1. Management Accounting For exams from February 2014
ACCA F2 FIA FMA
Management Accounting
For exams from February 2014

2. Key to icons

3. Syllabus A The nature, source and purpose of management information B
Cost accounting techniques C
Budgeting D
Standard costing E
Performance measurement

4. Exam format
This paper is assessed by a two hour computer-based or paper-based examination.
Section A: Thirty five two mark objective test questions: marks
Section B: Three ten mark multi-task questions: marks
Total: marks

5. Chapter 1 Accounting for management
Information
Planning, control and decision- making
Financial accounting and management accounting
Cost accounting

6. Syllabus learning outcomes
Distinguish between data and information
Identify and explain the attributes of good information.
Outline the managerial processes of planning, decision making and control.
Explain the difference between strategic, tactical and operational planning.
Describe the purpose and role of cost and management accounting within an organisation.
Compare and contrast financial accounting with cost and management accounting
Explain the limitations of management information in providing guidance for managerial decision-making

7. Overview Accounting for management
Role of management accounting function
Data and information
Information for planning
Information for decision making
Qualities
Comparison with financial accounting
Information for control

8. Tackling the exam
Example Question

9. Information
The successful management of any organisation depends on information.
For example management need information for:
Setting prices
Deciding on whether to purchase or lease machinery
Deciding how many units to produce

10. Information Information is used in any type of organisation:
Non-profit seeking organisations such as charities, clubs and local authorities need information for reporting on their activities and determining prices or subscriptions
Multinational businesses need information for reporting on their activities

11. Information Information is sometimes referred to as processed data.
The syllabus requires you to know the difference between information and data.
Data is the raw material for processing.
For example, data may relate to facts, events and transactions.
Researchers conducting questionnaire surveys obtain data which are processed and analysed to produce a report.
The resulting report is information.

12. Information Qualities of good information Relevance.
Information must be relevant to the purpose for which a manager wants to use it.
Completeness.
An information user should have all of the information that they need to do their job properly.
Accuracy.
Information should obviously be accurate because using incorrect information could have serious consequences.

13. Information Clarity. Information must be clear to the user.
Confidence.
Information must be trusted by the managers who are expected to use it.
Communication.
Individuals given authority to do certain tasks must be given the information they need to do them.
Volume.
There are physical and mental limitations to what a person can read, absorb and understand properly.

14. Information Timing. Information should be available when it is needed.
Channel of communication.
Some information is best communicated informally by telephone or word-of-mouth and some is better in a formal method, in writing.
Cost.
Benefits of information must outweigh the cost of collecting it.

15. Question to consider
What information may the managers of a business need?

16. Answer External information Internal information
Competitors – Service offered
– Prices charged
Customers – Other services they might use
– Satisfaction
– Jobs to tender for
Suppliers – Continuation of trade
Possibility of opening new office/dept
Management accounts
– Performance against budget
– Debtor reports
Budgets (eg Cash, production, sales)
Staff availability

17. Information Most organisations need: Financial information
Non-financial information
A combination of financial and non-financial information

18. Information
Non-financial information is becoming more important to managers.
For example, suppose a business decides to provide a staff canteen.
Non-financial information examples:
Managers need to know how staff morale is affected by the canteen
Whether the bread from a supplier is fresh
Why canteen staff are requesting a new dishwasher

19. Planning, control and decision-making
Management require information to help them to plan and control operations and to make informed decisions.
Planning
Control
Decision-making

20. Planning
Organisations should never be surprised by developments which occur gradually because they should have implemented a planning process.
Planning involves:
Establishing objectives
Selecting appropriate strategies to achieve those objectives
Planning forces management to think ahead systematically in both the short term and the long term.

21. Planning – establishing objectives
An objective is an aim or a goal of an organisation.
A strategy is a possible course of action that might enable an organisation to achieve its objectives.

