Fia Ma1 2013 Notes

Notes
FIA – MA1
Management Information
For exams in 2013
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ExPress Notes
FIA MA1 Management Information
Contents
About ExPress Notes 3
The nature and purpose of cost and
1. 7
management accounting
2. Source documents and coding 14
3. Cost classification and measurement 17
4. Recording costs 24
5. Providing information 34
6. The spreadsheet system 42
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Chapter 1
The Nature and Purpose of Cost and

Management Information
KEY KNOWLEDGE
Business organisation and accounting systems
The business organisation and its structure
Taken in its most general sense, an organization is a social arrangement which aims for
collective goals; in the case of a business, this usually involves the maximization of wealth of
the shareholders (owners) of the business.
An organisation controls its own performance and is distinct from its environment.
Benefits of an organisation include:

• shared expertise
• pooling of resources
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Policies, procedures and best practices
A policies and procedures manual contains a description of the practices and rules governing
an organisation’s operations.
In setting standards for the performance of work, it ensures consistency across the
organisation. Additional benefits of such a manual, normally distributed to all employees,
include the mitgation of risk to the business (and to staff) as well as compliance with
external regulatory rquirements.
By setting standards with reference to “best practices” – i.e. the best that the industry can
demonstrate at any given moment -- the organisation is recognizing that it can only survive
by doing at least as well as its competitors.
Effective control over transactions
Effective control over transactions means that they are initiated, executed and recorded
according to pre-set policies and procedures, so that the organisation is not exposed to an
unacceptable level of risk of loss.
Controls exist to prevent and detect errors and fraud; for example, internal controls are
processes put in place by management to help prevent things from going wrong. It is
management’s responsibility for having an adequate internal control policy in place.
Double-entry book-keeping
Double-entry bookkeeping involves the recording of transactions in such a way that two
entries are recorded, one called a debit and the other a credit.
Debits mean Credits mean
An increase in assets A decrease in assets
A decrease in liabilities An increase in liabilities
In this system, debits must equal credits.
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Ledgers and prime entry records
All accounting transactions are recorded in a document called a General Ledgers.
Books of prime entry are the bridge between the raw data (e.g. receipt for cash purchase of
some building materials) and the accounting system. They may be written up by the
accountant, or by a semi-trained member of staff within the client’s business.
The most commonly used books of original entry are:
Book of original Used to record data on: Data typically used to feed:
entry:
Cash in book Cash received into the business bank All sorts of things! Anything
account. that may generate cash for
the business.
Cash payments Cash paid from the business bank account. All sorts of things! Anything
book that results in cash being
paid out of the business.
Petty cash book Cash in and out of the balance of cash Typically, small expenses
held in notes and coins by the business (eg Friday cakes for staff!)
(normally small). This is often controlled and sundry income.
using the imprest system (see later).
Sales day book Sales on credit. Note that sales Sales revenue.
immediately settled in cash will be
recorded in either the cash book (if paid
directly into the bank account) or petty
cash book (if received in notes and coins).
Purchases day Purchases of inventory for resale on credit. Purchases of inventory for
book Note that purchases settled immediately in resale.
cash will be recorded immediately in the
cash payments book or petty cash book.
Journal book Anything not covered by any of the other Often, this is the book
books of original entry. maintained by the
accountant, in which “period
13” adjustments like
depreciation and bad debts
are recorded.
Books of original entry may be recorded in paper form, or using a spreadsheet.
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Integrated and interlocking accounting systems
An integrated system is one in which the cost and financial accounts are maintained in the
same books;
In an interlocking system, cost and financial accounts are kept separately (so that a
reconciliation of the two must be made)
Computerised accounting systems
Computerised systems are common and can be cheap. They still require rigorous systems
for data capture at the point when transactions happen, as the maxim “garbage in, garbage
out” very much applies! Input to a computerised system will not look like a book of original
entry, but will require the same data. Software may be more user friendly, for example
asking “how much cash was spent?” and “what was this for?”, whilst then offering a drop
down menu of choices. The software will still prepare records using the same methodology
as the manual recording systems above.
Advantages of using a computerised system include:
• Back ups can be made easily

