The nature, source and purpose

of management information
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 Learning Outcome
By the end of the lecture you should be able to:
describe the purpose and role of cost and management accounting
within an organization
compare and contrast financial accounting with cost and management
accounting
distinguish between 'data' and 'information
identify and explain the attributes of good information.

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 Learning Outcome-cont’d
describe sources of information from within and outside the
organization
describe the different elements of production cost – material, labour
and overheads
explain and illustrate with examples classifications used in the analysis
of the product/service costs including by function, direct and indirect,
fixed and variable, stepped fixed and semi-variable costs.

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 Learning Outcome-cont’d
 present information using tables, charts and graphs. (bar charts, line graphs, pie charts and
scatter graphs)

 interpret information presented in management reports.

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Outline
o Accounting for management
o Sources of data
o Cost classification
o Presentation of information

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 Accounting for management
Purpose and role of management accounting within an organization

 The purpose of management accounting is to assist management in running the business in

ways that will improve the performance of the business.
 One way of assisting management is to provide them with good information to help them
plan, control and make decisions
 Management Accounting is concerned with generating accounting information for use by
management in carrying out the management functions of planning, organizing, directing,
leading and controlling
 It also provides management with information for forecasting, controlling and evaluating cost

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 Accounting for management
Meaning of management accounting
•The Institute of Management Accountants describes
management accounting as:
•“the internal business-building role of accounting and finance
professionals who design, implement, and manage internal systems
that support effective decisions, and support, plan, and control the
organization's value creating operations.”

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 Accounting for management
•In 1981, the Institute of Management Accountants (IMA) of US defined management accounting
as:
•“… the process of identifying, measuring, accumulation, analysis, preparation,
interpretation, and communication of financial information used by
management to plan, evaluate, and control an organization and to assure
appropriate use of and accountability for its resources. Management accounting
also comprises the preparation of financial reports for non-management groups
such as shareholders, creditors, regulatory agencies, and tax authorities.”

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 Accounting for management
•In 2009, the Institute of Management Accountants (IMA) of US gave a
new definition as:
“Management accounting is a profession that involves partnering in
management decision making, devising planning and performance
management systems, and proving expertise in financial reporting and
control to assist management in the formulation and implementation of
an organization’s strategy.”

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 Accounting for management
•The Chartered Institute of Management Accountants (CIMA) of UK defines management
accounting in the following manner:
“Management accounting is an integral part of management concerned with identifying,
presenting and interpreting information for:
–Formulating policy
–Planning and controlling activities
–Decision making
–Optimizing the use of resources
–Disclosure to shareholders and others, external to the entity
–Disclosure to employees
–Safeguarding assets”.

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 Accounting for management
The main managerial processes
Costing
Cost accounting is identifying the cost of producing an item (or providing a service) in order to,
for example, assist in deciding on a selling price.
Decision making
e.g. decide on what selling price to charge for a new product
Control
e.g. check month-by-month whether the company is over or under spending on wages

Performance evaluation
Comparing the performance of mangers or departments against budgets or targets

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 Accounting for management
Financial Accounting
Financial Accounting is concerned with recording business transactions
and reporting financial information through financial statements such as
the Statement of profit or loss and the Statement of financial position.

Cost Accounting
Cost Accounting is concerned with the provision of cost information for
product costing, inventory valuation and for planning and control

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 Accounting for management
Cost accounting is concerned with cost data collection, applying cost to inventory,
products and services and preparing statements (e.g. budgets, costing). Cost
accounts aim at determining:
the cost of goods produced or service provided;
the cost of department or work section
what revenues have been realized
the profitability of a product , a service for a department or an organization in
total
selling prices with regard to accumulated costs and profit expectation;
future costs of goods or services; and
how actual costs compare with budgeted costs
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 Differences between Financial Accounting and
Management Accounting
Features Financial Accounting Management Accounting
Objective The basic purpose is to prepare financial statements to show Designed to collect information about optimum use of resources,
profitability and financial position. policy formulation and control purposes.

Sources of principles Generally accepted accounting principles and practices of Flexible and tailored to meet the specific needs of management.
accounting.
Coverage Entire business activity. Segments of business activity or organization, as a whole.