22. Local example Apple’s Strategy in China
With an early release of the new iPhone 5s and iPhone 5c in September, Apple (NASDAQ:AAPL) included China in the iPhone’s global debut for the first time. Now, that strategy might be paying off, a new report says, noting that the company has managed to surpass ZTE Corp. (SHE:000063) and Xiaomi Corp., to capture fifth position in the world's largest smartphone market in the third quarter.
company-beat-zte-enter-top-5-chinese-smartphone-market

23. Question to consider The objectives of a firm may be:
Profit making firm
Non profit making firm

24. Answer Profit making firm Non profit making firm
Maximise profits/shareholder wealth
Provide goods/services
Minimise costs
Maximise revenue
Use resources efficiently
Increase market share
Satisfaction of donor
Providing best quality

25. Planning
Long-term strategic planning (also known as corporate planning), involves selecting appropriate strategies to prepare a long-term plan to attain the objectives.
Time span – depends on organisation but could be 2, 5, 7 or 10 years
Formulating the plan is a detailed and lengthy process.

26. Planning
Long-term plans are broken down into a series of short-term plans usually covering 1 year.
They usually relate to sections, functions or departments.

27. The planning process 1 The planning process THE ASSESSMENT STAGE
THE OBJECTIVE STAGE
THE EVALUATION STAGE
Assess the external environment
Assess the organisation
Assess the future
Assess expectations
Evaluate corporate objectives
LONG- TERM STRATEGY PLANNING
Consider alternative ways of achieving objectives

28. The planning process 2 STRATEGY PLANNING THE EVALUATION STAGE
THE CORPORATE PLAN
Consider alternative ways of achieving objectives
Agree a corporate plan
Production planning
Resource planning
Product planning
Research and development planning
SHORT- TERM
PLANNING
Detailed operational plans which implement the corporate plan on a monthly, quarterly or annual basis. Operational plans include short-term budgets, standards and objectives.

29. Control There are two stages in the control process.
1 The performance of the organisation is regularly compared with the actual performance. Any deviations from plan can be identified and corrective action taken.
2 The corporate plan is reviewed in light of any changes in factors on which the plan was based. Plan is modified if necessary to prevent damage to future success of the business.

30. Decision-making
Decision-making involves making a choice between alternatives.
The management accountant must provide information so that management can reach an informed decision.
It is therefore vital the management accountant understands the decision-making process so that appropriate information can be supplied.

31. Decision-making process
Step 1
Step 2
Step 3
Step 4
Step 5 Step 6 Step 7
Identify goals, objectives or problems.
Identify alternative solutions/opportunities which might contribute towards achieving them.
Collect and analyse relevant data about each alternative.
PLANNING
Make the choice/decision. State the expected outcome and check that the expected outcome is in keeping with the overall goals or objectives.
Implement the decision.
Obtain data about actual results.
CONTROL
Compare actual results with the expected outcome. Evaluate achievements.

32. Anthony’s view of management activity
Anthony divides management activities into :
Strategic planning,
Management control, and
Operational control.
Strategic planning: ‘the process of deciding on objectives of the organisation, on changes in these objectives, and on the policies that are to govern the acquisition, use and disposition of these resources’.

33. Anthony’s view of management activity
Strategic plans are those which set or change the objectives or strategic targets of an organisation.
Examples include:
Selection of products and markets
Required levels of company profitability
Purchase and disposal of subsidiary companies
Purchase and disposal of major non-current assets

34. Anthony’s view of management activity
Tactical (or management) control: ‘the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organisation’s objectives’.
Resources refers to people, materials, machines, money.
Efficiency means optimum output is achieved from the input resources used.
Effectiveness in the use of resources means that outputs obtained are in line with the intended objectives.

35. Anthony’s view of management activity
Strategy feeds into tactical and operational plans. Eg
Increase sales by 5% per annum for at least 5 years
Strategic plan
Planning direct sales resources, advertising, sales promotion (to help increase sales by 5%)
Tactical plan
Sales territory specifies the weekly sales targets for each sales representative
Operational planning

36. Management control systems
A management control system is a system which 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.

37. Management control systems
Basic elements of a management control system:
Planning: deciding what to do and identifying the desired results
Recording the plan which should incorporate standards of efficiency or targets
Carrying out the plan and measuring actual results achieved
Evaluating the comparison and deciding whether further action is necessary
Where corrective action is necessary, this should be implemented

38. Strategic information
Derived from internal and external sources
Summarised at a high level
Relevant to the long term
Deals with the whole organisation
Often prepared on an ‘ad hoc’ basis
Is both quantitative and qualitative
Cannot provide complete certainty, given future cannot be predicted

39. Tactical information Primarily generated internally
Summarised at a lower level
Relevant to short and medium term
Describes or analyses activities or departments
Prepared routinely and regularly
Based on quantitative measures

40. Operational information
Derived almost entirely from internal sources
Highly detailed, being the processing of raw data
Relates to the immediate term
Prepared constantly or very frequently
Task specific and largely quantitative

41. Financial and management accounts
Management information provides a common source from which information is drawn for two groups of people.
Financial accounts are prepared for individuals external to an organisation.
Management accounts are prepared for internal managers of an organisation.