• Makes producing periodic frequent accounts much less laborious than a manual
system
• Can be user-friendly
• Analyses sales taxes more easily than manual systems (see later)
• Can be used to quickly produce lots of reports such as VAT returns and interim
management accounts.
Disadvantages of a computerised system include:
• Cost
• May not be tailored very well to the business own needs
• Still requires effective data capture and maintenance of the underlying records.
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KEY KNOWLEDGE
Management information
The purpose of management information
Planning: has to do with the formulation of objectives within the organization, both in the
short- and long-term;
Decision-making: refers to conclusions drawn once all relevant information has been
analysed. Implementation of decisions taken (i.e. the decision to take action) follows;
Control: Post-implementation, actual results are analysed in order to determine whether

planning and decisions taken need to be revised or to implement corrective actions.
The control step acts as a feedback loop into the previous processes. Remember, look at
theses systems dynamically: we learn from experience and need to take corrective steps and
to improve processes continuously!
An important focus of management accounting is suggested by its original name, cost

accounting. Knowing the costs of individual products is vital to running a business!
Comparison of cost and management accounting with external financial reporting
Principal differences between financial accounting and management accounting:
It particular, it should be noted that management accounting is:
• Aimed at internal users (as opposed to financial accounting, which is aimed at

external stakeholders)
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• Focused on present and future performance (as opposed to financial accounting,

which reports past performance)
• Not required by law and not regulated by accounting frameworks (as opposed to
financial accounting, which is a legal requirement and is regulated by accounting
frameworks)
• Focused on specific areas or activities (as opposed to financial accounting, which
provides a holistic view of company’s performance)
• Employs non-financial indicators as well financial, while financial accounting uses
only financial measures.
Since the management accounting system is based on (or derived from) a company’s
financial accounting system, the two are usually combined (or integrated) for reasons of
cost and efficiency, i.e. to avoid duplications.
Distinction between data and information
Management information systems convert raw data (facts and figures) into meaningful
information which can then be used by management for a variety of analyses and ultimately
decisions regarding the business. Good quality information enhances the quality of decision-
making.
Features of useful management information.[K]
Using a well known Accurate

mnemonic, information
should be ACCURATE:
Complete
Cost-beneficial
Understandable
Relevant
Adaptable
Timely
Easy to use
Sources and categories of information: Financial and Non-financial
In addition to financial information which can be extracted from the financial accounting
records, managers rely for their decision-making on a host of information that is derived
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from non-financial sources. These can range from industry data (overall size, market shares
of different competitors) to customer opinions about the products and services offered.
Internal examples of non-financial information
Non-financial information can embrace a host of operational statistics which are relevant to
managerial decision-making: examples include the rate of staff turnover; the time it takes to
cook a hamburger (in a restaurant business); the rate of defects in a production process;
the set-up time necessary between different production batch runs; or measurements of
service/product quality.
Limitations of cost and management accounting information
The key to management accounting is to measure the “right” things, i.e. activities and
processes that are relevant to the success of the business. Due to limitations of staff and
time, it is necessary to identify and prioritize what is to be measured. Not all companies are
successful in doing this and therefore squander resources measuring the wrong things!
The role of information technology
Information technology has had a dramatic and far-reaching impact on the structure and
conduct of business. IT has also been frequently poorly employed at great cost to
companies.
When implemented well, IT has made it possible for companies to exploit the benefits of
increased accuracy of information and faster decision-making.
Suitable formats for the presentation of management information according to purpose
Managerial accounting is a free-style form of accounting in which format and structure of

information are not prescribed externally, but conform to the requirements of the users
(management and staff).
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Chapter 2
Source Documents and Coding
KEY KNOWLEDGE
Source documents
When a business transaction happens, it is essential that the source data is captured
immediately. This does not necessarily mean immediately writing up the books, but it does
involve some record being made of the transaction happening.
Materials
The ordering, receiving and issuing of materials from inventory must be controlled according
to procedures and documented at all stages with forms appropriate to the purpose.
The controls and procedures are designed to monitor inventory movements so as to

minimise discrepancies and losses and theft.
Every company which buys, processes and sells materials will have established procedures
for ordering, receiving and issuing (such materials) which are generically similar. Some may
have highly automated systems in place, while others record the steps manually.
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The key documents one should be familiar with are:
Purchase requisition form: This is an internal form that provides the authorization for
materials to be ordered from a supplier (external).
Purchase order (PO): The buyer issues a PO to the seller, indicating the
• Description
• Quantity
• Price
of the product ordered.
The PO is a legal offer. Its acceptance by the seller creates a contractual commercial
relationship for the intended transaction.
Goods Received Note (GRN): This is completed by the buyer upon delivery to verify whether
the order has been properly fulfilled. It will contain:
• Order No.
• Description
• Quantity ordered
• Quantity delivered
Materials issuance (or requisition) form: This is the form necessary to authorize the release
of materials from inventory into the production process at the company.
Labor
Labor is evidenced by work contracts. The payroll function is responsible for ensuring
prompt payment of salaries and wages to employees.
Documents relating to the recording of sales
Sales order Records an order from a customer
Goods despatched note Records that an order from a customer has been sent out
Invoice A request for payment by a supplier
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Credit note Acknowledgement from a supplier that the customer has

