RIFT VALLEY UNIVERSITY

MARI-GORO CAMPUS

ACCOUNTING AND FINANCE

LEVEL – IV

Unit of Competence: Providing Management Accounting

Information

Module Title: Providing Management Accounting Information

LG Code: LSA ACF4M12 0322

TTLM Code: LSA ACF4M12 0322
 INTRODUCTION

Welcome to the module “Manage Overdue Customer Accounts”. This learner’s guide
was prepared to help you achieve the required competence in “ACCOUNTING AND
FINANCE LEVEL – IV”. This will be the source of information for you to acquire
knowledge attitude and skills in this particular occupation with minimum supervision or help
from your trainer.

Summary of Learning Outcomes

After completing this learning guide, you should be able to:

 Lo-1: Gather and record operating and cost data

 Lo-2: Analyze data
 Lo-3: Prepare budgeted reports
 Lo-4: Review costing system integrity

How to Use this TTLM

o Read through the Learning Guide carefully. It is divided into sections that cover
all the knowledge, skills and attitude that you need.
o Read Information Sheets and complete the Self-Check at the end of each section
to check your progress
o Read and make sure to Practice the activities in the Operation Sheets. Ask your
trainer to show you the correct way to do things or talk to more experienced
person for guidance.
o When you are ready, ask your trainer for institutional assessment and provide you
with feedback from your performance.
 LEARNING MODULE 12

TVET-PROGRAMME TITLE: Accounting and Finance Level IV

MODULE TITLE: Providing Management Accounting Information
MODULE CODE: LSA ACF4 M12 0322
NOMINAL DURATION: 130Hours
MODULE DESCRIPTION: This module covers the competence required to gather, record and
analyze operating and cost data, prepare budget reports and review costing systems integrity to
calculate and record the costs of products and services.
LEARNING OUTCOMES
At the end of the module the trainee will be able to:
LO1.Gather and record operating and cost data
LO2.Analyze data
LO3. Prepare budgeted reports
LO4.Review costing system integrity
MODULE CONTENTS:
LO1. Gather and record operating and cost data(20hr)
1.1. Identifying and establishing systems
1.2. Coding, classifying and checking
LO2. Analyze data(30hr)
2.1. Assigning costs to specified products, services and organizational units
2.2. Interpreting and supporting of revenues and costs
LO3. Prepare budgeted reports(60hr)
3.1. Seeking cost information advice
3.2. Structure and format of budgets and reports
3.3. Conforming Structure and format of budgets and reports to management
information
Requirements
3.4. Identifying and prioritizing variances against budget
 3.5. Making reports error free
LO4. Review costing system integrity(20hr)
4.1. Analyzing the variance between actual and applied overheads costs
4.2.Using variance analysis

ASESSMENT CRITERIA:
LO.1: Gather and record operating and cost data
 Systems are identified and established to generate data
 Data are systematically coded, classified and checked for accuracy and reliability in
accordance with organizational policies and procedures
LO.2 Analyze data

 Costs are assigned to specified products, services and organizational units and data is
reconciled to ensure calculations are accurate and comply with organizational procedures
 Interpretation of revenues and costs is supported by valid analysis and is consistent with
the organization's business performance objectives

LO.3: Prepare budgeted reports

 Cost information advice is sought from all sections of the organization when formulating
budgets
 Structure and format of budgets and reports are made clear and conformed to
management information requirements
 Variances against budget are identified and prioritized for review and decision making
 Reports are made error free, comprehensive and complied with management
requirements and organizational practices
LO.4: Review costing system integrity

 The variance between actual and applied overheads costs is analyzed

 Variance analysis is used to review the effectiveness of the cost assignment process
LO-1: GATHER AND RECORD OPERATING AND COST DATA

What is cost data in business?

 Cost data means factual information concerning the cost of labor, material, overhead, and
other cost elements which are expected to be incurred or which have been actually incurred
by the contractor in performing the contract.

What is data gathering procedure?

 The definition of data gathering procedure is that it is the technique used to obtain the
information used in a dissertation to substantiate the claims made by a writer. To get
the perfect outcome, you should use the best procedure

BASIC ASSUMPTIONS IN COST- VOLUME- PROFIT ANALYSIS

Certain assumptions are made about cost behavior so that cost information can be used in
accounting computations. The following list summarizes these simplifying assumptions about
revenue and cost function.

1. Relevant Range- A primary assumption is that the company is operating within the
relevant range of activity specified in determining the revenue and cost
information.
2. Revenue- Total revenue fluctuates in direct proportion to units sold. Revenue per
unit is assumed to remain constant, and fluctuations in per-unit revenue
for factors such as quantity discounts are ignored.
3. Variable Costs- Total variable costs fluctuate in direct proportion to level of activity of
volume. On a per unit basis, variable costs remain constant. Variable
costs exist in all functional business areas including production,
distribution, selling and administration.
4. Fixed Costs- Total fixed costs remain constant: thus, per unit fixed cost decreases as
volume increases and increases as volume decreases. Fixed costs
include both fixed factory overhead and fixed selling and administrative
expenses.
5. Mixed Costs- Mixed costs must be susceptible to separation in to their variable and
fixed elements.
LO-2: ANALYZE DATA

What is meant by data analysis?

