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Sunday, October 18, 2020

8:48 PM

MANAGEMENT INFORMATION Page 1

Sunday, October 18, 2020

3:51 PM

ACCOUNTING FOR
BEGINNERS :
MANAGEMENT
INFORMATION

MANAGEMENT INFORMATION Page 2

A
Sunday, October 18, 2020

3:49 PM

THE NATURE AND
PURPOSE OF COST
AND MANAGEMENT
INFORMATION

MANAGEMENT INFORMATION Page 3

BUSINESS ORGANISATIONS AND ACCOUNTING
Saturday, October 17, 2020

12:30 PM

Office organisation and functions
- The office in an organisation is a centre for information and administration
- The most common functions in an office are purchasing ,personnel (human resources),general administration, finance and sales and
marketing
- Organisation charts are a traditional way of depicting the various roles and relationships of the formal structure
...


Advantages of a centralised administration office include the following
...
Everyone uses the same data and information
...

(c) It gives better security/control over operations and it is easier to enforce standards
...
Senior managers in an organisation
can take a wider view of problems and consequences
...

(f) Senior management can keep a proper balance between different departments or functions eg by
deciding on the resources to allocate to each
...

(h) Crisis decisions are taken more quickly at the centre, without need to refer back, get authority
etc
...

(j) Administration staff are in a single location and more expert staff are likely to be employed
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(k) Standardisation of policies, systems, procedures and documentation
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(m) Duplication of services can be avoided and thus costs reduced
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(a) Local offices do not have to wait for tasks to be carried out centrally
(b) No reliance on head office
...
Geographically dispersed
organisations should often be decentralised on a regional/area basis
(f) Decisions can be made more quickly because no need for head office approval
(g) Local managers are able to make their own decisions, which may help motivate them
(h) More opportunities for junior managers to take on responsibility – important since job challenge
and entrepreneurial skills are highly valued in today's work environment
(i) There may be greater continuity between functional and general management, which may enable
junior managers to make the transition to senior management more smoothly
(j) Top managers are free to focus on matters affecting the organisation as a whole, and are not
overly burdened or stressed with local concerns
(k) Easier to identify separate spheres of responsibility, which may result in improved controls,
performance measurement and accountability

Policy manual
MANAGEMENT INFORMATION Page 4

Policy manual
- A policy manual should help to ensure that all personnel follow procedures and best practices
...

- In order for the purchase of non-current assets to be put in motion the manager of the department which
- requires the asset must firstly fill out a purchase requisition
...
If a sale is made on credit the goods are sent out with a
promise from the customer to pay in the future therefore the management of the business must
be as certain as they can be that this new customer can, and will, pay for the goods
...

- (b) Purchases of goods or non-current assets and payments for expenses
...

- (c) One of the largest payments made by most organisations is that of the wages bill for their
employees
...

- Debit entries in ledger accounts are increases in assets or expenses and decreases in liabilities and
income
...

- one of the basic principles of double entry is that for every debit entry there is an equal and opposite credit entry
...

THE ACCOUNTING EQUATION IS:

Assets – liabilities = Capital + profit – drawings

- So here is a brief reminder of the basic double-entry that you are likely to come across
...

- Cost accounting is the accumulation of costs for inventory valuation in order to meet the requirements of
external reporting and also for internal profit measurement
...

- The ledger accounts will only contain the totals from the day books, so to find individual transactions one has to look to th e day books
...
The journal keeps a record of unusual movement between accounts
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- The main types of transaction and their related books of prime entry are given below:
Sales invoices sent out – Sales day book
Credit notes sent out – Sales returns day book
Purchase invoices received – Purchases day book
Credit notes received – Purchases returns day book
Cash/cheque receipts – Cash received book
Cash/cheque payments – Cash payments book
Petty cash receipts/payments – Petty cash book
- An integrated system is one which combines the cost accounting and financial accounting functions in
one system of ledger accounts
...
However it has the disadvantage of trying to fu lfil two purposes
with one set of ledger accounts despite the differences between financial accounting and management accounting requirements
- An interlocking system has a separate cost ledger for the cost accounting function and a separate
financial ledger for the financial accounting function
...

