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Unit 1

Information for management

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Introduction

Decision-making is the primary role of the management function. The manager’s decision will depend on the provision of financial and non-financial information.

To be able to make decisions, management needs to be able to access relevant information

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Qualities of good information

Relevant Completeness Accuracy Clarity Confidence

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Qualities of good information

Communication Volume Timing Channel of communication Cost

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Why is information important Management accounting is concerned with

the provision of information to people within the organization to help them make better decisions and improve the efficiency and effectiveness of existing operations

Example Cost of new product Cost of repairing, hiring new machine For reporting purposes

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Some frequently asked questions in the area of internal decision-making. What is the cost of the product or service? At

what price should I sell to achieve a profit of Rs. X?

If my business manufacturers or offers various products or services, which of these products or services contributes most to (or reduces) the overall business profitability?

What is the financial impact of a reduction in sales price and/or added marketing expenses on overall profitability?

What is the extent of additional profitability if more branches or sales outlets are opened?

Should the company manufacture itself the item or should it outsource its production?

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What type of information is needed

Most organizations require the following types of information:- Financial Non-financial A combination of both

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Planning, control and decision making

Information for management is likely to be used for planning, control and

decision making

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Planning

Planning involves the following:- Establishing objectives

Maximize profit Maximize shareholder value Minimize costs Increase market share

Select appropriate strategies to achieve those objectives

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Control

There are two stages in the control process The performance of the organization as set out in

the detailed operational plans is compared with the actual performance of the organization on regular and continuous basis. Any deviations from plans can then be identified and corrective action taken

The corporate plan is reviewed in the light of the comparisons made and any changes in parameters on which the plan was based to assess whether the objectives of the plan can be achieved. The plan is modified if necessary

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Decision making Decision making always involves a choice

between alternatives The decision making process:-

Step 1- Identify goals, objectives or problems

Step 5- Implement the decision

Step 2- Identify alternative solutions which might contribute towards achieving them

Step 6- Obtain data about actual results

Step 3- Collect and analyze relevant data about each alternative

Step 7- Compare actual results with the expected outcome. Evaluate achievements

Step 4- Make the decision. State the expected outcome and check that expected outcome is in keeping with overall objective

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Management control system

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 organization are being met and the plans devised to attain them are carried out

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Management control systems (Cont…) Basic elements of a management control

system are as follows:- Planning- deciding what to do and identify the

desired results Recording the plan which should incorporate

standards of efficiency or targets Carrying out the plan and measuring actual results

achieved Comparing actual results against the plan Evaluating the comparison, and deciding whether

further action is necessary Where corrective action is necessary, this should be

implemented

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Financial accounts and management accounts Financial accounting systems ensures that the assets

and liabilities of a business are properly accounted for, and provide information about profits and so on to shareholders and to other interested parties.

Management accounting systems provide information specifically for the use of managers within an organization

Management information is drawn for two groups of people:- Financial accounts are prepared for individuals

external to the organization Management accounts are prepared for internal

managers of an organization

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Financial accounts versus management accounts

Financial accounts Management accounts

Financial accounts describe the performance of a business over a specific period and the state of affairs at the end of that period.  The specific period is often referred to as the "Trading Period" and is usually one year long.

Management accounts are used to help management record, plan and control the activities of a business and to assist in the decision-making process.  They can be prepared for any period

Preparing financial accounts is a legal requirement

There is no legal requirement to prepare management accounts

The format of published financial accounts is determined by several different regulatory elements:

There is no pre-determined format for management accounts.  They can be as detailed or brief as management wish

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Financial accounts versus management accounts (Cont…)

Financial accounts concentrate on the business as a whole rather than analysing the component parts of the business.

Management accounts can focus on specific areas of a business' activities.  For example, they can provide insights into performance of:•Products•Separate business locations (e.g. shops)•Departments / divisions

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Financial accounts versus management accounts (Cont…)

Most financial accounting information is of a monetary nature

Management accounts usually include a wide variety of non-financial information.  For example, management accounts often include analysis of:

- Employees (number, costs, productivity etc.)

- Sales volumes (units sold etc.)

- Customer transactions (e.g. number of calls received into a call centre)

By definition, financial accounts present a historic perspective on the financial performance of the business

Management accounts largely focus on analyzing historical performance.  However, they also usually include some forward-looking elements - e.g. a sales budget; cash-flow forecast

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Cost accounts

Cost accounting and management accounting are terms which are often used interchangeably.

It is not correct to do so Cost accounting is part of management

accounting Cost accounting provides a bank of

data for the management accountant to use

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Cost accounting and management accounting

Cost accounting is concerned with the following:- Preparing statements (budget preparation) Cost data collection Applying costs to inventory, products and

services Management accounting is concerned

with the following:- Using financial data and communicating it

as information to users

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Presentation of information to management

Main features of a report:- Title Who is the report intended for Who is the report from Date Subject Appendix

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Prepare notes on

What is strategic information and what is its main features

What is tactical information and what is its main features