 Data Analysis is the process of systematically applying statistical and/or logical techniques
to describe and illustrate, condense and recap, and evaluate data.

A Step-by-Step Guide to the Data Analysis Process

1) Defining the question.
2) Collecting the data.
3) Cleaning the data.
4) Analyzing the data.
5) Sharing your results.
6) Embracing failure.
7) Summary.
8) Modern analytics tend to fall in four distinct categories: descriptive, diagnostic,
predictive, and prescriptive.
1) Defining the Question:
Begin by clearly defining the problem or question you want to address through data analysis.
This step helps set the direction for your analysis and ensures that your efforts are focused on
relevant objectives.
2) Collecting the Data:
Once the question is defined, gather the necessary data to address it. This can involve
collecting data from various sources, such as surveys, databases, or external datasets. Ensure
the data collected is relevant, accurate, and sufficient for your analysis.
3) Cleaning the Data:
Raw data often contains errors, missing values, or inconsistencies. Data cleaning involves
identifying and rectifying these issues to ensure the accuracy and reliability of your analysis.
This step is crucial for obtaining meaningful insights.
4) Analyzing the Data:
With clean data, perform the actual analysis. This step may involve using statistical methods,
machine learning algorithms, or other analytical techniques to extract patterns, relationships,
or trends from the data.
5) Sharing Your Results:
Communicate your findings effectively to stakeholders or the intended audience. This step
includes creating visualizations, reports, or presentations that convey the key insights derived
from the analysis.
6) Embracing Failure:
Acknowledge that not all analyses will yield the desired results or insights. Embracing failure
involves learning from unsuccessful attempts, refining your approach, and iterating on the
analysis process. It encourages a culture of continuous improvement and innovation.
7) Summary:
Summarize the key findings and implications of your analysis. This step provides a concise
overview of the results, making it easier for others to grasp the main takeaways without
delving into the details.
8) Modern Analytics Categories: Descriptive, Diagnostic, Predictive, and Prescriptive:
Modern analytics can be categorized into four main types:
Descriptive Analytics: Focuses on summarizing historical data to provide insights into what
has happened.
Diagnostic Analytics: Aims to understand why certain events occurred by examining
patterns and relationships in the data.
Predictive Analytics: Involves forecasting future trends or outcomes based on historical data
and statistical models.
Prescriptive Analytics: Recommends actions to optimize outcomes by suggesting the best
course of action based on analysis results.
 LO-3: PREPARE BUDGETED REPORTS
3.1. Meaning of a Budget
A budget is a comprehensive and coordinated plan, expressed in financial terms, for the
operations and resources of an enterprise for some specific period in the future. The commitment
of management is key to the success in preparation and implementation of a budget. The basic
elements of a budget are:

1. It is a comprehensive and coordinated plan- It is a comprehensive plan in the sense that all
activities and operations are considered when it is prepared.
2. It is expressed in financial terms- For operational purposes; a budget is always quantified in
financial terms.
3. It is a plan for the firm's operations and resources-A budget is a mechanism to plan for the
firm's over all operations or activities. The two aspects of every operation are revenues and
expenses. The budget must plan for and quantify revenues and expenses related to a specific
operation.
4. It is a future plan for a specified period- A budget is meaningful only when it is related to a
specific period of time. A budget is not the same thing as forecast. A budget is an expression of
the management's intensions of achieving forecasts through positive and conscious actions and
influencing the events.
3.2. . Purpose of Budgeting
Budgeting is systematic and formalized approach for stating and communicating the firm's
expectations and accomplishing the planning, coordination, and control responsibilities of
management in such a way as to maximize the use of given resources. The major purposes of
budgets on budgeting are:
1. To state the firm's expectations (goals) in clear, formal terms to avoid confusion and to
facilitate their attainability. (Planning)
2. To communicate expectations to all concerned with the management of the firm so that
they are understood, supported & implemented. (Communication)
3. To provide a detailed plan of action for reducing uncertainty and for the proper direction of
individual and group efforts to achieve goals. (Planning)
4. To coordinate the activities and efforts in such a way that the use of resources is
maximized. (Coordination)
5. To provide a means of measuring and controlling the performance of individuals and units
and to supply information on the basis of which the necessary corrective action can be
taken. (Control)
3.3. Types of Budgets
There are many different ways of classifying budgets. Thus, budgets may be classified based on
capacity, time, and coverage, each of which is briefly discussed in this section.