42. Financial and management accounts
The data used to prepare financial accounts and management accounts are the same.
The differences between the financial accounts and the management accounts arise because the data is analysed differently.

43. Financial accounting
Financial accounting systems ensure that the assets and liabilities of a business are properly accounted for.
Financial accounts provide information about profits etc to external parties.
These external parties include shareholders, customers, suppliers, tax authorities and employees.

44. Financial accounting
The financial accounts show performance of a defined period.
There are legal and accounting requirements for limited companies in preparing financial accounts.
Financial accounts are largely monetary and show a historic picture of past operations.

45. Management accounting
Management accounting systems provide information specifically for the use of managers within an organisation.
Management accounts assist in planning and controlling an organisation’s activities and help the decision-making process.
There are no legal requirements to prepare management accounts or any set format.

46. Management accounting
Management accounts can focus on specific areas of an organisation’s activities.
Management accounts incorporate non-monetary measures and can be used as a future planning tool.

47. Management accounting
Question to consider
Complete the following table to compare financial and management accounting:
Financial accounting
Management accounting
Legal requirement
Users
Level of precision
Rules
Reporting
Scope
Frequency
Format

48. Management accounting
Answer
Financial accounting
Management accounting
Legal requirement  X
Users
External and internal
Internal
Precision
True and fair
As accurate as possible for the users needs
Rules
Generally accepted accounting principles
No rules govern them but some established techniques used
Reporting
Past data
Past and present data to make decisions about future
Scope
Whole organisation
Segments/divisions or whatever is needed by the business
Frequency
Annual
As required
Format
Governed by Companies Act
No set format

49. Cost accounts Cost accounting is part of management accounting.
Cost accounting provides a bank of data for the management accountant to use.
Concerned with:
Preparing statements (eg budgets, costing)
Cost data collection
Applying costs to inventory, products and services

50. Cost accounting information and decisions
All decision making is concerned with the future and so there will always be some degree of uncertainty.
Information for decision making should therefore incorporate uncertainty in some way.
The methods used to do this are outside the scope of this syllabus but it is important to note that cost accounting information is unsuitable for decision making as it does not take into account uncertainty.

51. Summary 1. Introduction to management accounting
Purpose is to assist management in running their business to achieve an overall objective.
2. Data and information
Information is data that has been processed to be meaningful to the person who receives it.
3. Planning, control and decision-making
Information is used in a business for planning, control and decision making.

52. Summary 4. Role of management accountant
Includes costing, decision-making, planning, control and performance evaluation.
5. Management accounting and financial accounting
Financial accounting systems ensure that the assets and liabilities of a business are properly accounted for. Management accounting systems provide information specifically for managers.

53. Chapter 2 Sources of data
Types of data
Sources of data
Secondary data
Sampling

54. Syllabus learning outcomes
Describe sources of information from within and outside the organisation.
Explain the uses and limitations of published information/data.
Describe the impact of general economic environment on costs/ revenues.
Explain sampling techniques.
Choose an appropriate sampling method in a specific situation.

55. Effect of general economic environment on costs / revenues
Overview
Effect of general economic environment on costs / revenues
Sources of Data
Data
Sampling
Primary vs Secondary
Internal vs External
Random
Non Random
Random
Systematic
Stratified
Multistage
Quota
Cluster

56. Tackling the exam
Example Question

57. Types of data Data may be classified as follows:
Primary and secondary data
Discrete and continuous data
Sample and population data

58. Types of data
Primary data are data collected especially for a specific purpose. Raw data are primary data which have not been processed at all.
Secondary data are data which have already been collected elsewhere, for some other purpose.