overpaid and is entitled either to a refund or free goods/
services in the future
Debit note To cancel a credit note that previously existed, eg if goods

were ordered, paid for and then returned there would initially
be a credit note. The refund made would be accompanied
with a debit note
Remittance advice Normally included with an invoice. A document that is

included with the payment (eg if paid by cheque) with details
that will allow the recipient of the funds to match the payment
to the customer’s account
Receipt Issued by the supplier for goods, to acknowledge

payment of a debt
KEY KNOWLEDGE
Coding system
Transactions in a business are more easily processed by use of a coding system. This
involves assigning to a particular transation a code, i.e. a kind of symbolic label, which
identifies the nature of the transaction in a systematic and unambiguous way. In doing so,
this allows transactions to be grouped together in information systems, processed, added up
and analyzed in a manner that permits checking and reconciliation (against original records).
The characteristics of a coding system shares some of the features of good information: it
must be standardized, logical, objective, brief (i.e. capable of being summarized), verifiable,
comprehensive and yet flexible (allowing development to cover all relevant situations in a
relevant manner).
There are different methods by which data can be coded; these include:
• sequential,
• hierarchical,
• block,
• faceted, and
• mnemonic
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Chapter 3
Cost Classification and

Measurement
KEY KNOWLEDGE
Cost Classification
There are a variety of ways in which one can classify costs:
Production vs. Non-Production
Production costs: These are costs (both direct and indirect, also variable and fixed) which
relate to the production of goods; this is also referred to as manufacturing or factory cost. It
is these costs, accumulated, which provide the value at which goods are placed in inventory
(prior to sale) and form the “cost of goods” value when sold.
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Non-production costs: These are expenses that are incurred independent of production and
include administrative, selling, distribution and finance costs. These costs can have the
character of “period” costs, as they relate to the period of time in which they occur.
Direct vs. Indirect
Direct costs: are costs that can be directly attributable to a product.
Indirect costs: these are costs that cannot be directly attributable to a product.
Fixed vs. variable
Fixed costs: are costs that remain constant regardless of the volume of production. A variety
of indirect costs are fixed.
Variable costs: vary in proportion with the volume produced. Direct costs are by their nature
variable in behaviour.
Other types of costs
Mixed costs: these are costs that contain a fixed and a variable element.
Step costs: costs that remain fixed within a defined range of production, but at a certain
level of output increase in a significant way to a new (fixed) level.
Direct and indirect labour
Direct labour refers to work which is directly involved in the manufacture of a product.
Indirect labour (e.g. the supervisor’s salary, or that of a security guard) forms part of
overhead costs.
It is important to note that the basic pay portion of direct labour costs is included in the
prime cost of a product.
Overtime premiums, bonuses, employers’ contributions, sick pay and idle time costs relating
to direct workers are all accounted for as overheads (indirect costs). One exception:
Overtime performed as a result of a client request is recorded as a direct labour cost.
Profit statements in Absorption and Marginal costing
Example
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Below is data on a manufacturing company.
Selling price (per unit): 120
Cost card (per unit):

Direct materials 45
Direct labour 18
Variable production O/Hs 9
Total variable costs 72
There is a variable selling cost of $2 per unit
Year 1 Year 2
(units) (units)
Budget (normal) production 1,100 1,100
Actual Production 1,000 1,100

Actual Sales 950 1,150
Actual fixed production O/Hs $16,500 $16,500

Actual SGA costs $ 7,000 $ 7,000
Based on the above data, a profit and loss statement for the Years 1 and 2 is prepared.
Assume that the beginning inventory is zero.
Profit/Loss (Marginal costing)
Year 1 Year 2
$ $
Sales (950/1,150 units) 114,000 138,000
Less: Variable cost of sales
Opening inventory 0 3,600
Production costs:
o Variable
(1,000 x $72) 72,000
(1,100 X $72) 79,200
Less: closing inventory

(50 x $72) (3,600) 0
(68,400) (82,800)
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Less: Variable selling costs