1) Based on Capacity
Budgets are classified based on capacity, into fixed and flexible budgets.

(a) Fixed budgets- A fixed (static) budget is a budget prepared for only the planned level of
activity and will remain unchanged irrespective of changes in the level of activity.
These budgets are suitable for planning purposes but are inadequate for evaluating how
well costs are controlled.
(b) Flexible budgets- A flexible budget is a budget that takes into account changes in
costs that should occur as a consequence of changes in activity. A flexible budget
provides estimates of what cost should be for any level of activity within a specified
range.
2) Based on Time
Budgets are developed for specific time periods.
a) Short-range budgets- cover a year, a quarter, or a month,
b) Long-range budgets cover periods longer than a year.
c) Continuous or perpetual budgets- are used by a significant number of organizations. A
continuous or perpetual budget, also known as a rolling or revolving budget, is a 12-
month budget that rolls forward one month or quarter as the current month or quarter is
completed.
3) Based on Coverage

On the basis their coverage, budgets are classified as functional and master budgets.
 (a) Functional budgets- The functional budgets represent the budgets that relate to the
various functional activities of an organization. The functional budgets are further
categorized into the following classes:
1. Physical budget- The physical budgets provide information about physical units like
sales, production, and the like. Units of sales and production are but few examples of
physical budgets.
2. Profit budgets- The profit budgets are budgets prepared to ascertain the profits. These
budgets include sales budget and profit and loss budget.
3. Cost budgets- These budgets provide information on such costs as manufacturing,
selling, and administrative.
4. Financial budgets-These budgets provide information on the financial condition of the
firm such as the cash budget and capital expenditure budget.

(b) Master budgets- A master budget, the central focus of this chapter, is a consolidated
summary of the various functional budgets. It coordinates all the financial projections
in an organization’s individual budgets into a single company-wide set of budgets for a
specified time period. The master budget incorporates the impact of both operating and
financing decisions. The term “master” in master budget stands to reflect the fact that the
master budget is a comprehensive, company-wide set of budgets.
3.4. Advantages of Budgeting
The following are some of the more significant advantages of budgeting:
1. Forced Planning: - Budgeting compels mgt to plan for future.
2. Coordinated Operations: - Budgeting helps to coordinate, integrate and balance the
efforts of various departments in the light of the overall objectives of the enterprise.
3. Performance Evaluation and Control: - Budgeting facilitates control by providing
definite expectations in the planning phase that can be used as a frame of reference for
judging the subsequent performance.
4. Effective Communication: - Budgeting improves the quality of communication. The
enterprise objectives, budget goals, plans, authority and responsibility and procedures to
implement plans are clearly written & communicated through budgets to all individuals in
the enterprise..
5. Optimum Utilization of Resources: - Budgeting helps to optimize the use of the firm's
resources- capital and human: it aids in directing the total efforts of the firm into the most
profitable channels.
6. Productivity Improvements: - Budgeting increases the morale and thus, the productivity
of the employees by seeking their meaningful participation in the formulation of plans and
policies.
7. Profit Mindedness: - Budgeting develops an atmosphere of profit mindedness and cost-
consciousness.
8. Mgt by Exception: - Budgets permits to focus mgt attention on significant matters through
budgetary reports; thus, it facilitates mgt by exception & there by saves mgt time and
energy considerably.
9. Efficiency: - Budgeting measures efficiency, permits mgt self-evaluation and indicates the
progress in attaining the enterprise objectives.

3.5. Limitations of Budgeting

Budgeting is a systematic approach to the solution of problems. But it is not foolproof; it suffers
from certain problems and limitations.
Mgt must consider the following limitations in using the budgeting system as a device to solve
managerial problems.
1. Management judgment: - Budgeting is not an exact since; its success hinges upon the
precision of estimates.
2. Continuous adaptation: - The installation of a perfect system of budgeting is not possible in
a short period. Business conditions change rapidly; therefore, budgeting program should be
continuously adapted.
3. Implementation: - A skillfully prepared budgetary program will not itself improve the
management of an enterprise unless it is properly implemented.
4. Management complacency: - Budgeting is a mgt tool- a way of managing, not the
management. The presence of a budgetary system should not make mgt complacent.
5. Unnecessary details: - Budgeting will be ineffective and expensive if it is unnecessary
detailed and complicated.
6. Goal conflict: - The purpose of budgeting will be defeated if carelessly set budget goals
conflict with enterprise objectives. This confuses means with the end results. Budget goals
7. Unrealistic targets: - Budgeting will lower morale & productivity if unrealistic targets are
set and if it is used as a pressure tactic. To some extent budgeting may be used as a
pressure device, but its extent must be carefully determined.

Developing the Master Budget

From an accounting point of view, the budgeting process culminates in the preparation of a
master budget, which is a comprehensive set of an organizations budgetary schedules and pro
forma (projected) financial statements. The master budget is composed of both operating &
financial budgets.

