AC 203

Computerized
Accounting Applications

Management Accounting Systems

 Management Accounting Systems
In managerial accounting information system information flows in
two directions.

 Top-down flow. Originates from events that occur at the top

management level

 Bottom-up flow. When events occur at the lower levels

University of Dar es Salaam Business School, Dept. of Accounting. Mbwile, P. R. 17-2

 Organizations Structure
 Provides the environment through which information
flows.
 For management AIS to function properly this
environment must have the following characteristics;
 The organization must establish a structure that
distinguishes each of its segments.
 The organization must issue a clear statement of
authority and responsibility for the manager of each
segment.
 Each employee should report to only one higher-level
manager.
 Top management should clearly define all superior-
subordinate relationships among employees.
University of Dar es Salaam Business School, Dept. of Accounting. Mbwile, P. R. 17-3
 Policy Statements
 Identify managements’ expectations
concerning the behaviour of the
organization employees.
 Provides guidelines for employees on how
to carry out specific duties contained in
job description.
 Common policy statements includes
Financial Regulations and Accounting
Manuals.
 Also code of conduct/ethical guidelines.

University of Dar es Salaam Business School, Dept. of Accounting. Mbwile, P. R. 17-4

 Data Accumulation
 Responsibility accounting systems provides
top-down and bottom-up information flows.
 This system produces a performance report
for each responsibility centre summarizing
budgeted costs and revenues to provide top-
down flow, and actual costs and revenues for
bottom-up flow (see illustration 2.9, p. 33).
 The system accumulates much of data by the
processes of classification and coding.

University of Dar es Salaam Business School, Dept. of Accounting. Mbwile, P. R. 17-5

 Classification
 This occurs when the system groups
transactions by responsibility centres and by
account from the chart of accounts.
Example: During a particular months, the
system may classify TShs. 910,000 labour
expenditure as a production department A’s
wages and salaries expense. In manual IS,
accountant perform this classification, while on
a computer-based, either a person or computer
may do it.
University of Dar es Salaam Business School, Dept. of Accounting. Mbwile, P. R. 17-6
 Coding
 This occurs when the system assigns to a
transaction a combination of characters that
distinguish the classifications to which it
belongs.
 This is done through/using a Chart of
Accounts
 The overall objective is providing information
for decision making

University of Dar es Salaam Business School, Dept. of Accounting. Mbwile, P. R. 17-7

 Advantages of Coding in AIS
 Concisely represent large amounts of
complex information that would otherwise be
unmanageable
 Provide a means of accountability over the
completeness of the transactions processed.
 Identify unique transactions and accounts
within a file
 Support the audit function by providing and
effective audit trail.

University of Dar es Salaam Business School, Dept. of Accounting. Mbwile, P. R. 17-8

 Classification (Cont.)
Responsibility accounting system classifies a
transaction in two ways.
 According to the proper account in the Chart
of Accounts
 According to the Responsibility Centre
The system then codes the transactions using
the proper account code for that account and
the proper responsibility code for that
responsibility centre.

University of Dar es Salaam Business School, Dept. of Accounting. Mbwile, P. R. 17-9

 Types of Codes
i. Responsibility Codes
 Codes that distinguish each responsibility
centre from others in the organization chart
(See Illustration 2-12, p. 36).
 Using this method, the responsibility
centre with the most zeros in its codes is
at the highest level in organization
structure.

University of Dar es Salaam Business School, Dept. of Accounting. Mbwile, P. R. 17-10

 Types of Codes
ii. Accounting Codes
 In financial AIS, each account in the chart
of accounts has a unique account code.
 Helps to uniquely identify each account in
the chart of accounts for each
responsibility centre.

University of Dar es Salaam Business School, Dept. of Accounting. Mbwile, P. R. 17-11

 Other 710 Wages and 720 Supplies Total Cost by

Accounting Codes
Code Description
Accounts Salaries Expense Responsibility

1000 President TShs. X TShs. X TShs. X TShs. XX

2000 Vice - President Counsel X X X XX

3000 Vice - President Manufacturing X X X XX

3100 Superintendent Factory 1 X X X XX

3200 Superintended Factory 2 X X X XX

3300 Superintendent Factory 3 X X X XX

Total Cost by Account XX XX XX XXX

From the above illustration, wages paid to people working in the office of President
will be charged to 1000-710. Likewise supplies used in the office of President will
be changed to 1000-720 etc.