59. Local example China Primary
China Primary is an organisation dedicated to delivering an information advantage for the investment process. It provides access to previously unavailable data on companies operating performance in Asia - data that allows for more accurate analysis and ultimately, increased returns.

60. Types of data
Quantitative (measurable) data may be classified as being discrete or continuous:
Discrete data are data which can only take on a finite or countable number of values within a given range.
Eg the number of goals scored by Manchester United against Chelsea in a league final: Manchester United 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.

61. Types of data
Continuous data are data which can take on any value. They are measured rather than counted.
Continuous data include the heights of all the members of your family, as these can take on any value.

62. Types of data
Sample data are data arising as a result of investigating a sample. A sample is a selection from the population.
Population data are data arising as a result of investigating the population. A population is the group of people or objects of interest to the data collector.

63. (attributes that cannot be measured)
Types of data
DATA
QUANTITATIVE
(variables that can
be measured)
QUALITATIVE
(attributes that cannot be measured)
DISCRETE
(countable number)
CONTINUOUS
(any value)
PRIMARY
SECONDARY
PRIMARY OR SECONDARY

64. Sources of data
Data may be obtained from an internal source or an external source.
Internal sources examples:
Sales ledger
Purchase ledger
General ledger
To maintain the integrity of the accounting records, an organisation will have systems and controls over transactions.

65. Sources of data Other internal sources examples:
Data relating to personnel will be linked to the payroll system.
Additional data may be obtained from this source if, say, a project is being costed and it is necessary to ascertain the availability and rate of pay of different levels of staff, or the need for and cost of recruiting staff from outside the organisation.

66. Sources of data Other internal sources examples:
Much data will be produced by a production department about machine capacity, fuel consumption, movement of people, materials, and work in progress, set up times, maintenance requirements and so on.
A large part of the traditional work of cost accounting involves ascribing costs to the physical information produced by this source.

67. Sources of data External data examples: Invoices Letters
Advertisements
Other items received from from customers and suppliers

68. Secondary data
You will remember that primary data are data collected especially for a specific purpose.
The advantage of such data is that the investigator knows where the data came from and is aware of any inadequacies or limitations in the data.
Its disadvantage is that it can be very expensive to collect primary data.
Management accountants often collect primary data when they carry out investigations. Eg analysing invoices to establish the direct cost of a product.

69. Secondary data
Secondary data sources may be satisfactory in certain situations but is essential that there is good reason to believe that the secondary data used is accurate and reliable.
Main sources of secondary data are:
Governments
Banks
Newspapers
Trade journals

70. Secondary data Government statistics
Official statistics are supplied by many Governments.
Population data is published by many Governments around the world, and includes population numbers, births, deaths, marriages and so on.

71. Secondary data
Banks
The Bank of England issues a quarterly magazine which includes data on banks in the UK, the money supply and Government borrowing and financial transactions.
Financial newspapers
Financial newspapers contain detailed business data and information.
Financial newspapers include the Financial Times, the Wall Street Journal, the Singapore Business Times and the Nikkei Weekly. Such newspapers provide data on foreign exchange rates, interest rates, gilts and other share prices.

72. Secondary data Trade journals
Most industries are served by one or more trade journals. Journals contain data on new developments in the industry, articles about competitors' products, details of industry costs and prices and so on.

73. Secondary data Internet
The Internet is a global network connecting millions of computers.
The Internet allows any computer with a telecommunications link to send and receive information to and from any other suitably equipped computer.
A website is a collection of images and text that provide information which may be viewed on the World Wide Web.
Most organisations now have a website and many are able to process transactions (known as electronic commerce or e-commerce).

74. Secondary data Internet (continued)
Remember, when you are looking at information on the Internet it is not necessarily good information, just because it is 'published'.
Anybody can put information on the Internet. The reliability and reputation of the provider is important.
For example, The Financial Times site, FT.com, is a respected source of financial information. On the other hand, a site such as 'Fred's Financial Advice' may contain unreliable information.

75. Local example
The National Bureau of Statistics of China collates and publishes statistics such as:
Producer price indices for manufactured goods
Consumer price indices
Gross domestic product
Employment rates

76. Economic environment
General economic environment will affect the costs and revenues of a business.
The forecast state of the economy will influence the planning process for organisations which operate within it. In times of boom and increased demand and consumption, the overall planning problem will be to identify the demand. Conversely, in times of recession, the emphasis will be on cost-effectiveness, continuing profitability, survival and competition.

