M1 - The nature, source and purpose of
management information
Contents
Management Information
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Management information and types of accounting:
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Managerial processes:
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Data and information:
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Presentation of information:
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Sources of Information and Big Data
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Management accounting information
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Internal sources
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External sources
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Cost vs Benefit analysis
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Three main data sources
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1. Machine / Sensor
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2. Transactional
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3. Human / Social
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impact of the general economic environment on businesses
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Big data
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3 V’s of big data
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Big data and performance measurement
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Limitations of big data
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Summary
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Cost Classification
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Definitions used
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Cost classification
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Classification by function
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Classification by nature
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Other classifications
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Capital and revenue expenditure
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Responsibility centres
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Cost Behaviour
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Classification of costs by their behaviour
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Variable
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Semi-variable
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Fixed
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Stepped fixed
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Presentation of Information
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Column, Bar and Line Charts
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Line Graphs
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Compound Column, Bar and Line Charts
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Component/Stacked Column and Bar Charts
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Pie Charts
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100% Stacked Column Charts
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Scatter Diagrams
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coding system
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preparing reports
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Summary
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Management Information
MANAGEMENT INFORMATION AND TYPES OF ACCOUNTING:
Management information is the information provided to managers to allow them to do their jobs.
There are three types of accounting:
1. Cost accounting;
2. Management accounting;
3. Financial accounting.
To understand these types of accounting, we need to consider the following questions:
a) Does the information relate to the past or to the future?
b) Is the information of a financial or of a non-financial nature?
c) Is the information used by internal or external users?
d) Is there a legal requirement for cost accounts, management accounts or financial accounts to be
prepared by an organisation?
Cost accounting
Management
accounting
Financial accounting
Past or future?
Past
Past and future
Past
Financial or
non-financial?
Financial
(Product/Service costing)
Financial and
non-financial
Financial
(Published accounts)
Internal or
external use?
Internal
(Cost information)
Internal
(For managers)
Internal & External (For
shareholders)
Legal
requirement?
No legal requirement
No legal requirement
Legal requirement
(Limited companies)
MANAGERIAL PROCESSES:
Roles of the management accountant:
1.
2.
3.
4.
5.
Analysis of past financial information which includes costs and revenues;
Forecast of future financial information which includes costs and revenues;
Preparation of regular reports, for example, monthly management accounts;
Analysis of past non-financial information (orders processed, number of staff leaving etc.);
Planning, decision-making and control - the main role.
Planning is about what we want to achieve in the future and how we will go about reaching our goal.
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Types of planning:
1) Strategic planning is concerned with the long-term aims and looks at the plans for the next five to ten
years;
2) Tactical planning is concerned with specific short-term actions on how to carry out the strategic plan
over the next one to three years;
3) Operational planning is concerned with the shorter term, for example, achieving the tactical objectives
on a daily or monthly basis.
The decision-making process involves looking at information and using it to ‘make a decision’.
Control involves looking at the actual results of an organisation and comparing them with the planned
results (or the results that we were expecting based on the information that we were given at a certain
time). The comparison of these results gives rise to ‘variances’, calculation and analysis of which is an
important part of management accounting.
DATA AND INFORMATION:
Data is ‘crude’ information or information which hasn’t been processed into a more meaningful form. Data
can be financial or non-financial.
Information is data which has been processed into a meaningful form so that it can be used, for example,
in the managerial processes of planning, decision making and control. Information can be financial or
non-financial.
Internal sources of data and information:
External sources of data and information:
− Accounting records;
− Government statistics;
− Production records (usage, hours spent
− Newspapers and television;
etc.);
− Libraries;
− Payroll system;
− Internet;
− Employee records.
− Journals and magazines;
− Financial press;
− Trade associations;
− Customers and suppliers;
− Quotations and price lists.
Information should be:
A - Accurate;
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C - Cost effective;
C - Complete;
U - User focused;
R - Relevant;
A - Authoritative;
T - Timely;
E - Easy to understand and use.
Note: If some of these attributes are not present in management information, then it might have an
adverse effect on the decisions made by an organisation.
Limitations of management information are:
− Cost outweighs benefit;
− Information is out-of-date;
− Information contains errors;
− Information is not complete;
− The importance of non-financial information is overlooked;
− Information is based on incorrect assumptions.
PRESENTATION OF INFORMATION:
Ways of presentation:
− Reports;
− Tables;
− Charts;
− Graphs.