- In a full ledger computerised system the computer system will normally maintain the following ledgers:
• General or main ledger (for all asset, liability, income and expense accounts)
• Receivables ledger – accounts for each customer
• Payables ledger – accounts for each supplier
• Cash books – including the main cash book and the petty cash book
- Computerised accounting therefore follows a data processing cycle of input, process, and output
...
A
collection of similar records makes up a file
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A field is an item of data relating to a record
...

- A transaction file is a file containing records that relate to individual transactions
...
The sales day book
entries are examples of transaction records in a transactions file
...

- Both manual and computer data processing can be divided into two broad types: batch processing and
real-time processing
...
Because data is not input as soon as it is received the
system will not always be up-to-date
...


QUESTIONS
1 Which one of the following is a potential advantage of decentralisation?
A Less control by senior management
B Duplication of services can be avoided
C Local offices are more self sufficient
D Consistency of decision-making across the organisation

2 Which one of the following is a potential disadvantage of a policy manual?
A It may lead to inflexibility
B Personnel follow best practices
C Procedures are formalised
D It acts as a form of control over activities of employees
3 Which of the following personnel in an organisation would not be involved in the sale of goods on credit?
A Credit controller
B Payables ledger clerk
C Sales person
D Warehouse operative

4 What document should normally be completed if a purchase of a non-current asset is required?
A A purchase requisition
B A despatch note
C A goods received note
D An invoice
5 What is the correct accounting equation?
A Assets + Liabilities = Capital + profit – drawings
B Assets + Liabilities = Capital - profit – drawings
C Assets – Liabilities = Capital + profit + drawings
D Assets – Liabilities = Capital + profit – drawings
6 What is the double entry for the purchase of materials on credit?
A Dr Materials control Cr Payables
B Dr Payables Cr Materials control
C Dr Materials control Cr Receivables
D Dr Receivables Cr Materials control

7 An integrated system combines the cost accounting and financial accounting functions into one system
of ledger accounts
...

2 A Although a policy manual is to be recommended, care must be taken that strict adherence to the
rules does not create inflexibility and in cases of doubt, a more senior member of staff should be
consulted
...


4 A A purchase requisition will need to be completed and as non-current assets are relatively
expensive, it will usually have to be authorised by senior management
...

8 (a) Dr Work in progress control account
(b) Dr Finished goods control account

Cr Production overhead account
Cr Work in progress control account

MANAGEMENT INFORMATION Page 8

INTRODUCTION TO MANAGEMENT INFORMATION
Saturday, October 17, 2020

2:03 PM

Data and information
- Raw data may be processed to produce meaningful information
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Data are the raw materials for data
processing
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Information is anything that is communicated
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- Management information can therefore be described as information that is given to the people who are
in charge of running an organisation
...

- Management information is often classified into two types:
• Financial information (measured in terms of money)
• Non-financial information (not measured in terms of money)

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

• Planning
• Control
• Decision making

Planning
...


Control
...


Decision making
...
Decision making
always involves a choice between alternatives
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- Management information is used for a wide variety of purposes
...

- Reporting information requires the active co-operation of the following groups
...

- Data and information come from sources both inside and outside an organisation
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Management accounting and financial reporting
- Computer systems and coding structures help to sort the information into the categories and formats
required for both financial and management accounting
...

- Cost accounting is the accumulation of costs for inventory valuation in order to meet both the
requirements of external reporting and also for internal profit measurement
- The purpose of financial accounting is to provide accurate financial information for the company
accounts, which will be used by both senior management and external parties (for example, investors)
...

• There is a legal requirement for limited companies to prepare them and presentation is dictated
by accounting standards
...

• They usually include only financial information
...


The trainee accountant's role in a cost and management
accounting system
- In a cost and management accounting system, the role of the trainee accountant is to provide answers
to questions on costs and revenues
...

- The questions a trainee accountant is going to provide answers for are;
(a) What has the cost of goods produced or services provided been?
(b) What has the cost of operating a department been?
(c) What have revenues been?