Degree of accuracy As exact as possible, with emphasis on accuracy. Emphasis is on prompt and timely reporting, even if less precise.
Decision maker is satisfied, if information is correct to a large
extent.
Data Mainly concerned with presentation of data that are wholly Mainly concern with the analysis of data, both monetary and non-
monetary in nature. monetary in nature.
Time span covered Concerned with past data. So, it is said to be a post-mortem Mainly concerned with future. So, it supplies information both for
analysis of past activity. the present and future.

Legal compulsion Generally, there is legal requirement to follow. Financial There is no legal compulsion, totally optional. The format for
statement must follow national laws (Companies Act 2019, management accounts is entirely at the discretion of management.
Act 992) and/or international laws such as IFRS. No strict rules govern the way they are prepared and presented.
Each entity can devise its own management accounting system and
format of reports.

Users Serves external users like shareholders, debenture holders Exclusively for internal use.
and financial institutions.

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 Accounting for management
Data and Information
Data is the raw material for data processing. Data relates to facts, events and transactions, etc.

Information is data that has been processed in such a way as to be meaningful to the person
who receives it.

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 Accounting for management
Attributes of good information.
These are qualitative characteristics that make information useful
Good quality information should:
• be Accurate
• be Complete
• be Cost effective (the benefit should outweigh the cost)
• be Understandable
• be Relevant (to the decision being made)
• be Authoritative
• be Timely
• be Easy to use
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 Accounting for management
• What information is needed?
Information can be in the form of:
 Financial
 Non-financial
 Combination of financial and non-financial
Example: Financial and non-financial information
Suppose that the management of ABC Co have decided to provide a canteen for their employees
a. the financial information required by management might include the canteen staff cost, cost of
subsidizing meals, capital cost and cost of lighting and cooling/heating
b. the non-financial information might include the management comment on the effect on
employee morale of the provision of canteen facilities, details of number of meals served each
day, attendance record for canteen staff etc
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 Accounting for management
Types of information
Information within the organization can be grouped into :
- Strategic
- Tactical
-Operational
Strategic information is used by senior managers to plan the objectives of their organization, and
to assess whether the objectives are being met in practice.
Features:
It is derived from both internal and external sources.
It is summarised at a high level.
It is relevant to the long term.
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 Accounting for management
• It deals with the whole organisation
• It is often prepared on an 'ad hoc' basis.
• It is both quantitative and qualitative.
• It cannot provide complete certainty, given that the future cannot
be predicted

Tactical information:
Tactical information is used by middle management to decide how the resources of the
business should be employed, and to monitor how they are being and have been employed

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 Accounting for management
Features:
It is primarily generated internally.

It is summarised at a lower level.

It is relevant to the short and medium term.

It describes or analyses activities or departments.

It is prepared routinely and regularly.

It is based on quantitative measures.

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 Accounting for management
Operational information:
This level of information is used by 'front-line' managers such as foremen or head clerks to
ensure that specific tasks are planned and carried out properly within a factory or office

Features:
It is derived almost entirely from internal sources.
It is highly detailed, being the processing of raw data.
It relates to the immediate term, and is prepared constantly, or very frequently.
It is task-specific and largely quantitative.

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 Sources of Data
Types of data
Data may be classified as follows:
a. Primary and secondary data
b. Discrete and continuous data
c. Sample and population data

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 Sources of Data
Data may be obtained from an internal source or an external source

Internal sources of data

- The accounting records
- Data relating to personnel will be linked to the payroll system.
- Much data will be produced by a production department

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 Sources of Data
• External sources
These can be primary or secondary source
The main sources of secondary data are: governments; banks; newspapers; trade journals;
information bureaux; consultancies; libraries; and information services, websites.

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 Cost Classification
Cost concepts
Cost: the amount of expenditure (actual or notional) incurred or
attributable to a specified activity or object.

Cost centre. A location, a person or an item of equipment or

combination of these in relation to which cost may be
ascertained for the purpose of cost control.

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 Cost Classification
Cost units
A quantitative unit of product, time or service in relation to
which cost may be expressed.
A cost unit is a unit of product or service to which costs can be related. The cost unit is the basic
control unit for costing purposes.