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Sources of Information and Big Data
MANAGEMENT ACCOUNTING INFORMATION
Management accounting information is far more than debits and credits, and financial information. In their
modern role, accountants increasingly measure externally focused, nonfinancial, forward-looking
information to help with decision-making and performance management in the organisation. This makes
the potential sources of management accounting information huge:
Internal sources
Internal sources may be considered:
− Formal: For example:
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Management accounts and underlying systems;
Human resources information stores;
Inventory ledgers;
Production control;
Procurement plans;
Activity.
− Informal: For example:
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Chats around the coffee machine;
Email chatter;
Social gatherings.
Limitations
Internally sourced information:
− May well be relatively expensive to produce, especially the formal information.
− Usually, it is produced for relatively few people. Data needs to be captured and processed.
− The time it takes to produce the information could be spent on other things too.
− There is also the chance that the information (whether informal or formally sourced) is incorrect or
misleading.
− This could waste resources or cause errors to be made.
NOTE: Informal sources are essential - we often find out what’s important this way, whereas formal sources
are often sterile and standardised, hiding the key messages.
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External sources
External sources may be considered:
− Formal: For example:
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Government statistics;
Inland revenue announcements;
Central bank reports;
External formal research.
− Informal: For example:
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Press gossip;
Chats with supply chain partners;
Rumours.
Limitations
External sources may be less expensive (many, such as government statistics, are provided free of charge),
but:
− Some cost money;
− Might be of questionable reliability;
− Might be of questionable authenticity;
− Might be biased and not neutral;
− Take management’s time and attention away from other things.
NOTE: Informal sources can often be very important - formal sources are often widely available, so they
cannot in themselves provide a source of competitive advantage.
Cost vs Benefit analysis
All sources of information, whether internal or external, formal or informal, should be considered from a
cost-benefit perspective. Is the benefit in excess of the cost? Cost, in this sense, should include opportunity
cost, lost time, for example, as well as tangible financial costs.
THREE MAIN DATA SOURCES
The three main sources of data for management are:
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1. Machine / Sensor
Usually, for businesses, there are inputs in machines, which are processed as outputs. These outputs are
data for the management, for example:
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Smart phones
Attendance recording devices
Accounting software
Inventory management software
2. Transactional
As the business transacts, it generates a chain of documents as evidence of those transactions. Such
documents are also a source of data for the company. These include:
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Sales order
Purchase order
Goods received notes
Dispatch notes
Invoices
3. Human / Social
This is often a source of a non-financial form of data, which is rather difficult to interpret and record. The
examples include:
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Customer satisfaction survey
Focus group discussions
In-depth interviews
Social media
IMPACT OF THE GENERAL ECONOMIC ENVIRONMENT ON BUSINESSES
The external economic environment can impact business in numerous ways, for example:
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Rise in tax rates can impact the overall profitability
Increase in interest rates can increase the finance cost for the business
Increase in inflation can impact the demand of the company’s product or services
If the domestic currency depreciates as compared to a foreign currency, this can increase exports
(and thus foreign demand) but decrease imports or make them more costly (increasing costs for
businesses)
● Rise is unemployment rate can reduce the demand for the products
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BIG DATA
The possible sources of external information are exploding with the increasing development of big data.
Big data refers to a wide variety of information stored in a wide variety of places in a wide variety of
formats.
For example, about our customers:
− Social media posts;
− Reviews they post on review websites;
− Tracking cookies;
− Seeing what they’ve looked at online;
− Photos of them;
− Re-tweets;
− Newsfeeds they subscribe to.
Big data represents a huge challenge but also a huge opportunity. If the information can be harnessed and
used more effectively than a competitor, then it can provide a source of competitive advantage. For
example, imagine being able to predict social trends more accurately as a result of big data analysis. This
might inform decisions about the future direction of the business.
3 V’s of big data
A key theorist here is Doug Laney. He originally identified the ‘3 V’s’ for big data, which summarise both the
challenges and opportunities presented by big data:
1. Variety
There is a huge variety of sources and formats, meaning whereas it's a challenge to find the data, it means
there is a rich source of potential information to enable a very detailed picture to be painted.
2. Velocity
Velocity refers to the fact that big data changes quickly, people's own feeds are updated several times a
day, perhaps on social media. This is a challenge to keep up with, but it means if you can keep up with it,
then the data will be immediate and very current.
3. Volume
Volume refers to the sheer amount of data out there, it's a challenge, as capturing it is a
monumental task, but if you can cope with the volume, there’s a lot out there to learn!
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He later added a fourth ‘V’:
4. Veracity:
Veracity means that its reliability is questionable because there’s often no audit trail; it's outside our
control. This reduces its value.