(950 x $2) (1,900)
(1,150 x $2) (2,300)
Contribution 43,700 52,900
Less: Fixed production O/Hs (16,500) (16,500)

Less: SGA costs (7,000) (7,000)
Profit 20,200 29,400
Inventory is valued at variable production costs.
Absorption Costing
This method argues that focusing on marginal costs is potentially misleading in the longer
run because fixed production costs have also to be covered. Accounting conventions require
that fixed production costs be reflected in each unit produced.
Revised cost card (Absorption costing)
Cost card (per unit):

Direct materials 45
Direct labour 18
Variable production O/Hs 9
Fixed production O/Hs 15
Total production costs 87
Year 1 Year 2
Profit/Loss (Absorption costing) $ $
Sales (950/1,150 units) 114,000 138,000
Less: Variable cost of sales
Opening inventory 0 4,350
Production costs:
o Variable
(1,000 x $72) 72,000
(1,100 X $72) 79,200
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o Fixed
(1,000 x $15) 15,000
(1,100 X $15) 16,500
Less: closing inventory

(50 x $87) (4,350) 0
Over/(under) absorption 1,500 0

(84,150) (100,050)
Gross Profit 29,850 37,950
Less: Variable selling costs

(950 x $2) 1,900
(1,150 x $2) 2,300
Less: SGA costs 7,000 (8,900) 7,000 (9,300)

Profit 20,950 28,650
Inventory is valued at the full production costs.
KEY KNOWLEDGE
Summary of Absorption and Marginal costing systems
Summary of Absorption costing and Marginal costing formats
Absorption Costing Marginal Costing
Revenue
Less: Cost of Sales
Variable/Fixed Variable production/

production costs non-production costs
Gross profit Contribution
Less: Expenses
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Variable/Fixed Fixed production/

non-production costs non-production costs
Net Profit
Reconciliation of the two methods
The different profit figures calculated under Absorption costing and Marginal costing can be
reconciled thus:
The difference in profit = Net change in inventory (no. of units) X the fixed cost per unit
It follows that:
• If the level of inventory increases in a given period, then profits (for that period)
under the Absorption costing system will be greater than under Marginal costing; and
• If the level of inventory decreases, then profits under the Absorption costing system
will be smaller than under Marginal costing
• If the inventory level does not change, then the profit calculated under both methods
will be equal.
KEY KNOWLEDGE
Cost concepts and terms
Cost units: The units are the discreet items to be measured, such as packs of nails (batches)
or a student.
Cost centres: Responsible for current expenses only
Revenue centres: Responsible for revenues, but not current expenses other than marketing
expenses
Profit centres: Responsible for revenues and current expenses
Investment centres: Responsible for revenues, current expenses and capital expenditure
In order to competently manage his/her area of responsibility, a manager needs to have

relevant information (and authority) pertaining to their job function.
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Performance measures
Different measures of performance apply to the types of centre:
Cost centres: Controlling costs in absolute (monetary) terms or in relation to overall business
volumes achieved (revenue);
Revenue centres: Sales targets achieved (on a risk-adjusted basis);
Profit centres: Profits achieved; Profit margins (and in the case of banks, for example,
profitability on a risk-adjusted basis);
Investment centres: Return on Capital Employed (ROCE); Residual Income (RI); Asset
turnover (in relation to sales)
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Chapter 4
Recording Costs
KEY KNOWLEDGE
Accounting for materials
Material costs can be broken down into
• Raw materials
• Semi-finished goods
• Finished goods
Accounting entries
Materials Inventory
Debit (Dr) entries Credit (Cr) entries
= =
Increase in Decrease in
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inventory inventory
Material requirements
In budgeting for the amount of materials to be purchased, a business must take into
consideration the volume of sales expected, the level of finished goods required (which
together determine the volume of production required) and the level of raw material
required (closing balance).
Methods of inventory valuation:
• FIFO (first-in-first-out);
• LIFO (last-in-first-out);
• Periodic; and
• Weighted average
Accounting for labour costs
Labour Account
Debit (Dr) entries Credit (Cr) entries
= =
Labour costs
incurred Transfer to P&L
Note: The transfer to the P&L takes place via the Work-In-Progress (WIP) account for direct
labour costs and the production overheads account in the case of indirect labour costs.
Remuneration methods
There are two basic forms of remuneration:
• Time-based, and
• Output–based (e.g. piecework)
Effective incentive schemes are designed to ensure that the interests and behaviour of
individual employees and groups of employees are in-line (i.e. consistent) with the
company’s objectives.
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Accounting for other expenses
a) Explain the process of charging indirect costs to cost centres and cost units and illustrate the
process of cost apportionment for indirect costs (excluding reciprocal service) .[s]
b) Explain and illustrate the process of cost absorption for indirect costs .[s]
Direct and Indirect costs
Traditionally, accountants maintain that costs have to be charged to whatever is being

