Session 1

Accounting for Management

FOCUS
This session covers the following content from the ACCA Study Guide.

A. The Nature, Source and Purpose of

Management Information
1. Accounting for management
a) Describe the purpose and role of cost and management accounting within
an organisation.
b) Compare and contrast financial accounting with cost and management
accounting.
c) Outline the managerial processes of planning, decision-making and control.
d) Explain the difference between strategic, tactical and operational planning.
e) Distinguish between data and information.
f) Identify and explain the attributes of good information.
g) Explain the limitations of management information in providing guidance
for managerial decision-making.

Session 1 Guidance
Appreciate the meaning of accounting and financial reporting (s.1, s.2).
Revisit the processes involved in management accounting (s.3).

(continued on next page)

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VISUAL OVERVIEW
Objective: To outline and contrast the purposes of cost and management accounting
and financial accounting and to understand the roles of the management accountant
and management information in planning, controlling, decision-making and performance
measurement.

ACCOUNTING

FINANCIAL MANAGEMENT
ACCOUNTING COMPARISON ACCOUNTING
• Processes
• Planning
• Decision-Making
• Control
• Cost Accounting
(see Sessions 5-11, 16)
• Performance
Measurement

DATA AND
INFORMATION
• Terminology
• Data Processing
• Attributes
• Limitations

Session 1 Guidance
Understand the difference between data and information and the attributes of useful
information (s.4).
Identify the main areas of difference between management accounting and financial accounting (s.5).

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Session 1 • Accounting for Management F2 Management Accounting

1 Accounting
The primary functions of accounting are:
 To classify and record actual transactions in monetary terms.
 To present and interpret the results of transactions to assess:
 performance over a period; and
 financial position at a given date.
 To project, in monetary terms, future activities arising from
alternative planned courses of action.

2 Financial Accounting
Financial accounting involves the following:
 Classifies and records actual transactions in monetary terms in
accordance with established concepts, principles, accounting
standards and legal requirements. For example, in accordance
with the requirements of International Financial Reporting
Standards (IFRS).
 Presents as accurate a view as possible of the effect of those
transactions over a period of time and at the end of that time.
 That part of financial accounting which is concerned with
the preparation of the financial statements is referred to as
financial reporting.
 A set of financial statements consists of:

3 Management Accounting

3.1 Processes
Management accounting is concerned with the provision of
information to enable management to:
 formulate policies;
 plan (set objectives, select strategies);
 organise (establish sequence of tasks);
 make decisions on alternative courses of action;
 control activities (including safeguarding assets);
 manage and measure performance (including motivation).

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F2 Management Accounting Session 1 • Accounting for Management

Feedback
and control

3.2 Planning
 Planning is the setting of goals and selecting the means
of achieving them.
 As businesses become large, these will need to be formalised.
 Short-term plans such as the annual budget show in detail
the intended results for the forthcoming year.
 Long-term plans document the long-term objectives
of the business.

3.2.1 Anthony's Model

Robert Anthony suggested that the planning process takes
place at three levels within an organisation:

STRATEGIC

TACTICAL
OPERATIONAL

3.2.2 Strategic Planning

Strategic planning means formulating, evaluating and selecting
strategies for the purpose of preparing a long-term plan of action.
 Time period of planning is long—typically five or more years.
 Decisions taken are "high level"—how to compete, which
products and markets.
 Targets used will be broad—such as achieving a specific
market share, or growth in the market value of the company
or return on capital employed.
 Information used in planning will be mainly external
(e.g. competitors, markets).

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Session 1 • Accounting for Management F2 Management Accounting

3.2.3 Tactical Planning

Tactical planning means planning the utilisation of resources to
achieve specific objectives in the most effective and efficient way.
 The time frame for planning is typically one year.
 Tactical plans aim to contribute to the long-term strategy.
 Plans may be very formalised and detailed.
 Information used in planning will be a mix of internal
and external.