QUESTIONS
1 Two statements follow about information:
1
...

2
...

Are the above statements true or false?
A Both statements are true
B Both statements are false
C Statement 1 is false but statement 2 is true
D Statement 1 is true but statement 2 is false
2 Which one of the following is not usually considered to be one of the purposes of management
information?
A Implementing
B Planning
C Control
D Decision making
3 What is the main factor to consider when designing a management report?
A The needs of the user
B The length of the report
C Confidentiality
D Neat handwriting
4 Which one of the following does not appear in the mnemonic 'accurate'?
A Accurate
B Communication
C Complete
D User-targeted
5 Which one of the following sources of information would you expect to be an internal source of
information for a business?
MANAGEMENT INFORMATION Page 10

information for a business?
A The government
B Tax consultants
C The internet
D The receivables ledger
6 Two statements follow about the format and content of information
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There are no external rules governing the format and content of management information
2
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It is data which is the term for facts, figures and processing
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2 A Implementing
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3 A The needs of the user
...

4 B Communication
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It is worth memorising the
mnemonic for the exam
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The question says 'usually' because a tax specialist company would
probably not need to use external tax consultants so their source of tax information would be
internal
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Statement 2 is false as
financial information is subject to external rules and regulations
...
Questions
on business strategy would normally be discussed at board level
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MANAGEMENT INFORMATION Page 11

MANAGEMENT INFORMATION Page 12

B
Saturday, October 17, 2020

2:31 PM

COST
CLASSIFICATION AND
MEASUREMENTS

MANAGEMENT INFORMATION Page 13

COST UNITS , COST CLASSIFICATION AND PROFIT REPORTING
Saturday, October 17, 2020

2:34 PM

Introduction to costs
- The amount paid to the wholesaler can be split in a similar way: there will be a profit element and
amounts to cover the costs of running a wholesaling business
...


Cost units
- A cost unit is a unit of product or service to which costs can be related
...

• Room (in a hotel)
• Batch of 1,000 shoes
• Patient night ( the cost of a patient staying in a hospital for a night)
- Cost information is needed to aid price setting, decision making, planning and budgeting, control and
reporting
...
Examples include direct or
indirect costs, fixed or variable costs
...

Costs can be classified as direct or indirect
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Direct materials – which form part of the end product
Direct labour – involved directly in making the product
Direct expenses – it is rare for expenses to be directly traceable to the product
The sum of the direct costs is known as the prime cost
...

Indirect materials – such as lubricants for machinery
Indirect labour – such as supervisors and maintenance workers
Indirect expenses – such as heating and lighting for the factory
There are also non-manufacturing overheads in a manufacturing business
...

- Cost behaviour is the way that costs change as the level of activity changes
...

- The basic principle of cost behaviour is that as the level of activity rises, costs will usually rise
...
The variable cost
per unit is the same amount for each unit produced whereas total variable cost increases as volume of
output increases
...


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- The cost will be the same for each unit produced giving the following graph for variable cost per unit
...
In other words, constant rate and efficiency levels are implied in variable costs
...

(a) The cost of raw materials, because the volume of raw materials purchased relates to the volume
used in production
...
This is due to the ability to increase or decrease the number of workers and
therefore the total cost
...

- A variable cost is not just another name for a direct cost
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(a) Costs are either variable or fixed, depending upon whether they change in total when the
volume of production changes
...


Fixed costs
- A fixed cost is a cost which tends to be unaffected in total by increases or decreases in the volume of
output
...


Graph of total fixed cost

- The following are fixed costs
...


Graph of fixed cost per unit
MANAGEMENT INFORMATION Page 15

Graph of fixed cost per unit

Stepped-fixed costs
- Stepped-fixed costs are costs which are fixed in nature within certain levels of activity
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(a) Rent, where accommodation requirements increase as output levels get higher
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One supervisor may be able to supervise a maximum of ten employees
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Mixed costs (or semi-variable costs or semi-fixed costs)
- Mixed costs (semi-variable/semi-fixed costs) are partly fixed and partly variable, and therefore only partly
affected by changes in activity levels
...
An example of this is a telephone bill with a fixed charge for line rental and a
variable charge for calls made
...
For example, production, distribution and selling,
administration and financing costs
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(a) Production costs
...