costed – the goal is ultimately to link costs to the units of product themselves:
Direct costs are not a problem as they are directly attributable to the product.
Indirect costs – in this context referred to as “overheads” -- are more difficult to link to
products (e.g. a supervisor’s salary or a security guard).
KEY KNOWLEDGE
Absorption costing at work
This is one method which seeks to make the link between overheads and (product) cost
units. The diagram below provides a useful roadmap.
Total Production Costs
Direct Costs Indirect costs (overheads)
2. Allocate/Apportion to Cost Centres
Production A Production B Service C
1. Allocate
3. Reapportion from
Service to Production
Production A Production B
4. Absorb
Cost Unit
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The focus (above) is production. Overhead costs that are not incurred at the time of
production do not find their way into inventory.
It is useful to think of production costs as being those that end up as part of the inventory
(valuation) while other (non-production) costs are incurred outside, and normally after the
product leaves inventory.
Allocation and Apportionment
Allocate, Apportion and Re-apportion indirect production costs (shown on the right side of
the diagram) to cost units.
Our focus is on the first category (production); the other overhead costs are not incurred at
the time of production and do not find their way into inventory. Always think of the costs
going into inventory and those that occur after the product leaves inventory!
EXERCISE
A company producing refrigerators and toasters has identified the following overhead costs
relating to production:
$
Rent 8,000
Indirect materials 1,500
Power 3,000
Equipment insurance 2,500
15,000
The company has 3 cost centres, 2 production workshops (A & B) and 1 warehouse (C,
service centre).
1. Suggest the basis on which the costs shown above might be charged to the various cost
centres.
Basis A B C
Rent 8,000 sq.m. 4000 2500 1500
Indirect materials 1,500 Specific 600 700 200
Power 3,000 kWh 1500 1000 500
Equipment 2,500 Book 1000 1400 100
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ExPress Notes
insurance value
15,000 sq.m. 7100 5600 2300
As a manager with cost centre responsibility, what could be your concerns with respect
to the bases selected above?
2. Re-apportion the service centre costs to the production workshops.
Assumption: C is used by A (65%) and B (35%):
A B C
Costs apportioned to A, B, C: 7,100 5,600 2,300
Costs re-apportioned from C: 1,500 800 (2,300)
Total overheads: 8,600 6,400
3. Absorb the overheads into the units produced.
Assumption: The company absorbs overhead costs on the basis of direct labour hours
Total labour Overheads Overhead Absorption

Hrs $ Rate (OAR) $
Workshop A 1,400 8,600 6.14

Workshop B 950 6,400 6.74
Each workshop uses its OAR to keep track of overhead costs as it produces.
Alternatively, the company can use a “blanket” or company-wide OAR, calculated as:
Total overhead costs = 15,000 = 6.38

Total labour hours 2,350
The company’s cost cards for toasters and refrigerators could look as follows:
Refrigerator (cost per unit) $

Direct materials (15kg @ $2/kg) 30.00
Direct labour (1.75hrs @ $15/hr) 26.25
Variable OHs 5.00
Fixed OHs (1.75hrs @ $6.38/hr) 11.17
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Total 72.42
Toaster (cost per unit) $

Direct materials (1kg @ $3/kg) 3.00
Direct labour (0.30hrs @ $15/hr) 4.50
Variable OHs 2.00
Fixed OHs (0.30hrs @ $6.38/hr) 1.91
Total 11.41
Summary – Absorption costing
• Method of measuring the cost of products or services by including a fixed overhead “fair”
share into the product manufacturing/service provision cost
• Results in reporting higher ending inventories and higher operating profits (as fixed
factory overheads are taken to inventory cost instead of being expensed as incurred)
It addresses the problem of allocating factory overheads per product lines
• Step 1: Identify total factory overheads to be absorbed
• Step 2: Take the total quantity recorded for the absorption base
o The absorption base should be highly correlated with incurrence of overhead
o Most common absorption bases selected: direct labour hours, machine hours,
units of output
• Step 3: Compute overhead absorption rate (OAR) as Step 1 / Step 2 ($/unit of

