical list of employees.
(6) People are stopped in the street according to instructions such as ‘stop equal numbers of
men and women’.

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