77. Question to consider
Consider an accountancy training business and state how it might be affected by a recession (ie the general economic environment.)

78. Answer Change Impact Decline in GDP
Less money in the economy meaning less disposable income may create fall in demand for courses
The firm operate in a city which has a high promotion of financial service firms which seem to be bucking the overall recession well. (eg of a Local economic trend)
A higher proportion of students coming from an area less affected by the recession may stave off the expected fall in demand due to the national recession.
Increased inflation
High inflation in prices of utilities and food costs mean that students will have less disposable income and therefore may not be able to afford fees.

79. Answer – continued Low Interest rates
Will make it easier for the business to raise debt finance to finance it’s business.
From the point of view of the students low interest rates should keep down mortgage repayments and thus combat the high price inflation to help maintain disposable income levels.
Increases in tax rates
Will reduce the profits made by the business which could cause a reduction in either the dividends paid to investors or a reduction in re investment within the business
Reductions in government spending
Any contracts with government agencies could be at risk due to local cutbacks.

80. Sampling
If all members of a population are examined, the survey is called a census.
If it is not possible to survey the entire population, a sample is selected
The results from the sample are used to estimate the results of the whole
Once a certain sample size has been reached very little accuracy is gained by examining more items

81. Sampling Disadvantages of a census
The high cost of a census may exceed the value of the results obtained.
It might be out of date by the time you complete it.
Advantages of a sample
It can be shown mathematically that once a certain sample size has been reached, very little accuracy is gained by examining more items. The larger the size of the sample, however, the more accurate the results.
It is possible to ask more questions with a sample.

82. Sampling
A random sample is selected so that every item in the population has an equal chance of being included.
This will require a sampling frame.
A sampling frame is a numbered list of all items in a population.
From this list a random sample can be selected using random number tables.
Random sampling may be expensive, can produce an unrepresentative sample or a sampling frame may not exist.

83. Sampling
As random sampling can be expensive or impossible then there are various methods of quasi-random sampling.
Stratified random sampling is where the population is divided into categories from which random samples are taken.
This method means that a representative sample is selected which reflects the population.
Inferences can be made about each category.
However the method requires prior knowledge of each population item.

84. Sampling
Systematic sampling is another method of quasi-random sampling.
This involves selecting every nth item after a random start
Systematic sampling is easy to use and reasonably random
However a biased sample might be chosen if the population has a regular pattern coinciding with the sampling interval

85. Sampling
Multistage sampling is where the population is divided into subpopulations from which a small random sample is selected.
Each sub-population is then divided further and then a small sample is again selected at random.
This process can take place as many times as necessary.
This method does not require a sampling frame of the entire population and is relatively cheap.
However it is not truly random and there is a possibility of bias.

86. Sampling
When a sampling frame cannot be established then non-random sampling methods must be used.
Quota sampling involves stratifying the population and restricting the sample to a fixed number in each stratum.
This method is cheap and administratively easy and often used by market researchers.
Much larger samples can be studied and no sampling frame is required.
However it could result in a certain bias.

87. Sampling Another form of non-random sampling is cluster sampling.
This involves selecting one definable subsection of the population as the sample that is taken to be representative.
It is inexpensive to operate.
It is a good alternative to multistage sampling if a sampling frame does not exist.
However there is potential for considerable bias.

88. Chapter Summary
1. Data
Data is term for facts, figures, information and measurements. If collected for a specific purpose it is known as primary data and if collected for another purpose it is known as secondary.
2. Sources of data
Data can be internal (accounting records, payroll information, product information, published accounts or historic records) or external (market research, interviews, questionnaires, data from government, banks, newspapers or the internet).
3. Impact of general economic environment on costs/revenues
The economic environment will impact the costs and revenues of a business.

89. Chapter Summary 4. Sampling
A sample is where data is only collected from a sample of the population whereas a census collects information from the whole population.
5. Random sampling
The sample is selected in such a way that each item has an equal chance of being selected. Often done using random numbers. Quasi random sampling can also be used.
6. Non-random sampling
Where a random sample cannot be used non random sampling can be a solution. Both quota and cluster sampling can be used.