absorption base)
• Step 4: Obtain unit overhead cost per product line, by multiplying the OAR with the
absorption base quantity recorded per unit
• Step 5: For each product, multiply Step 4 by total output to determine factory
overhead to absorb in the production cost.
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ExPress Notes
KEY KNOWLEDGE
Job costing / Batch costing
This refers to the calculation of costs associated with a specific job or customer order. This
is appropriate in situations where each product or service is distinct, and possibly unique, in
its delivery.
Batch costing is similar to job costing; the distinction lies in the identification of costs with
specific batches, which are numbered (separately identified) for this purpose.
KEY KNOWLEDGE
Process costing
Process costing is a technique that applies to the mass production of a large number of
identical products, moving through a series of processing stages. The accumulated costs of
production can be averaged over the number of items produced.
Illustration 1
Process B
units $ units $
Input units 1,000 20,000 Output to 1,000 30,000

from Process A Process C
Additional:
Materials 5,000
Labour 3,000
Overheads 2,000
1,000 30,000 1,000 30,000
Avg.cost/unit: 30
The average cost is determined by the following formula:
Average cost per unit = Total cost of inputs – Scrap value of rejected units
No. of units of input – Normal loss
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ExPress Notes
The total cost of inputs refers to labour, materials and overhead costs of production. If
losses occur along the way that necessitate the scrapping of defective units, then to the
extent that these items fetch a scrap value, then that (scrap) value will reduce the total
costs.
Similarly, an accounting is made of the number of units introduced into a process with the
expectation that a normal loss will be incurred. The number of good units emerging from a
process will therefore be the number of units entering it, minus the expected number lost in
processing.
Illustration 2
Normal loss
10% of input
1,000 = 900 + 100

good NL
Avg. cost / unit 33.3
Conclusion:
Average cost per unit = Total cost of inputs

Process B
units $ units $
Input units 1,000 20,000 Output to 900 30,000

from Process A Process C
Additional:
Materials 5,000 Normal loss 100 0
Labour 3,000
Overheads 2,000
1,000 30,000 1,000 30,000
Illustration 3
Scrap value
scrap/unit 5
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ExPress Notes
Avg cost/unit 32.78
Conclusion:
Average cost per unit = Total cost of inputs – Scrap value of normal loss units
Process B
units $ units $
Input units 1,000 20,000 Output to 900 29,500

from Process
A Process C
Additional:
Materials 5,000 Normal loss 100 500
Labour 3,000
Overheads 2,000
1,000 30,000 1,000 30,000
Equivalent units (EU)
This refers to the way in which partially-completed output (“work-in-progress” or WIP) is

expressed. If an unfinished unit of product contains 35% of the labour and materials costs
of a complete unit, then the unit has a degree of completion of 35% in terms of value. It
is therefore considered to have an EU of 35%, which is normally expressed in monetary
terms.
Illustration 5
Closing WIP
Assume 200 units are 100% complete with respect to materials,

but 40% with respect to the conversion costs (labour + overheads)
Materials EU Conv. EU Total

Finished units 800 100% 800 100% 800
WIP units 200 100% 200 40% 80
Total units
(EU) 1000 880
Value 25,000 5000
Value/unit 25.00 5.68
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ExPress Notes
Finished units 20000 4545 24545

WIP units 5000 455 5455
25000 5000
Process B
units $ units $
Finished
Input units 1,000 20,000 output 800 24,545
from Process A to Process C
Additional:
Materials 5,000 Closing WIP 200 5,455
Labour 3,000
Overheads 2,000
1,000 30,000 1,000 30,000
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ExPress Notes
Chapter 5
Providing Information
KEY KNOWLEDGE
Information for comparison
The purpose of making comparisons
Information is only really meaningful if it is looked at in relevant contexts and allows

comparisons to be made. For example, a company with sales growth of 10% is impressive if
the overall market has grown only 5%. If the growth of the market is 20%, then 10% looks
modest.
In analysing a company’s performance, one can use different bases of comparison:

1) Company performance with that of its competitors during the same period of time;
2) Company performance during the current period with a previous period (year,
quarter or month);
3) Company actual performance compared to its budget for the period.
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ExPress Notes
Budgeting: definition and purpose
A budget is a quantitative plan addressing the future.
It is used to:
a) Communicate b) Motivate b) Control b) Evaluate

