Chapter6

Introduction to managem nt information e

topiclist
lntroduction Dataand information 3 4
p

information The purposeof management of The features usefulmanagement information Sourcesand categories information of accounting financial reporting Management and The limitations cost and management of accounting information technician's in a costaccounting role The accounting system

6 :f

following study sessions are covered in this chapter: Syllabus reference planning, Discuss purpose management the of information: control and decision-making Distinguish between dataandinformation Describe features useful the of management information Describe identify and sources categories information and of Compare and management cost accounting external with financial reporting Explain limitations costandmanagement the of accounting information Describe accounting the technician's in a costandmanagement role accounting system 3(a) 6(b) 3(a) 6(b) 3(a) 6(b) 6(b)

119

w)
hdrswtflrmol

Part B: Management information I

INTRODUCTION
information and in particular, explain what management information is and why it needed.Let's start from basics.

1 . 1 The main aim of this chapter is to introduce you to the subject of

DATA AND INFORMATION

What is data?

Z.L

Examples of data include the following. . . . The number of tourists who visit Hong Kong each year The salesturnovers of all restaurants inZambia The number of people (with black hair) who passtheir driving test eachyear

What is information?

2.2 Information is sometimes referred to as processeddata. The terms 'information' and'data'

are often used interchangeably. Let us consider the following situation in which data is collected and then processed in order to produce meaningful information.

2.3 Many companies providing a product or service researchconsumer opinion to ensure they
provide what customers and potential customers want and will buy. A typical market research survey employs a number of researcherswho request a sample of the public to answer questions relating to the product. Several hundred questionnaires may be completed. The questionnairesare usually input into a computer system for analysis.

2.4 Individually, a completed questionnaire would not tell the company very much, only the
views of one consumer. In this case,the individual questionnairesare data. Once they have been processed and analysed,the resulting report is information. The people who run the business can consider the report and use the information to make decisions regarding the product, such as whether to improve it or scrap it.

2.5 Management is the term used for the people in charge of running a business(managers)or
other organisation.

2.6

Management information can therefore be described as information that is given to the people who are in charge of running an organisation. The report described above is one example of managementinformation.

W))
horscthnml

120

6: lntroduction to management information To run a business successfully depends upon making the right decisions. Information is vital to enable good decisions to be made. Examples of the some of the questions that managementmight wish to have answersto include: . . . . How How How How much doesit cost to produce the product(s) or service(s)they supply. many product(s)/service(s)they sold last month. much was spent on wageslast year. many staff the company currently employs.

Managementinformation is often classified into two types: r . Financial information (measuredin terms of money) Non-financial information (not measuredin terms of money)

THE PURPOSEOF MANAGEMENT INFORMATION

In order to managetheir resources,managersin any organisation need to know on a regular .basishow their particular department or section is performing. They will also wish to know whether activities are going as planned and whether any problems have arisen. Accounting :*yst.-s must therefore provide them with reliable, up-to-date information which is relevant to the decisions they have to take. Managementinformation has the following purposes. . r ,l Planning Control Decision making

Planning. Management needs to decide what the obiectives of the company are and how they can be achieved. Management information is used to help management plan the resources that a businesswill require and how they will be used. Once management puts a plan of action into operation, there needs to be some control over the business'sactivities to make sure that they are carrying out the original

n making. Management at all levels within an organisation take decisions.Decision always involves a choice between alternatives. Information is required that managementto reach an informed decision. The information required by a manager will vary according to the nature of the organisationand their individual responsibilities. Look at the following examples. -;Ka) Senior management will usually be interested in the financial statements(balancesheet profit and lossaccount),on a monthly basis. and (b) A supervisor in a large factory may want a daily output report for every production shift. (c) A salesmanagermay want a weekly report of orders achievedby the salesteam.

121w)) hmoluhrrnur

Part B: Managementinformation 3.7 Management information is used for a wide variety of purposes. In a
accounting context, planning control and decision making activities include:
a a a a

Pricing Valuing stock profitability Assessing Decidingon the purchase capitalassets of

3.8 In the present business environment where the rate of change is increasing,
management information systems are seen by many as the key to success. Although systems give a basis for improved management decisions they do not guarantea., management.Poor information, however, is likely to reduce a manager'schancesof 3.9 Ife have looked at why managementinformation is needed. Let's have a look now management information is collected by an organisation.

Activity 6.1
Themanagement accountant the of compares profitability two products, andQ, andconcludes P is the bestproduct make.He writesa report hisfindings the boardof directors. to of for This
primarilyaid management in A B C D Decision-making Planning Controlling lmplementing

THE FEATURES OF USEFUL MANAGEMENT INFORMATION

4.r

Good management information helps managers make informed decisions. To do this information should be: r Reliable. It is important that management have an accurate picture of what is happening. Timely. Information should be available in time for decisionsto be made. Relevant. Management information should be relevant to the needsof the and the individual manager. Complete. The manager should have all the information he needs to do the properly without being overwhelmed by information.

o r

122

6: lntroduction to management information r Accurate. Incorrect information may lead to incorrect decisions. However, accuracyor detail is pointless. unnecessary Clear. It must be communicated well and understood.