University of Dar es Salaam Business School, Dept. of Accounting. Mbwile, P. R. 17-12

 Types of Codes
iii. Budget Codes
 These work like Account codes however,
when designing the system the designer add
one digit to the account code to distinguish
between budgeted and actual amounts.
E.g. assume the digit 0 indicates actual amounts and
the digit 9 signifies budget amounts, then the actual
wages and salaries expense for the office of
President is recorded in account 1000-0-710 while
the budgeted amount will be recorded in 1000-9-710.

University of Dar es Salaam Business School, Dept. of Accounting. Mbwile, P. R. 17-13

 Types of Coding Structure
Sequential Codes
 Assigns unique identifiers to data items in sequence.
 Accountants commonly assign them to the documents
processed by an AIS. These include cheques, sales
orders, purchase orders, invoices etc.
 Easy-to-use sequential codes enable an accountant to
keep a record of documents on hand and to identify
their unauthorized use.
 Examplecheques issued by cash payment system have
unique identifying numbers in an increasing sequence
e.g. Cheque No. 10034, cheque No. 10035, etc.
 However sequential codes are less flexible.

University of Dar es Salaam Business School, Dept. of Accounting. Mbwile, P. R. 17-14

 Types of Coding Structure
Block Codes
 System designer here reserve certain adjacent
numbers in the sequence for certain classification.
 Block codes – allow future expansion of the chart of
accounts.
Account Category Block

Current Assets 100-199

Property, Plant and Equipment 200-299

Current Liabilities 300-399

Long-term Debt 400-499

Stakeholders Equity 500-599

Revenue 600-699

Expenses 700-799

University of Dar es Salaam Business School, Dept. of Accounting. Mbwile, P. R. 17-15

 Group Codes
 An extension of a block codes in which the position of
each character in the group has significance.
 The position represents a different characteristics of the
data classification.
 Usually are used as account codes and has the form of
xxxx-x-xxx
 Often group codes are structured so that the interpretation of
each succeeding digit depends on the digit immediately to
its left.

 Advantages of Group Codes: it is easy to add or delete

items/groups without affecting others. Also one can reassign
meaning to a group of codes without affecting other items.

University of Dar es Salaam Business School, Dept. of Accounting. Mbwile, P. R. 17-16

 Mnemonic Codes
 Identify data items with combination of letters
and numbers.
 The design team chooses the combination so
that clerks can more easily remember the
associated data items.
 Help to prevent errors in data entry. E.g.
shortened version of customers’ names.
 However, if there are many similar data items,
the mnemonics many also be similar which may
confuse clerks and cause errors. E.g. customers
many have similar names etc.
University of Dar es Salaam Business School, Dept. of Accounting. Mbwile, P. R. 17-17
 Additional Notes
 Coding structures help to classify, summarize and
retrieve data.
 Coding structures should be adaptable to changing
needs within a company e.g. A three digit employee
code becomes inadequate once a company hires more
than 999 employees.
 Furthermore, producing comparable information from
data codes in different ways require different systems;
maintaining redundant system is expensive and
inefficient.
Accountants, therefore participating in system design must
choose an appropriate coding structure

University of Dar es Salaam Business School, Dept. of Accounting. Mbwile, P. R. 17-18

 Additional Notes
 Responsibility Centrean organizational unit where a
manager controls financial measures recorded and reported
by a managerial accounting information system. It may be
either a cost centre (e.g. production department), a profit
centre (e.g. sales office, regions, divisions), or an investment
centre (e.g. subsidiary).
 Chart of Accounts is a created list of the accounts used
by a business entity to define each class of items for which
money or the equivalent is spent or received.

Review Questions (Boockholdt, J. L. Chapter 2 Questions 2-24, 2-25)

University of Dar es Salaam Business School, Dept. of Accounting. Mbwile, P. R. 17-19