Objectives Employees Activities Performance
KEY KNOWLEDGE
Forecasting/Budgeting
The process by which a budget is prepared can be a highly structured and even complex. It
is based on the company’s strategy, a clear understanding of the company’s opportunities
and capabilities, and identification of any limiting factors.
Master budget
The result of combining the budgets defined above, while ensuring consistency in
assumptions made, is the company’s master budget, which sits atop a hierarchy of budgets.
Master budget
Operating Financial
budgets budgets
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ExPress Notes
The master budget process features:

• Annual frequency, preferably revised on a regular basis (rolling budget)
• Based on organization’s objectives, expressed in financial, quantitative and
qualitative measures
Operating budgets
These are budgets that quantify the revenues and costs relating to a company’s activities at
a disaggregated level, meaning that there is direct input from department and functional
levels. They require both volume (e.g. units of output, quantities, hours, etc.) and price
specifications. Operating budgets are modelled on what will emerge as the company’s
income statement.
Examples include:
• Sales budget
• Production budget
• Direct material usage
• Direct material purchases
• Direct labour budget
• Factory overhead budget
• Selling & distribution budget
• Administrative expenses budget
The “disaggregation” of budgets referred to above allows the practice of “responsibility”

accounting.
The operating budget sequence:

1. Sales budget
2. Production budget
3. Ending inventory budget
4. Direct materials budget, Direct labour budget, Factory overhead budget
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ExPress Notes
5. Cost of Sales budget

6. R&D budget, Marketing budget, Distribution budget, Customer service budget, Admin
budget
7. Pro-forma income statement
Financial budgets
The operating budgets, which cover future periods, feed into the company’s financial
budgets, based on the balance sheet. These provide a “snap shot” view of the company’s
assets and liabilities frozen at a moment in time.
The financial budget sequence

• Capital budget
• Cash budget
• Pro-forma balance-sheet and pro-forma statement of cash-flows
Principal budget factor
When a budget is prepared, management must identify any factors that will prevent the
company from surpassing a certain level of activity.
A bank, for example, may be constrained from developing an extensive branch network
owing to the scarcity of suitably-skilled professional staff; or production may be constrained
by the built capacity of the plant or by the level of demand for a company’s products. In
each of these cases, there is a limiting factor at work.
Fixed vs. flexible budgets
Traditional budgets tended to be rigid, i.e. they were not subject to modification during the
period to which they referred.
EXAMPLE
A producer of office equipment has a budget for the coming year:
Output: 1,000 units
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ExPress Notes
Costs:
Materials 75,000
Labour 200,000
Fixed O/Hs 100,000
Total 375,000
After 3 months, the company observes that sales are running ca. 20% higher than originally
projected and it has therefore increased its production by a similar amount. In order to look
back at what its budget would have been had the actual (higher) level of activity been
anticipated, management can prepare a “flexed” budget; this is effectively a re-calibration of
the original budget. It allows management to re-focus their efforts without losing time
tracking “artificial” spending excesses according to the original budget.
Output: 1,200 units

Costs:
Materials 90,000
Labour 225,000
Fixed O/Hs 100,000
Total 415,000
Prepare a flexed budget for an output level of 1,075 units.
Based on the data (below), the
• variable cost of labour is $125 per unit, and the

• fixed cost of labour is $75,000
Output: 1000 1200
Mats 75,000 90,000
Labour 200,000 225,000
Fix 100,000 100,000
Total 375,000 415,000
The cost of labour at output of 1,075 units is $209,375.
Variance analysis
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ExPress Notes
In the previous example, if 1,000 units are (originally) budgeted, actual output is 1,075
units, and actual labor costs are $205,000, then the following variances may be calculated
with respect to labor costs:
(a) Original budget/labor costs: $200,000

Actual labor costs: $205,000
Difference: $ 5,000 (adverse)
(b) Flexed budget/labor costs: $209,375

Actual labor costs: $205,000
Difference: $ 4,375 (favorable)
Causes of variances
Material price
Favourable: Unanticipated discounts received, better purchasing/negotiation,

cheaper (substandard) materials
Adverse: Price inflation, poor purchasing, better quality materials
Material usage
Favourable: Better quality materials, more efficient processing
Adverse: Substandard material, waste, poor quality control, theft
Labour rate
Favourable: Low pay rates, cheap workers
Adverse: Wage inflation
Labour efficiency
Favourable: More efficient production, motivated/better trained workers, better

materials and/or equipment
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ExPress Notes
Adverse: Poorly trained workers, deficient work organization, materials or

equipment
Exception reports
When transactions and processes run according to expectations, there is normally no need
for management attention and intervention. This is beneficial when large numbers are
involved (number of bottles filled in a bottling plant; number of credit card invoices issued in
a month).
In such cases, management needs to highlight exceptions to normal operations (defective

bottles, or bottles dropped; number and amount of invoices not paid on time) so that
corrective actions can be undertaken.
Investigating variances
Variances need to be investigated when:
1. They involve a large amount of financial loss to the firm (materiality);