Cost objects
A cost object is any activity for which a separate measurement of costs is desired.

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 Cost Classification
Cost classification
Cost classification is the arrangement of cost items into logical groups. For
example: by their nature (materials, wages etc.); or function (administration,
production etc.)

Elements/nature: material, labour and expenses

Purpose: direct cost and indirect cost
Function: production, administration, selling, distribution, research and
development
Behaviour: Fixed, variable, semi-fixed, stepped fixed cost
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Classification By Elements
 Cost Classification
Elements of Cost
The accumulation of costs is done according to the elements of cost. The
elements of cost represent the nature of cost. There are three elements
of cost: material cost, labour cost and expenses.

Material cost:
Materials represent the raw substance from which finished
products are made by the addition of labour and expenses

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 Cost Classification
Material cost

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 Cost Classification
Direct materials
These are those materials that are part of the final product and can be
directly traced to the goods or services being produced. The cost of
these materials can be directly charged to products because physical
observation can be used to measure the quantity that are used by each
product.
Example, tires on a new car, wood in a dining room table etc.

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 Cost Classification
Direct materials

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 Cost Classification
Direct materials

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 Cost Classification
• Indirect materials
These are those materials that cannot be directly traced to the
goods or services being produced.

Indirect materials include other materials which cannot be

allocated to a particular cost unit.

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 Cost Classification
• They are minor in importance such as small and relatively inexpensive
items which may become a part of the finished product and those
items which do not physically become a part of the finished product.

• Example, bolts and nuts used for production, lubricating oil,

consumable materials, etc.

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Cost Classification

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 Cost Classification
Labour cost
Labour represents the human effort, either physical or mental,
expended in transferring materials to finished products with the
addition of expenses.

It represents the charge that is paid to those persons who perform the
production task.

Labour charges can either be direct or indirect.

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 Cost Classification
Direct labour
Direct labour is the labour that can be directly traced to the goods or
services being produced.
Those employees who convert direct materials into a product or who
provide a service to customers are classified as direct labour.

Indirect labour
Indirect labour is the cost of labour which is not directly engaged in the
production operations but only assists or help production operations.
. Example, the salary of a supervisor or a cleaner.
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Types of LABOUR
DIRECT LABOUR EXAMPLE
INDIRECT LABOUR EXAMPLE
 Cost Classification
Expenses
All cost other than material cost and labour cost are called expenses. It
can be direct or indirect
Direct expenses are those expenses that can be directly traced to the
goods or services being produced. E.g. Royalties paid in publishing a
book, hiring of a special equipment/plant for a particular job
Indirect expenses are those expenses that cannot be directly traced to
the goods or services being produced. E.g. rent, property rate, insurance
on factory buildings, electricity

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Examples of expenses

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 Cost Classification
The aggregate of all the direct material, direct labour and direct
expenses are called prime cost.

The aggregate of all indirect material, indirect labour and indirect

expenses are called overhead

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 Cost Classification
Functional classification
(a) Production costs are the costs which are incurred by the sequence of operations beginning
with the supply of raw materials, and ending with the completion of the product ready for
warehousing as a finished goods item. Packaging costs are production costs where they relate
to 'primary‘ packing (boxes, wrappers and so on)
(b) Administration costs are the costs of managing an organization, that is, planning and
controlling its operations, but only insofar as such administration costs are not related to the
production, sales, distribution or research and development functions.

(c )Selling cost, which include marketing costs, are the costs of creating demand for products
and securing firm orders from customers.

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 Cost Classification
(d) Distribution costs are the costs of the sequence of operations beginning with the receipt of
finished goods from the production department and making them ready for dispatch and ending
with the reconditioning for re-use of returned empty containers.

(e) Research costs are the costs of searching for new or improved products, whereas
development costs are the costs incurred between the decision to produce a new or improved
product and the commencement of full, formal manufacture of the product.

(f) Financing costs are costs incurred to finance the business such as loan interest.

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 Cost Classification
Behaviour: costs can be classified according to how they behave or relate to the level of activity.
Costs are thus classified fixed, variable and semi-variable.