1) Operating budgets are expressed in both units and dollars when an operating budget is
related to revenues, the units are those expected to be sold, and the dollars reflect selling
prices. When an operating budget relates to expense items, the units are those expected to
be used and the dollar reflect costs.
2) Financial budgets reflect the funds to be generated or consumed during the budget
period. (Source and uses of funds).Financial budgets include the company’s cash and
capital budgets as well as its proforma financial statements. These budgets are the
ultimate focal points for the firm's top management.

The master budget is prepared for a specific period and is static rather than flexible. If is static in
that it is based on a single, most probable level of output demand. The demand level of sales or
service quantities selected for use in the preparation of the master budget affects all
organizational components.
 The budgetary process in a manufacturing organization can be shown as under.

Purchasing Personnel Operations Capacity

Department. Department Management (Capital
(Raw. Materials) . (Overhead) facilities)
(Labor)

Sales Dept. Production

dept. WIP Finished
Goods

Accounts Non Factory

Receivable Operations
(Selling and Debt Other
Service Payroll A/Pay Payables
Adm. Exp.)

Cash
Receipts
Cash Disbursements

Treasurer
(Funds Management)
The above figure indicates the budgetary interrelationships among the primary department of
manufacturing organizations. A budget developed by one department is commonly an essential
ingredient in developing another department's budget.

Assuming that top management is engaging in participatory budgeting, each department in the
budgetary process either prepares its own budget or provides information for inclusion in a
budget. The master budget has 3 functions:

1. It illustrates how the activities of the different departments interact within the
organization.
2. If summarizes the budgets of the individual departments- all of which are based on
the most likely level of future activity.
3. It combines the individual budgets into an integrated plan for the firm as a whole.
Operating budget is accompanies by the following schedules:
 Sales budget
 Production budget
 Purchase budget
 Labor budget
 Production cost budget
 Ending inventory budget
 Manufacturing overhead budget
 Selling and administration expense budget
 Budgeted income statement
Financial budget includes:
 Capital budget
 Cash budgets including receipts & disbursements
 Budgeted balance sheet
Note: The preparation of a master budget must begin with the sales budget because of the sales
budget is the basis for all other budgets.

 Sales budget is developed based on the sales forecast, a formal prediction of the quantities
expected to be sold in the budget period and the price at which the expected volume of
sales is to be sold.
 The sales budget is the foundation for the production budget in mfg enterprises. The
production budget stems from the sales budget. Once the sales forecast and the sales
budget are completed, the next phase in developing the master budget is to prepare the
production budget.
 After decision is reached as to how many units should be produced, the mfg cost can be
estimated. The manufacturing cost budget is the summary of each manufacturing cost
elements- DM & DL & OH costs.
 Capital budgeting is making of long-term planning decisions for investments plans for the
acquisition of various properties such as building machinery equipment etc.
 The cash budget is into sections that show cash receipts, cash disbursements, cash surplus
or deficiency and financing activities.
Benefit of Budgets
However, regardless of the type and size of the firm there are 3 ways in which budgets can
benefit all firms.
1. Better planning
2. Control of performance
3. Communication and coordination

 Budgets indicate mgt how profitable the firm is expected to be, and the resources that are
expected to be generated or used during the forthcoming budget periods.
 When changes from normal operating activities are being considered, a budget can also
inform the manager of the consequences of alternative courses of action, providing a
basis for deciding which will be the best alternative.
 Without a budget, a manager can only hope that he/she is going in the best direction and
has little idea of the ultimate results to expect.
  . The performance report, prepared by the accountant, shows the actual results, the
budgeted results, and any differences between actual and budget, referred to as variances.

LO-4: REVIEW COSTING SYSTEM INTEGRITY

4.1. What are the 5 principles of costing?
5 important fundamental principles of costing
(1) Cost is always related to its cause:
(2) Abnormal costs are charged in costing:
(3) Cost is charged after it is incurred:
(4) Past costs are not taken into consideration to future costs:
(5) Keeping of accounts for cost is also based on Double entry principle:

What are the principles of costing systems?

The cost principle means items need to be recorded as the actual price paid. It is the same
way when a buyer buys products, and the recording is done based on the price paid. In short, the
cost principle is equal to the amount paid for each transaction.
What are the 3 elements of costing?
A cost is composed of three elements – Material, Labour and Expenses. Each of these three
elements can be direct and indirect, i.e., direct materials and indirect materials, direct labour and
indirect labour, direct expenses and indirect expenses.
What are the main 3 types of cost?
These expenses include:
 Variable costs: This type of expense is one that varies depending on the company's needs and
usage during the production process. ...
 Fixed costs: Fixed costs are expenses that don't change despite the level of production. ...
 Direct costs: These costs are directly related to manufacturing a product.