2. The cost of investigation does not exceed the amount that can be saved.
KEY KNOWLEDGE
Reporting management information
Methods of analysing, presenting and communicating information
Information can be conveyed in a variety of ways:
• Formal reports, with tables and appendices attached; normally an “executive

summary” is provided at the beginning for busy managers with short attention
spans;
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ExPress Notes
• Means of transmission: The use of e-mail is increasingly dominating other ways of

communication because it is efficient; printing reports, memos and letters may be
considered wasteful, particularly if the item is not read;
• (On-line) databases: allowing managers to access and view information at their

discretion; this method requires that databases are organised in a purpose-driven
manner and faithfully kept up to date with relevant information;
• Powerpoint presentations (favored by general managers);
• Informal: Oral reports, provided on an adhoc basis, usually to those who need to
know.
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ExPress Notes
Chapter 6
The Spreadsheet System
KEY KNOWLEDGE
Use of spreadsheets
The use of spreadsheets is a basic skill that all accountants and business analysts should
possess.
A spreadsheet is a computer program that is organised in a tabular format. The vertical and
horizontal arrangement of cells allows the input and processing of large amounts of data in
a systematic way.
Spreadsheets contain sophisticated formulae which can be used to operate on the data.
Instead of merely adding up columns of numbers, spreadsheet formulae can handle
discounting (i.e. net present value) calculations.
Apart from processing a large volume of data quickly, spreadsheets permit analysis to be
performed with great efficiency. Thus, if an assumption is modified, then the spreadsheet
can automatically adjust all affected values (known as “what-if” analysis), meaning that the
management acccountant can focus on interpeting the output.
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3. Cost classification and measurement 17

6. The spreadsheet system 42

Components of an effective study system

• The ExPress notes for that paper

How to get the most from these ExPress notes

Your stage in These ExPress ExP ExP ACCA online

Your stage in These ExPress ExP ExP ACCA online

Our ExPress notes fit into our portfolio of materials as follows:

Notes Notes Notes

To maximise your chances of success in the exam we recommend you visit

The Nature and Purpose of Cost and

The business organisation and its structure

Benefits of an organisation include:

Policies, procedures and best practices

Effective control over transactions

Debits mean Credits mean

An increase in assets A decrease in assets

A decrease in liabilities An increase in liabilities

In this system, debits must equal credits.

Ledgers and prime entry records

All accounting transactions are recorded in a document called a General Ledgers.

The most commonly used books of original entry are:

Books of original entry may be recorded in paper form, or using a spreadsheet.

Integrated and interlocking accounting systems

Computerised accounting systems

Advantages of using a computerised system include:

• Back ups can be made easily

Disadvantages of a computerised system include:

The purpose of management information

Control: Post-implementation, actual results are analysed in order to determine whether

An important focus of management accounting is suggested by its original name, cost

Comparison of cost and management accounting with external financial reporting

Principal differences between financial accounting and management accounting:

It particular, it should be noted that management accounting is:

• Aimed at internal users (as opposed to financial accounting, which is aimed at

• Focused on present and future performance (as opposed to financial accounting,

Distinction between data and information

Features of useful management information.[K]

Using a well known Accurate

Sources and categories of information: Financial and Non-financial

Internal examples of non-financial information

Limitations of cost and management accounting information

The role of information technology

Suitable formats for the presentation of management information according to purpose

Managerial accounting is a free-style form of accounting in which format and structure of

Source Documents and Coding

The controls and procedures are designed to monitor inventory movements so as to

The key documents one should be familiar with are:

of the product ordered.

Documents relating to the recording of sales

Sales order Records an order from a customer

Invoice A request for payment by a supplier

Credit note Acknowledgement from a supplier that the customer has

Debit note To cancel a credit note that previously existed, eg if goods

Remittance advice Normally included with an invoice. A document that is

Receipt Issued by the supplier for goods, to acknowledge

Cost Classification and

There are a variety of ways in which one can classify costs:

Production vs. Non-Production

Direct vs. Indirect

Direct costs: are costs that can be directly attributable to a product.

Fixed vs. variable