(b) Distribution and selling costs
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(c) Administration costs
...
You might like to think of these costs as the materials
and labour used and the expenses incurred in co-ordinating the activities of the production
function and the distribution and selling function
...
The expenses incurred when a business has to borrow to purchase non-current
assets, say, or simply to operate on a day-to-day basis
...
If there are changes
in inventory levels during a period, marginal costing and absorption costing give different profit figures
...

Marginal costing: the cost of the product for inventory valuation is the variable production cost
only
...


Marginal costing and absorption costing compared
- Marginal costing and absorption costing are different
...

(ii) Fixed costs are charged in full against the profit of the period in which they are incurred
...

(ii) The effect of this is that cost of sales in a period will include some fixed overhead incurred
in a previous period (in opening inventory values)
...


Both methods are widely used for costing purposes, but marginal costing has the advantage of being
better for decision-making purposes
...


QUESTIONS
1 A unit of product or service to which costs can be related is known as?
A A cost centre
B A cost unit
C A product unit
D A service unit
2 Which one of the following cost elements does not form part of the overheads?
A Indirect expenses
B Indirect labour
C Indirect materials
D Direct labour

3 The basic principle of cost behaviour is that as the level of activity rises, total costs will usually
___________
...
Which one of the following is not an example of a
functional cost heading?
A Production costs
B Administration costs
C Financing costs
D Carriage out costs

i
...

iii
...


(i)
(ii)
(iii)
(iv)

7 XYZ Co produces a component W
...
70+ Variable $483
...
80 + Variable $75
...
40 = Selling price $1,000
...
70
$739
...
20
$227
...
50
$75
...
00
$124
...

2 D Direct labour is a direct cost and therefore not part of overheads
...

4 D The name given to cost unaffected by increases and decreases in the volume of output is fixed
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4 D The name given to cost unaffected by increases and decreases in the volume of output is fixed
costs
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Options A, B and D are all usually fixed costs
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These costs would normally come under the functional heading of 'distribution
and selling costs'
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70 + $483
...
20
Selling costs are never included in inventory valuations
...

(b) $483
...
The valuation under a marginal costing
system is the variable production cost
...

- Responsibility accounting is a system of accounting that segregates revenue and costs into areas of
personal responsibility in order to monitor and assess the performance of each part of an organisation
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- A cost centre is a production or service location, function, activity or item of equipment for which costs
are accumulated
...
Items of expenditure will be recorded with the app ropriate
cost code
...

- Information about cost centres might be collected in terms of total actual costs, total budgeted costs and total cost varianc es (the
differences between actual and budgeted costs)
...

Cost centres may include the following
...
Costs might include salary, company car and other expenses
incurred by the director)

Profit centres
- A profit centre is any section of an organisation to which both revenues and costs are assigned, so that
the profitability of the section may be measured
...

- Profit centre information is needed by managers who are responsible for both revenue and costs
...

- The manager of the profit centre has some influence over both revenues and costs, that is, a say in
both sales and production policies
...

- Investment centres refer to centres with additional responsibility for capital investment and possibly for
financing, and whose performance is measured by its return on capital employed
...

• Cost centres collect information on costs
• Profit centres collect information on costs, revenues and profits
• Investment centres collect information on costs, revenues and profits in relation to the value of
non-current assets and working capital

Performance measures
- Performance measurement aims to establish how well something or somebody is doing in relation to a
planned activity
...

- Performance measures for materials and labour include differences between actual and expected
(budgeted) performance
...

- Standard hours are useful in computing levels of efficiency, capacity utilisation and production volume
MANAGEMENT INFORMATION Page 20

- Standard hours are useful in computing levels of efficiency, capacity utilisation and production volume
(or activity)
...

- The three main control ratios are the efficiency, capacity utilisation and
production volume ratios
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(b) The capacity utilisation ratio compares actual hours worked and budgeted hours, and measures
the extent to which planned utilisation has been achieved
...