3.2.4 Operational Planning

Operational planning means the fully detailed specifications by
which individuals are expected to carry out the predetermined
cycles of operations to meet sector objectives.
 The time frame for planning is short—possibly one week or
even one day.
 Targets set will be "transaction-based" numeric targets—such
as producing a given number of units per hour.
 The information used for planning will be mainly internal.

Illustration 1 Planning

In a large multinational company, the strategic planning is likely

to be performed by the chief executive officer and the senior
management team. This may involve decisions such as which
markets to invest in and which product areas. Tactical planning
may be carried out by a local team of management within each
geographic area. The team will make plans, such as how many staff
to employ in the next financial year, how much to produce and so
on—often by means of a budget. Operational managers might be
shift managers—their planning may involve items such as staff rotas,
or purchasing of raw materials.

3.3 Decision-Making
 Decision-making usually involves using the information
provided by the costing system to make decisions concerning:
 long-term goals; and
 day-to-day routine operations.

 For decisions to be optimal, management must be provided

with information appropriate to its needs.

3.4 Control
 Strategic control is externally focused comparing the
strengths, weaknesses and limitations of the organisation
with other businesses in the same industry.
 "Management control systems" are mechanisms which
aim to ensure that organisational objectives are achieved.

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F2 Management Accounting Session 1 • Accounting for Management

3.4.1 Results or Output Controls

 Control often includes the assessment of performance
by comparing the budgeted results with actual results
(i.e. the outcomes of work effort).* *Output control
 The output report usually takes the form of an "operating systems require that
statement" which breaks down the difference into its performance measures
component parts (detailed in Session 16). ("standards") be set
as targets and that
3.4.2 Different Types of Controls actual performance is
measured. Rewards
 Although budgetary control (through variance analysis) is and punishments
widely used to influence the decisions of line managers, may be important
other categories of control include: motivational factors.
 action (or behavioural) controls; and
 personnel and cultural controls
(also called "clan and social").
 Behavioural control involves the actions of subordinates
being observed (e.g. by a factory foreman).
 Behavioural constraints include physical preventive
measures (e.g. bans on international telephone calls
and computer passwords).
 Pre-action reviews give prior approval to an action plan
before it is implemented.
 The main advantage of action/behavioural controls is that
they prevent deviations, whereas results/output controls
detect them.
 Personnel, social and cultural controls rely on underlying
discipline, shared values and codes of conduct.

3.5 Cost Accounting

Cost accounting is that part of management accounting which:
 Establishes budgets, standard costs and actual costs of:
 operations/processes;
 departments/products; and
 Analyses differences between budgeted or standard
costs and actual costs.

3.6 Performance Measurement

Performance measurement is a vital function in organisations.
It provides feedback on what does and does not work, and helps
motivate people to sustain their efforts.
 "Performance" concerns output (e.g. of products and services)
which permits evaluation and comparison with goals, standards,
etc. It can be expressed in non-financial and financial terms.
 "Measurement" concerns numerical information which
quantifies input, output, etc. Performance measures might be
simple (i.e. derived from one measurement, such as unit cost)
or composite (e.g. a consumer or retail price index).
Organisations need to match and align suitable performance
measures with their business strategy, structures and corporate
culture. Suitable measures need to strike a balance between
their merits, costs and results.

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Session 1 • Accounting for Management F2 Management Accounting

4 Data and Information

4.1 Data Processing Model

Processing may include the following:

 Summarising;
 Analysing;
 Filtering;
 Storing.

Data—facts or pieces of information. These are not useful for

decision-making without being further processed.
Information—processed data. It is useful for supporting
management in the decision-making process.

Illustration 2 Data Processing

Model
In a retail business, each sale is recorded, usually by the cash
register. The record of each sale is a piece of data. Without further
processing it does not help managers to make decisions. If members
of senior management were informed every time a sale was made,
they would soon lose focus.
At the end of each month a report might be produced, showing total
sales, analysed by product, with comparisons to the same period last
year. This report is an example of useful information. The report is
prepared by summarising and analysing each individual sale. It tells
management which products are being successful, how the business
is performing compared with the previous year, and so forth.