Big data and performance measurement
Big data potentially improves performance measurement. For example, we can gauge customer feedback
more completely and immediately by looking at social media posts and reviews about the company and its
products. This allows the company to respond in real-time. It also potentially allows us to understand our
customers better and gauge future trends. This can inform marketing and product design to target
customers more effectively and satisfy their needs.
Limitations of big data
There are, however, several risks big data poses in addition to the challenges pointed out in Laney’s 3 V’s:
− Some demographics are more likely to contribute to the pool of big data than others. For example,
perhaps some in the older generations may not post so frequently to social media or conduct web
searches. They are still a potential source of customers but may be missed in big data sourced research.
− Sources may appear to contradict each other, resulting in more uncertainty rather than less. For
example, the image portrayed on social media may not represent the true individual, causing analysis of
social media information to be of limited use.
− There are also some potential ethical issues to consider. Gathering personal data to build a profile that
can be exploited for commercial advantage may be considered ethically questionable. A company
should consider its moral responsibilities in this regard, and think about how it plays into its policies on
Corporate Social Responsibility.
SUMMARY
− There are many internal and external sources of information;
− Each with its own costs and benefits;
− Big data potentially dramatically expands the pool of potential external data sources;
− This also raises its own challenges, issues and ethical questions.
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NOTE: In the exam, be prepared to explore the benefits of using big data for an organisation, but be
cautious of the downsides.
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Cost Classification
DEFINITIONS USED
Classification of cost means putting costs into groups of similar items. The ways in which costs can be
classified include
COST CLASSIFICATION
1) By element - this means grouping costs according to whether they are materials, labour or expenses;
2) By nature - this means classifying costs one step further according to whether they are direct or indirect
costs;
3) By function - this involves classifying costs according to the kind of work that is being carried out. Work
is normally classified as production or non-production;
4) By behaviour - individual costs behave in different ways and so can be classified as variable,
semi-variable, fixed or stepped fixed costs.
Classification by function
Main production costs
Main non-production costs
1) Materials;
1) Selling costs;
2) Labour;
2) Distribution costs;
3) Overheads.
3) Administrative costs;
4) Financing costs.
Note: It is important that the costs associated with making a product (the materials, labour and expenses),
are included in the cost of the unit of inventory. This allows an organisation to work out how much profit it
makes when it sells the product.
Gross profit = Revenue - Cost of sales
Classification by nature
Direct costs are those costs which can be directly attributed to a unit of a product.
Indirect costs are those costs which cannot be directly attributed to a unit of a product.
Direct material + Direct labour + Direct expense = Prime costs
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Indirect material + Indirect labour + Indirect expense = Overheads
Other classifications
Sometimes costs are grouped together for other reasons. For example, costs may be collected in cost
objects, cost units and cost centres.
Cost objects are objects for which costs can be collected, for example, a product that is produced, a service
that is provided or a department in an organisation.
Cost units are units of a product or service for which costs can be identified (not necessarily a single
product or service).
Cost centres are centres where the costs of a department or organisational unit are collected.
CAPITAL AND REVENUE EXPENDITURE
It is important to be able to distinguish between capital and revenue expenditure because they are treated
differently in financial accounts.
The cost of purchasing or making improvements to non-current assets is known as capital expenditure.
All other costs incurred in running an organisation are known as revenue expenditures. Revenue
expenditure includes costs such as wages and salaries, production costs, finance costs and administration
costs.
Responsibility centres
Sometimes costs, and revenues are grouped into one centre where one individual manager, or group of
managers, is responsible for that centre. Such ‘centres’ are known as responsibility centres and are usually
a department within an organisation.
Responsibility centres include
1) Cost centres - where the costs of a department are collected (materials, labour, expenses, overheads);
2) Revenue centres - where revenues from the goods and services sold by a department will be collected;
3) Profit centres - are a combination of cost and revenue centres.
4) Investment centres - are similar to profit centres, but in addition to costs and revenues, they also
include capital expenditure.