Efficiency ratio = Standard hours of actual production × 100% ÷ Actual hours worked
Capacity utilisation ratio = Actual hours worked × 100% ÷ Budgeted hours

Production volume ratio = Standard hours of actual production × 100% ÷ Budgeted hours
- The capacity utilisation ratio multiplied by the efficiency ratio gives us the activity or production volume
ratio: 109
...
8% = 102
...
3% above budget
with higher than budget hours more than offsetting the below budget efficiency
...

- The net profit margin (net profit to sales ratio) is calculated as (profit ÷ sales) × 100%
...

- The net profit margin provides a simple measure of performance for profit centres
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- Profit margin may be calculated using either net profit or operating profit
...

- The operating profit is the difference between the value of sales (excluding sales tax) and the costs
incurred during operations (total operating expenses)
...


Performance measures for investment centres
- Return on capital employed (ROCE) or return on investment (ROI)) shows how much profit has been
made in relation to the amount of resources invested
...

- Residual income (RI) is an alternative way of measuring the performance of an investment centre
...

- Residual income (RI) is profit before interest and tax less a notional interest charge for invested capital
...
It is
calculated as (sales ÷ capital employed)
...
Is this true or
false?

4 Place the correct letters in the boxes
...

2 B Note that the question said 'the main aim'
...

3 True This is how quantitative and qualitative performance measures differ
...
Net profit margin = net profit ÷ sales revenue

MANAGEMENT INFORMATION Page 22

C
Sunday, October 18, 2020

12:21 AM

SOURCE DOCUMENTS AND
CODING

MANAGEMENT INFORMATION Page 23

SOURCE DOCUMENTS AND CODING
Sunday, October 18, 2020

12:22 AM

Coding
- A code is a system of words, letters, figures or symbols used to represent others
...

- Most organisations use computers to record their accounting transactions because they have the
following advantages
...

• They are automatically accurate and have built in checking facilities
...

• They are capable of sorting information in many different ways
...
For example:
000042 4 cm nails
000043 Office stapler
000044 Hand wrench

(b) Block (or group classification) codes
- These are an improvement on simple sequences codes, in that a digit (often the first one)
indicates the classification of an item
...
'N' stands for another digit; 'NNNNN' indicates there are five further digits in the code
...
For example:
(i) The first digit: 1 Nails
2 Screws
3 Bolts etc…
(ii) The second digit: 1 Steel
2 Brass
3 Copper etc…
(iii) The third digit: 1 50mm
2 60mm
3 75mm etc…
A 60mm steel screw would have a code of 212
...
Under this type of coding the
code means something, it may be an abbreviation of the object being coded
...
For example:
LAX Los Angeles
SIN Singapore
MANAGEMENT INFORMATION Page 24

LAX Los Angeles
CAI Cairo

SIN Singapore
LHR London Heathrow

(e) 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
...

- A purchase requisition is prepared by the person who identifies a need for the goods to be bought, such
as the storekeeper, and then it must be countersigned (authorised) by the supervisor or departmental
head who is responsible for the department's budget
...

- The supplier may then provide a quotation or an estimate which may include either trade or cash
discounts
...
If discounts are
offered they may be of two types
...

(b) A cash discount is usually given for prompt payment within a stated period (for example,
payment within 7 days gives a 3% discount)
...

- If sales tax is payable, discounts are deducted from the cost of the goods before the sales tax is
calculated and added to the invoice
...

- Once a supplier has been selected, the buyer will prepare a purchase order to ask for the goods to be
supplied
...

• The supplier – to ask for the goods
...

• The stores section – for updating the inventory records
...

- The goods will be sent, normally accompanied by a delivery note, and when received by the business a
goods received note will be completed
...

- If the supplier does not use its own transport, a consignment note will provide the
same evidence as the advice note
...

- If a customer has been overcharged, a credit note may be issued to reduce the original sales invoice to
its correct value
...

- The stores ledger accounts are very similar to bin cards
...
But there are two important
MANAGEMENT INFORMATION Page 25

does, and they are updated from the same sources: GRNs, MRs and MRNs
...