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F2 Management Accounting Session 1 • Accounting for Management

4.2 Attributes of Good Information

Good information assists management to make good decisions.
What constitutes good information can be summarised by the
acronym "ACCURATE", as follows:
 Accurate—the degree of accuracy depends on the user. If an
investor is reviewing a set of financial statements, an error
of $100 in sales might not matter if total sales are $1 million.
However, a cashier in a shop has to count the cash in the cash
register at the end of each shift. A discrepancy of just $1 may
be a cause for concern.
 Complete—all relevant information for the decision should
be included.
 Cost effective—the cost of providing information should be
less than the benefits it provides.
 Understandable—the information should be free from
technical jargon.
 Relevant—if a manager is provided with a long report that
contains a lot of superfluous information, it is difficult for the
manager to identity the important information.
 Available—information should be available to the appropriate
managers when they need it.
 Timely—the later information is received, the less likely it is
to be useful.
 Easy to use—information should be presented in a professional
way, with summaries and diagrams.

4.3 Limitations of Information in Decision-

Making
 The quality of information (output) is dependent on the quality
of raw data (input). If historic financial data is not reliable,
then management accounting cannot make an appropriate
analysis of it for decisions about the future.
 Managers involved in the decision-making process must
have relevant knowledge and a proper understanding of
the information and principles (e.g. statistics, economics)
which underlie it.
 Managers may make intuitive decisions on a course of action
(e.g. to avoid a lengthy decision-making process) which limits
the use of management accounting information.
 Management accounting provides information—not decisions.
Managers must take the part of decision-maker and ensure
their implementation.
 Obtaining good-quality information for decision-making may
be too costly for smaller businesses.
 Interpretation of information often will depend on the personal
judgement of the manager. This can be affected by bias
(e.g. aversion to risk) or other personal prejudices which will
affect the objectivity of decisions.
 Decision-making on management information alone ignores such
personal factors as attitude (e.g. to risk), morale and motivation.

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Session 1 • Accounting for Management F2 Management Accounting

5 Comparison of Management and Financial Accounting

Management Accounting Financial Accounting

Users of Management only Shareholders, banks, creditors,

information potential investors, customs and
excise, government, taxation
authorities

Format of Can take any form Presentation regulated by law

information (e.g. Companies Acts) and
accounting standards (e.g. IFRS)

Content Includes future predictions A summary of mainly historic

(e.g. in budgets) information

Level of detail More detailed (e.g. costs and As prescribed by users,

revenues by department/ product) legislation, etc

Frequency of Quarterly, monthly (even weekly) Usually annually (more frequently

preparation for certain types of "public interest"
companies)

Purpose of Useful to plan, control and make Stewardship and investment

information decisions decisions

Basis of Relevant for decision-making Historical costs (as modified by

valuation (e.g. replacement cost) revaluation of certain fixed assets)

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 Session 1

Summary
 Accounting aims to record, present and interpret the results of transactions to reflect the
financial performance of an organisation over a given period, and to present its financial
position at the end of the period.
 Financial accounting is performed for the purpose of external users, and presents information
in accordance with a specified set of rules or standards (e.g. IFRS).
 The purpose of management accounting is to provide internal information to managers for
planning, decision-making and control purposes.
 Accounting involves data processing, which is the process of converting raw data into
information.
 The characteristics of good information can be remembered using the acronym "ACCURATE".

Session 1 Quiz
Estimated time: 10 minutes

1. List the SIX processes involved in management accounting. (3.1)

2. True or false? Tactical planning is typically for a period of several years. (3.2.3)

3. State THREE categories of management controls. (3.4.2)

4. Define "information". (4)

5. List EIGHT attributes of good information. (4.2)

6. List FIVE areas of difference between management accounting and financial accounting. (5)

Study Question Bank

Estimated time: 15 minutes

Priority Estimated Time Completed

Management
Q2 15 minutes
information functions
Additional
Q1 Sigma

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