ACCOUNTING FOR MANAGEMENT

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FINANCIAL ACCOUNTS VS MANAGEMENT ACCOUNTS

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COST ACCOUNTS
Cost accounting is the process of recording, classifying, analysing, summarizing, and
allocating costs associated with a process, and then developing various courses of
action to control the costs
Management accounting involves preparing and providing timely information to
business managers so that they can make day-to-day and short-term managerial
decisions

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DATA & INFORMATION
Data is the raw material for data processing.
Information(processed data): is data that has been processed in a way that is
meaningful to the person who receives it. Information is anything that is
communicated.

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QUALITIES OF GOOD INFORMATION
Relevance
Completeness
Accuracy
Clarity
Confidence: it must be trusted by the managers who are expected to use it
Communication: it must be communicated to the right person
Volume: should not be too little or too much.
Timing: should be available when required.
Cost: benefits obtained from the information should outweigh the costs of acquiring it.
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PLANNING, CONTROL AND DECISION MAKING
Information for management is used for planning, control and decision making.
Planning involves the following:
-Establishing objectives
-Selecting appropriate strategies to achieve the objectives

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Objective is the aim/goal of an organisation. The main objectives of an organisation may
include the following:
1. Maximise profits
2. Maximise shareholder wealth
3. Minimise cost
4. Maximise revenue
5. Increase market share

A strategy is a possible course of action that might enable an organisation to achieve its
objectives.

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THE PLANNING PROCESS
Assess the external and the internal environment

Evaluate corporate objectives Long term

strategy
planning
Consider alternative ways of achieving the objectives

Agree a corporate plan

Break the corporate plan into smaller plans e.g. production planning, resource planning,
R&D planning and product planning.
Short term
Make detailed operational plans that implement the corporate plan on a short term basis. planning

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CONTROL
There are 2 stages in the control process:
1. The performance of the firm as set out in the plan is compared with actual
performance. Any deviations are identified and corrective actions taken
2. The corporate plan is reviewed in light of the comparisons made and the plan is
modified if necessary.

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STRATEGIC, TACTICAL AND OPERATIONAL PLANNING
A strategic plan is a high-level overview of the entire business, its
vision, objectives, changes in these objectives, resources required to
attain these objectives and the policies governing the acquisition,
use and disposition of the resources. Usually prepared for 5 year
or more

The tactical plan describes the tactics the organization plans to use
resources efficiently and effectively to achieve the ambitions
outlined in the strategic plan. Usually prepared for 1- 5 years

The operational plan describes the day to day running of the

company. The operational plan charts out a roadmap to achieve
the tactical goals within a realistic timeframe. This plan is highly
specific with an emphasis on short-term objectives. Usually
prepared for less than 1 year. RADHIKA G
a) Resources: are often referred to as the ‘4 Ms’ (men, materials,
machines and money)
b) Efficiency in the use of resources means optimum output is
achieved from the input resources used.
c) Effectiveness in the use of resources means that the outputs
obtained are in line with the intended objectives.

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MANAGEMENT CONTROL SYSTEMS

This is a system that measures and corrects the performance of activities of

subordinates in order to make sure that the objectives of an organisation
are being met and the plans devised to attain them are being carried out.
The basic elements of a MCS are as follows:
-Planning: deciding what to do and identifying the desire results
-Recording: the plan which should incorporate standards of efficiency or
targets
-Carrying out the plan and measuring actual results achieved
-Comparing actual results against the plans
-Evaluating the comparison, deciding whether further action is necessary
-Taking corrective action when necessary
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SOURCES OF DATA
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 TYPES OF DATA:
Data may be classified as follows:
1. Categorical data: this is data that is descriptive. It represents characteristics e.g. eye color of a person.
Categorical data is broken down into two types: nominal data and ordinal data.
Nominal data can be labelled/named but not measured e.g. eye colour can be labelled as black, blue etc
Ordinal data is data that can be put in an order or put on a scale e.g. satisfaction levels.
2. Numeric data: This is quantitative data. It can be a measurement, such as a person’s height, weight, IQ, or blood
pressure; or it can be a count, such as the number of stock shares a person owns, how many teeth a dog has etc.
Numerical data can be further broken into two types: discrete and continuous.
•Discrete data represent items that can be counted; they take on possible values that can be listed out. The list of
possible values may be fixed (also called finite)
•Continuous data represent measurements; their possible values cannot be counted and can only be described using
intervals on the real number line e.g. the value of pie in math, weight of a person etc.