Information needs for different responsibility centres are summarised below:
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Responsibility
centre
Information need
Cost
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Information regarding cost of materials
Information regarding cost of labour
Information regarding cost of overheads
Information regarding cost of other direct expenses
Revenue
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Information regarding pricing
Information regarding competitors
Information regarding product features
Information regarding markets
Profit
● All information required by costs centres
● All information required by profit centres
● Information regarding markup and margin
Investment
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All information required by profit centres
Information regarding investment appraisal
Information regarding value addition
Information regarding capital structure
Information regarding capital employed
Information regarding cost of capital (or required rate of return of equity and
debt holders)
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Cost Behaviour
CLASSIFICATION OF COSTS BY THEIR BEHAVIOUR
Variable
These costs that vary with the level of activity (for example cost of materials);
Semi-variable
These costs that are partly fixed and partly variable (electricity payments);
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Fixed
These costs that do not change with the level of activity (rental payments);
Stepped fixed
These costs that are fixed for a specific level of activity and go up in steps (rentals of additional space for a
higher level of activity).
Note: Level of activity is the number of units produced or sold by the company.
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Presentation of Information
An accountant's job is to make sense of large volumes of data and communicate it to decision-makers.
Graphs and charts are a clear way to do this, as large volumes of information can be conveyed quickly.
The MA syllabus requires students to be able to describe the key features of different charts, identify
suitable charts and interpret the data presented in charts.
Below is a quick review of some popular graphs:
COLUMN, BAR AND LINE CHARTS
● These charts are drawn with two axes, with the independent variables being shown on the x-axis and
the dependent variable shown on the y-axis.
● They can be used to convey a lot of information, such as yearly results.
● They are useful for showing trends and comparisons over time.
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LINE GRAPHS
● Show changes over time;
● Track trends; and
● Must be labelled clearly.
COMPOUND COLUMN, BAR AND LINE CHARTS
● These charts with multiple data sets are called compound column/bar charts or 'clustered graphs' in
Excel.
● They can all be used to show multiple data types if the numerical range of the data is similar.
● Comparing data in this way gives meaningful insights for users.
● They must be clearly labelled and have a key or legend.
● If the graph is unclear, then users cannot rely upon it; or will make poor decisions.
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COMPONENT/STACKED COLUMN AND BAR CHARTS
● A component or stacked column chart shows totals like a bar chart.
● It also breaks down the total, showing what makes up the total.
● A stacked chart is useful because trends can be shown and the totals analysed.
PIE CHARTS
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Pie charts are very popular, and most users will understand them.
They show the components of a total, demonstrating the makeup.
They don’t demonstrate trends like bar charts.
To demonstrate trends over, say five years, you would need to produce 5 different pie charts, one for
each year.
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100% STACKED COLUMN CHARTS
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Stacked column and bar charts give a percentage breakdown of the total, each bar representing 100%.
They are like pie charts but present trends more concisely.
They have the same restrictions as pie charts; their totals are unknown, only the percentages.
Interrelated data cannot be examined, for example, sales vs the cost of sales of a product.
SCATTER DIAGRAMS
● They are also known as XY charts.
● These charts have two axes that represent two variables.
● They are used to show the relationship between two types of data. For example, the relationship
between sales and purchases.
● The points on the diagram can be used to estimate a trend and perhaps forecast into the future.
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CODING SYSTEM
A code is simply the use of a system of symbols to help classify items, giving them brief references. For
example, instead of writing the nature of the expense each time, a company can simply give codes to each
expense category and use them when classifying costs.
Like, for any administrative cost, the company use a code of ‘ADM’ – and instead of writing ‘administrative
cost’ with that expense, the company can simply write ADM, and all concerned would know that this
expense is of administrative nature.
Another example would be to give a code to each item of inventory that is used in the production, and
instead of writing the full specifications of the inventory (for example, wood type A 12’ by 10’) – the
company can use a code, making it brief and accurate (for example, giving the code of W1 to inventory
“wood type A 12’ by 10’”).
PREPARING REPORTS
For management accountants, the information is usually shared in reports with senior management. The
contents and structure of the report will vary based on the nature of the assignment and purpose of the
report. However, generally, the structure of the report is as follows:
Details of the
address
The report first addresses the party for which the report is being prepared for.
Date
The report then shows the date of this preparation.
Title
The report states its title and subject.
Executive summary The report then gives a summary of the contents (usually, this is one page).
Introduction
The report then gives the introduction, explaining the problem being addressed in
the report.
Main body and
analysis
The report then performs the main analysis and discussions; usually, this section is
divided into subsections, as needed.
Conclusion
The report them provides conclusions and recommendations.
Appendices
The report that lists down other relevant details for the users in the appendices
that can be referred if needed for details.
SUMMARY
When using graphs to present information, ensure:
● The graph is clearly labelled, and the title reflects the information being presented;
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● The users’ needs are considered, and the information they need is being presented;
● That the scale of the graph shows important data or trends correctly; and
● Don’t overload the graph with too much information.
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