Reports to managers should enable them to manage the resources for which they are responsible,and give the required level ofdetail. If management information does hot contain enough detail, it may fail to highlight problems within the organisation. On the other hand, too much detail may mean that the most important information is not seen. Numbers are often rounded to make reports easier to read, eg money may be expressedto S100,f1,000 or f10,000 dependingon the sizeofthe organisation. the nearest The time periods covered by reports will also vary for different organisations and for different managers within them. Some computer systems allow managers access to information on a real time basis and/or to construct their own reports as necessary. It is more common for reports to be provided by the accounting department of an organisationevery week or month (or any specified period). Reporting information requires the active co-operation of the following groups. r o . End users: managersand supervisors the The accounts department: which usually processes information The information technology department: which usually setsup and makes changesto the computer system

Difficulties may arise when these groups fail to communicate effectively or when the system itself is not flexible enough to respond to changing needs. Information requirementsmust be clearly specified.

Activity 6.2
Goodmanagement is information A B C D Relevant, regularand reliable Timely,regularand sufficient Reliable, timely and relevant Relevant. convenientand material

123

W)
hN&hrIFtt

information Part B: Management

4.9

MANAGEMENT REPORT
SUMMARY MONTHLY REPORT TO TRUSTEES OF A CHARITY FOR THE HOMELESS

txpenditute cotejli projeOt r,tg ltAobil,e Medico0seuioes e0otP.iltg 9n/on,r, doste0 costs SProntSo00 tfte ntolttft 6orr

This type of report is often backed up with appendices. An appendix would give details of costs and income to help the trustees decide what to do about the shortfall fbr month. The charity has spent f,800 more than it received in the month under

(for fund raising, the cateringproject, the hostel etc) will need Individual managers reportsfor their own activities. receive moredetailed Management information informationreportsmight alsoshowthe following. 4.10 Management
a a a a a a

Comparisonsbetweenplanned results (budgets) and actual results Year-to-date (cumulative information) Comparison of company results and competitor results Comparison between cunent year and previous year'sresults The profitability of a product or serviceor the whole organisation The value of stocks of goodsthat are still held in store at the end of a period

w2
hmEn|ll,fuftft

124

6: Introduction to managementinformation
SOURCES AND CATEGORIES do organisations need information? If we take a wider view, and look at information in general rather than just information used specifically by management, we could say that organisations require information for five purposes. The five purposes listed below include three (planning, controlling and decision-making) that we have already talked about in the context of management information. r o o o o Planning Controlling Recordingtransactions Overall performance measurement Decision making OF INFORMATION

I
J

3r

Planning requires a knowledge of, among other things, available resources, possible timescales for implementation and the likely outcome under alternative scenarios.

whether things are going to plan, or whether there is Information is required to assess plan. It may consequently be necessary take some form to someunexpecteddeviation from ofcorrectiveaction. ffansactions Information about each transaction or event is required for a number of reasons. Documentation of transactions can be used as evidence in a caseof dispute. There may be a legal requirement to record transactions, for example for accounting and audit purposes. Detailed information on production costs can be built up, allowing a better assessment of profitability.

perfmm"an rneusur ce ement

Just as individual operations need to be controlled, a wider picture of performance is also required, for example to enable comparisons against budget to be carried out. This requiresinformation on, for example, costs,revenues,volumes, time-scaleand profitability.

making
As we discussedearlier, information required to allow informed decision making.

12s

w)
horsoil thffnl

Part B: Management information The qualities of good information 5.7 The qualities of good information are outlined below - in the form of a 'accurate'.These general qualities are similar to the features of useful informationdiscussed theprevious in section. Quality A C ccurate omplete Example Figuresshouldadd up, the degree ofrounding shouldbe thereshouldbe no mistakes.
Information should include all relevant information that is correct but excludes something important is likely to be little value. For example external data or comparative informa

maybe required.

C
U

osrbeneficial

It should not cost mofe to obtain the information than the derived from having it. managersmay require summaries.

ser-targeted The needs of the user should be borne in mind, for instance
elevant uthoritative Information that is not relevant should be omitted. The source of the information should be reputable and reliable. The information should be availablewhen it is needed. Information should be clearly presented, not excessively long sent using the right communication channel (e-mail, intranet, hard-copy report etc).

R A T E

imely
asy to use

Internal information 5.8 Data and information come from sources both inside and outside an organisation.
information system should be designed so as to obtain - or capture - relevant informa from whatever source. Capturing data/information from inside the organisation involves the following. (a) A system for collecting anflor measuring transaction data - for example purchases,stock turnover etc. (b) Informal communication of information between managers and staff(for example,b$

or word-of-mouth at meetings). (c) Communicationbetween staffat all levels. Internal data sources The accountingrecords 5.9 purchase generalledgers, ledgers, cashbooksetc hold information that Sales ledgers, department, example, for salesinformation for be of great value outsidethe accounts marketing function.

9)

5,
5.10 To maintain the integrity of its accounting records, an organisation requires controls transactions. These also give rise to valuable information. A stock control system

orders,goodsreceived notes,goodsreturned example will includedetailsof purchase

w2

126

hm&Iltrcfir0r