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SAMPLE & POPULATION DATA
Sample data is data arising as a result of investigating a sample. A sample is a
selection from the population.
Population data is data arising from investigating the population. If the whole
population is examined, the survey is known as a census.

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SOURCES OF DATA
Data may be obtained from internal or external sources
Internal sources External sources
Accounting records Governments
Payroll system Banks
Production department Newspapers
Records showing time spent on various Trade journals
activities in service businesses
Websites

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BIG DATA
Big data is ‘extremely large collections of data (data sets) that may be analyzed to reveal patterns,
trends, and associations, especially relating to human behavior and interactions.'
Characteristics of big data
The characteristics of big data, known as the 5Vs, are:
•Volume
Variety: This data can be both structured, semi-structured or unstructured:
Structured: This is in a field or data record, so easy to analyze. This is in a standardized format, so is
easy to analyze, store and search.
Semi-structured: This is not in a field but can be analyzed and organized e.g. E-mails - these contain
structured data such as the date, sender name and email address but the actual content of the email is
unstructured.
Unstructured : This is not in data fields (such as video, audio and images), therefore difficult to analyze,
manage and search.

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•Velocity: Information must be provided quickly enough to be of use in decision-
making and performance management.
•Veracity: Veracity means accuracy and truthfulness and relates to the quality of the
data. In the context of big data, for any analysis to provide useful findings for
decision making, the data collected must be true. To assess how true the data
collected is, companies must consider not only how accurate or reliable a data set
might be but also how trusted is the source of the data.
•Value: There is little point in going to the effort and expense of gathering and
analyzing the data if this does not ultimately result in adding value to the company. It
is important for companies to consider the potential of big data analytics and the
value it could create if gathered, analyzed and used wisely.

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SOURCES OF BIG DATA

Main sources of big data can be grouped under the headings of social
(human), machine (sensor) and transactional:
1. Social (human) – this source is becoming more and more relevant to
organizations. This source includes all social media posts, videos posted
etc.
2. Machine (sensor) – this data comes from what can be measured by the
equipment used.
3. Transactional – this comes from the transactions which are undertaken by
the organization. This is perhaps the most traditional of the sources.

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DATA ANALYTICS
Data analytics are carried out on big data in order to get insights and make better
decisions.
Data analytics can be descriptive analysis and/or inferential analysis.
Descriptive statistics intend to describe a big hunk of data with summary charts and
tables, but do not attempt to draw conclusions about the population from which
the sample was taken.
Conversely, with inferential statistics, you are testing a hypothesis and drawing
conclusions about a population, based on your sample. Statistical analysis is used
for predictive purposes based on the sample of data collected.

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BIG DATA 2
Benefits of Big Data analytics

•Better marketing
•Better customer service and relationship management
•Increased customer loyalty
•Increased competitive strength
•Increased operational efficiency
•The discovery of new sources of revenue.

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SAMPLING METHODS
Probability sampling method: is a method in which there is a known chance of each
member of the population appearing in the sample.
E.gs include:
-Random
-Stratified random
-Systematic
-Multistage
-Cluster

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Non probability sampling: is a sampling method in which the chance of each member of
the population appearing in the sample is not known, e.g. quota sampling.

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RANDOM SAMPLING
A simple random sample is a sample selected in such a way that every item in the
population has an equal chance of being included.
This method is free from bias, however, a random sample is not necessarily a perfect
sample.
If random sampling is used it is necessary to construct a SAMPLING FRAME.
A sampling frame is a numbered list of all items in a population. Once this is made, it
is easy to select a random sample, simply by generating a list of random numbers.

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CHARACTERISTICS OF A GOOD SAMPLING FRAME
Completeness/adequacy
Accuracy
Up to dateness
Convenience – i.e. is it readily accessible?
Non duplication

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DRAWBACKS OF RANDOM SAMPLING
An unrepresentative sample may result
It is not possible to use where the population is heterogenous in nature
An adequate sampling frame may not exist
The numbering of the population may be laborious
It may be difficult and costly to obtain data if population is wide spread

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STRATIFIED RANDOM SAMPLING
This method involves dividing the population into strata/categories. Random samples
are then taken from each stratum/category.