Fixed costs: these are costs that remain the same whatever the level of activity. A fixed cost can
be defined as a cost which remains unchanged regardless of the level of activity within the
relevant range. Examples of fixed costs are rent and rates, managerial salaries and insurance

Variable costs vary in direct proportion to the level of production. In other words, when the level
of production increases, total variable cost also increases and vice versa. However, the variable
cost per unit remains fixed. Examples include direct material cost and direct wages.

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 Cost Classification
Semi – Variable Costs (or Semi-Fixed Costs or Mixed Costs)
A semi-variable/semi-fixed/mixed cost is a cost containing both fixed and variable components
and which is thus partly affected by fluctuations in the level of activity’(CIMA Official
Terminology).
e.g. Electricity and water bills, Salesman’s salary, Costs of running a car.
It is necessary to determine the fixed and variable elements of semi-variable costs. A method
known as ‘High-Low’ can be used to establish the fixed and variable elements

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 Cost Classification
Steps involved are
Step 1 find the Period with highest activity as well as the
Period with lowest activity
Step 2 Find the following
Total cost at high activity level
Total cost at low activity level
Total units at high activity level
Total units at low activity level

Step 3 calculate the Variable cost per unit using the formula
= total cost at high activity level - total cost at low activity level
total units at high activity level - total unit at low activity level
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 Cost Classification
Step 4 find the fixed cost
The fixed costs can be determined as follows. (Total cost at high activity level) – (total
units at high activity level × variable cost per unit)

illustration

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 Cost Classification
The total costs of a business during the last five years are as follows:
Year Output volume Total cost
Units GHS
2016 5,000 80,000
2017 5,500 85,000
2018 4,350 73,500
2019 6,430 94,300
2020 7,500 105,000

a) What are the fixed and variable elements of the total cost using High-Low method
b) Calculate the total cost that should be expected in 2021 if output is 7,750 units
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 Cost Classification
a) What are the fixed and variable elements of the total cost using High-Low method
Step 1 Period with highest activity = 2020
Period with lowest activity = 2018
Step 2
Total cost at high activity level = GHS105,000
Total cost at low activity level = GHS73,500
Total units at high activity level = 7500
Total units at low activity level = 4350

Step 3 Variable cost per unit

=total cost at high activity level - total cost at low activity level = 105,000- 73,500 = 31500 = 10
total units at high activity level - total unit at low activity level 7500- 4350 3150
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 Cost Classification
Step 4 find the fixed cost
Total cost at high activity level = GHS105,000
Total units at high activity level × variable cost per unit = 7500 × 10 = GHS75,000
therefore, fixed cost = GHS 105,000 - GHS75,000 = GHS30,000
thus fixed cost is GHS30,000 and variable cost is GHS75,000

b) Calculate the total cost that should be expected in 2021 if output is 7,750 units
Total cost = FIXED COST + VARIABLE COST
Fixed cost = GHS30,000
Variable cost= variable cost per unit × units expected to be produced
= GHS10 × 7,750 = GHS77,500
Hence, total cost = GHS30,000 + GHS77,500 Eddie= GHS 107,500
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 Cost Classification
Total Cost GHS
Production cost:
Direct materials A
Direct wages B
Direct expenses C
Prime cost A+B+C
Production overhead D
Production cost A+B+C+D
Administration cost E
Selling and distribution cost F
Total cost A + B + C + D +E +F
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 Presentation of Information
Introduction
The management accountant has to provide information to
management to help them make decisions, and it is important that the
information is presented to them in a form that is easy for them to use.

The information can be presented in the form of report, tables,

charts and graphs

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 Presentation of Information
• Tables
These are a way of presenting actual numbers in a format that is easy to understand. e.g.

Year Sales GHS’000’s

product A product B product C Total
2018 4.37 3.21 2.50 10.08
2019 5.23 3.60 3.10 11.93
2020 5.84 3.96 3.50 13.30
2021 7.15 4.30 4.16 15.61
2022 8.24 4.65 4.51 17.40
Total 30.83 19.72 17.77 68.32
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 Presentation of Information
Charts and graphs
• In many cases, management do not need to see the actual numbers

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 Presentation of Information
Compound bar chart

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 Presentation of Information
Component bar chart:

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 Presentation of Information
Pie chart

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END OF LECTURE

THANK YOU
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Q and A

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