Unit 1: Management Information

Cost and management accounting systems provide information to managers to help them make decisions about their business. This introductory chapter explains the purpose of management information, the nature of the decision-making process and the qualities that management information should have to be of value.

Management information may come from sources within the organization or from external sources, and it may be financial and non-financial in nature. Accountants specialize in providing financial information. This chapter explains the role of the trainee accountant in providing management information and the main elements of information about costs. These will be described in more detail in later chapter.

MANAGEMENT INFORMATION

The purpose of management information is to help managers to manage resources efficiently and effectively by planning, controlling operations and by allowing informed decision-making.

PLANNING

Planning involves establishing an objective or identifying a problem and then choosing a strategy to achieve the objective or alleviate the problem.

An objective is the aim or goal of an organization.

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

There are four steps in the planning process:

          Step 1:         establish an objective or identify a problem

          Step 2:         develop solutions or strategies

          Step 3:         collect and analyze relevant data

          Step 4:         make decision about which strategy or solution to take

CONTROL

Control is the action of monitoring something in order to keep it on course.

DECISION-MAKING

Decision-making mean choosing between various alternatives. Decision-making and planning are linked: you decide to plan in the first place and the plan you make is a collection of decisions.

THE QUALITIES OF GOOD MANAGEMENT INFORMATION: ACCURATE

-       Accurate

-       Complete

-       Cost beneficial

-       User targeted

-       Relevant

-       Authoritative

-       Timely

-       Easy to use

SOURCES OF MANAGEMENT INFORMATION

Internal sources of management information are:

-                         -   accounting records

-                         -   personnel records

-                         -   production records

-                        -     detailed time records

External sources of management information are:

-       A primary source of information is as close as you can get to the origin of an item of info: the eyewitness to an event, the place in question, and the document under scrutiny.

-       A secondary source provides second hand information: books, articles, verbal or written report by someone else.

FINANCIAL AND NON-FINANCIAL INFORMATION FOR MANAGEMENT

Most organizations require the following types of information for management:

-                        -     financial

-                        -     non-financial

-                        -     a combination of financial and non-financial information

RECORDING MANAGEMENT INFORMATION

Financial accounts are prepared for individuals external to an organization, whereas management accounts are prepared for internal managers of an organization.

Cost accounting produces information that is used for both financial accounting and management accounting.

The differences between financial accounting and management accounting are:

Financial accounting	Management accounting
-       for external users -       required by law -       format determined by law -       focus on total aspect -       financial information -       historical picture of past operations	-       for internal managers -       no regulation -       no restrict rule -       can focus on specific area -       financial and non-financial -       both historical records and future planning tool

COST ACCOUNTS

Cost accounting aims to capture an organization’s costs of operations, departments, or products, and then classify and analyze this information to produce cost reports.

Cost accounting is part of management accounting.

Cost accounts aim to establish the following:

-                        -     cost of goods or services

-                        -     cost of department, or work section

-                        -     revenue

-                        -     profitability

-                          -    selling price

-       value of inventory of goods

-       future costs.

THE ROLES OF THE TRAINEE ACCOUNTANT

The trainee accountants know all about the costs incurred and revenues eared, and they may also be asked to:

-                        -     assess how profitable certain products or department are.

-                        -     review the costs of products

-                         -   put a value to inventories of goods

COSTS

Direct costs can be traced directly to specific units of production.

A unit cost is a unit of product which has costs attached to it.

Cost centers are the essential building blocks of a costing system.

Overheads (indirect costs) can’t be identified with any one product because they are incurred for the benefit of all products rather than for any one specific product

FIXED AND VARIABLE COSTS

Costs are either variable or fixed, depending upon whether they change when the volume of production change.

PRODUCT COSTING

-                         -   job costing

-                        -     batch costing

-                        -     process costing

-                         -   service costing

COST CODES

A cost code is a brief reference designed to help with the classification of items by assisting with entry, collection, and analysis.

Types of codes:

-                         -   sequential code

-                         -   block code

-                         -   mnemonic code

-                         -   hierarchical code

-                        -     faceted code.