Advantages of stratification Disadvantages of stratification

The sample selected will be representative Prior knowledge is required of each item
in the population
The structure of the sample will represent
that of the population
Conclusions can be made about each
stratum
Precision is increased

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SYSTEMATIC SAMPLING
This is a method which works by selecting every nth item after a random start. The
starting point can be chosen using the lottery method or random number tables.
The distance between two points at which measurements are taken is known as a
sampling interval e.g. if we select every 30th item after a random start, our sampling
interval is 30

Advantages of systematic sampling Disadvantages of systematic sampling

It is easy to use The sample may be biased if a regular
pattern of the population coincides with
the sampling method
It is cheap It is not completely random since some
items have a zero chance of being chosen

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MULTI STAGE SAMPLING
In the method, the population is divided into a number of sub populations and then a
small sample is selected from these sub populations at random.
Each sub population is then divided further, and a small sample is selected at random
again. This is repeated as necessary.

Advantages of multi stage sampling Disadvantages of multi stage sampling

Fewer investigators are needed
It is not so costly to obtain a sample
Possibility of bias
The method isn’t truly random as once the
final sampling areas have been chosen,
the rest of the population cannot be in the
sample.

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CLUSTER SAMPLING
This involves selecting one definable subsection of the population as the sample, that
subsection is taken to be representative of the population.

Advantages of cluster sampling Disadvantages of cluster sampling

It is a good alternative to multistage There is potential for bias
sampling if a suitable sampling frame
doesn’t exist
It is inexpensive to operate

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NON PROBABILITY SAMPLING METHODS: QUOTA
SAMPLING
In quota sampling, investigators interview any one who meets up to a certain quota.
Randomness is forfeited in the interest of cheapness and simplicity.

Advantages of quota sampling Disadvantages of quota sampling

Relatively easy to administer Sample selection is not random
Cost-effective There is a potential for selection bias,
which can result in a sample that is
unrepresentative of the population
Can be performed quickly
A useful method when probability
sampling techniques are not possible

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COST CLASSIFICATION
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DIRECT & INDIRECT COSTS
Direct costs are costs that can be traced in full to the product. E.gs include Direct
material, direct labour and direct expenses.
Indirect costs: these are costs that can’t be traced in full to a product. E.gs include
Rent, Electricity, indirect wages etc.

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Direct material:
Direct material is charged to a product as part of the Prime cost. E.gs of direct material include:
-Component parts
-Part finished work
-Primary packing materials
Direct Labour:
Direct wages are all wages paid for labour (either basic hours or as overtime) spent on work on the
product itself. Direct Labour is also part of the prime cost.
Direct expenses/chargeable expenses:
These are any expenses which are incurred on a specific product other than direct material cost and
direct wages. They also form part of the prime cost. E.gs include
-Hire of tools for a particular job
-Maintenance costs of tools

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 Production overheads: these are all indirect material costs, indirect wages and indirect
expenses incurred in the factory from receipt of the order until its completion. E.gs include
materials used in negligible amounts, supervisor/foreman’s wages, rent, rates, insurance,
depreciation etc.
Administration overheads: this is all indirect material costs, wages and expenses incurred in
the direction, control and administration of an undertaking. E.gs include depreciation of
office buildings, office salaries, rent, rates, insurance and lighting charges of the office area.
Selling overhead: this is all indirect material costs, wages and expenses incurred in
promoting sales and retaining customers. E.gs include printing and stationary costs of
catalogues, salaries and commission of sales staff, advertising and sales promotion costs, rent
and rates of sales offices and showrooms etc.
Distribution overheads: these are all indirect material costs, wages and expenses incurred in
making the packed product ready for despatch and delivering it to the customer. E.gs
include cost of packing cases, wages of packers, drivers and despatch clerks etc.
Costs can also be classified as ‘functional costs’ E.g. production or manufacturing costs,
administration costs, marketing or selling and distribution costs.

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FULL COST OF SALES:
PRODUCTION COSTS: $
Direct materials A
Direct wages B
Direct expenses C

PRIME COST A+B+C

Production overheads D

FULL FACTORY COST A+B+C+D

Administration costs E
Selling and distribution costs F

FULL COST OF SALES A+B+C+D+E+F

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FIXED AND VARIABLE COSTS
Fixed costs are costs that can be incurred for a particular period of time and which,
within certain activity levels, is unaffected by changes in the level of activity
Variable costs are costs that tend to vary with the level of activity.
Some costs can be semi fixed or semi variable overhead costs. E.g. telephone call
charges increase with more calls, but there is also a fixed element of the line rental.

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PRODUCTION AND NON PRODUCTION COSTS
Production costs are costs that can be identified with a finished product. They are
included in the cost of sales calculation
Non production costs are costs that are deducted as an expenses during the current
period without ever being included in the value of inventory.

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 EXAMPLE:

During the period 100 units are produced. Calculate the production cost of one unit.