1
...
The balance of inventory after each inventory movement is also
valued
...

2
...

- Stores ledger accounts are very often computerised, and this would enable the amount of free inventory
to be monitored
...

Free inventory is inventory on hand + inventory on order – inventory that has been scheduled for use
...

The hours worked are often recorded on clock cards, job cards or timesheets
...
Labour costs include wages (usually weekly) and
salaries (usually monthly) paid to employees, and other payments such as agency workers or contractors
who supply labour
...


QUESTIONS
1 When materials are received by a business what is the internal document completed by the receiving
department?
A Purchase requisition
B Goods received note
C Invoice
D Despatch note
2 Statement 1
...

Statement 2
...
It cannot be
shown as a deduction until payment has been made
...
Is
this true or false?
4 Which type of coding system uses an aid to memory in its code?
5 Which document is filled in by a company when goods have been delivered to them?

ANSWERS
1 B Goods received note
...
This is prepared when the goods arrive and it is sent to other departments
so that they know that the goods have arrived
...

Statement 2 describes a cash discount, not a trade discount
...

4 Mnemonic
5 A goods received note is filled in by a company when goods have been received into inventory
...


MANAGEMENT INFORMATION Page 27

D
Sunday, October 18, 2020

12:50 AM

COST ACCOUNTING

MANAGEMENT INFORMATION Page 28

ACCOUNTING FOR MATERIAL AND LABOUR COSTS
Sunday, October 18, 2020

12:51 AM

Types of materials
- Materials can be classified according to the substances that make them up, how they are measured, or
their physical properties
...

- Work in progress is a term used to represent an intermediate stage between the manufacturer
purchasing the materials that go to make up the finished product and the finished product
...


Ordering inventory
- When the store keeper places an order for materials the amount that will be ordered will be dependent
upon the sales and/or manufacturing plans for the immediate future
...

- Materials issued to production must be classified as either direct or indirect materials
...
Indirect
materials are credited to the materials control account and debited to the production overhead account
...
The remaining inventory will thus be valued at the price of the most recent
purchases
...
Issues will be valued at the prices of the most recent
purchases; hence inventory remaining will be valued at the cost of the oldest items
...

(i) Cumulative weighted average pricing
- With this method we calculate an average cost of all the units in inventory whenever a
new delivery is received
...
The periodic weighted average
pricing method is easier to calculate than the cumulative weighted average method, and
therefore requires less effort, but it must be applied retrospectively since the costs of
materials used cannot be calculated until the end of the period
...

(b) Closing inventory values will be higher using FIFO rather than LIFO
...

In a period of falling raw material prices, the opposite will occur
...
These extra payments are known as shift allowances
...
This
MANAGEMENT INFORMATION Page 29

- Sometimes, employees may receive wages that are directly related to the output that they produce
...


Unit labour costs
- The labour cost can often be a significant element of unit cost and it can change if different
remuneration methods are introduced or if there is a change in productivity
...

- The total labour cost for an employer is the gross pay plus the employer's benefit contributions
...

- Indirect labour costs normally include the overtime premium for direct workers and any idle time hours
for direct workers as well as the indirect workers employment costs
...

- The overtime premium is generally treated as an indirect cost rather than a direct cost of production
...
However, there is an exception to this: if a customer requests
that overtime is worked in order to complete a job earlier, then the entire overtime payment will
normally be treated as a direct cost of that job
...


QUESTIONS
1 What is the name of the amount paid in excess of the normal hourly rate for overtime hours?
A Overtime payments
B Overtime premium
C Overtime excess
D Overtime special payment
2 If overtime is worked at the request of the customer how is the overtime premium normally treated?
A As a direct labour cost
B As an indirect labour cost
3 How is the cost of idle time hours usually treated?
A As a direct labour cost
B As a indirect labour cost
C Neither of the above
4 What is the double entry for direct labour costs?
A Dr Wages control
Cr WIP
B Dr Wages control
Cr Payables
C Dr WIP
Cr Wages control
D Dr Payables
Cr WIP
5 A sys

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