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Production cost = (600 + 1000 + 500) / 100 = $21
This affects gross profit and the valuation of closing inventory. If 80 units are sold at $40
each, the gross profit will be:
Sales (80 x 40) 3,200
Cost of sales (80x21) (1,680)
Gross profit 1,520

The value of closing inventory will be (20x21) = $420.

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COST CODES:
Once costs have been classified, a coding system can be applied to make it easier to
manage to cost data both in manual and computerised systems.
Each cost should be identifiable by its code. This is possible by building up the
individual characteristics of the cost into the code.
The characteristics normally identified are as follows:
-The nature of the cost (material, labour, overhead), which is known as subjective
classification
-The type of cost (direct, indirect etc)
-The cost unit to be charged, this is known as objective classification.
-The department which the cost unit is in

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FEATURES OF A GOOD CODING SYSTEM
1. Must be easy to use and communicate
2. Each item should have a unique code
3. The code should be flexible so changes can be made easily
4. The coding system should be brief but comprehensive.
5. There should be a readily available index or reference book for codes
6. Existing codes should be reviewed regularly
7. Codes should be issued from a single central point
8. They should be either entirely numeric or entirely alphabetic. Avoid special characters
9. They should be uniform.
10. Mnemonics should be used i.e. the code should be derived from the items description or name
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TYPES OF CODES
1. Composite codes
The first three digits in the composite code might indicate the nature of the expense whereas
the last three digits might indicate the cost center or the cost unit to be charged.
For example:
Symbol 892.133 means:
8 – labor
9 – semi-skilled
2 – grade 2
These codes are showing this was semi-skilled labor
1 – indirect cost
1 – Factory XYZ
3 – finishing department
This code shows us this labor expenditure is to be charged as indirect labor to the finishing department
in factory XYZ

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2. Sequence (or progressive) codes
A sequential code simply follows a sequence. Imagine we are drafting a register for
employees for salary purposes.
We begin with the first employee being assigned the number 00, the second employee is
assigned the number 01 and so on.
3. Group classification codes
Group classification (block) codes are very common in accounting circles in that they
commonly form the basis of charts of accounts, as depicted below:
1000 – Non-current assets
2000 - Current assets (excl. inventories)
3000 - Inventories
4000 – Non-current liabilities
5000 - Current liabilities
6000 - Equity
7000 - Revenues
8000 - Expenditures
The 1000 “Block” is allocated to non-current assets. This means that it is possible to classify
up to 1,000 different non-current assets using this block.

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4. Faceted codes
These are refinement of group classification codes, in that each digit of the code
gives information about an
item.
For example
The first digit: The second digit: The third digit
1 – Nails 1 – Steel 1 - 50mm
2 – Screws 2 – Brass 2 - 60mm
3 – Bolts 3 – Copper 3 - 75mm

Therefore, a 60mm steel screw would have a code of 212

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5. Significant digit codes
These incorporate some digits which are part of the description of the item being
coded.
For example
Screws 5060 - 60mm screws
Screws 5075 - 75mm screws
6. 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
3 = screws
31 = flat headed screws
32 = round headed screws
322 = steel (round headed ) screws and so on

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ADVANTAGES OF CODING SYSTEMS:
Codes are brief thus they save time
Codes are precise and thus reduces ambiguity
Coding facilitates data processing.

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COST UNITS, COST OBJECTS AND RESPONSIBILITY
CENTRES:
Cost centres: are collecting places for costs before they are further classified into
cost units. E.gs of cost centres are a department, a machine, a project and overhead
costs (these are then allocated to a department or a project)
Cost unit: this is a unit of product or service to which a cost can be related. E.g. a
room in a hotel, a patient episode in a hospital, a barrel in a brewing industry.
Cost object: this is any activity for which a separate measurement of cost is desired.
If manager want to know the cost of something, it may be called a cost object e.g.
cost of a product/service/operating a department.

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Profit centres: these are similar to cost centres but are accountable for both costs and
revenues.
Revenue centres: here, managers are only accountable for revenues. They will not be
accountable for costs.
Investment centres: these are profit centres with additional responsibility for capital
investment and possibly for financing, and whose performance is measured by its return on
investment.
Responsibility centres: is a department or organisational function whose performance is the
direct responsibility of a specific manager. All the above centres are also known as
responsibility centres.

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TECHNICAL ARTICLES TO READ
https://www.accaglobal.com/sg/en/student/exam-support-resources/fundamentals-
exams-study-resources/f5/technical-articles/what-is-big-data.html

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