CHAPTER 1: MANAGEMENT INFORMATION

This is information that is mainly used by managers.

The purpose of management information is to help managers to manage resources efficiently and
effectively, by planning and controlling operations and by allowing informed decision-making.
N/B:
A management information system is the hardware and software used to drive a database system
which provides useful information for management.

The purpose of management information

Management information is used by managers to:
1. Plan the future of the business. Planning involves establishing an objective or identifying a problem
and then choosing a strategy to achieve the objective or alleviate the problem. For example, future
cash flows and whether borrowing will need to be arranged or whether more employees need to be
recruited.
2. Control the progress of the business. Control is the action of monitoring something in order to keep
it on course. For example, whether budgets set in the planning stage will be met.
3. Decision making. Decision-making means choosing between various alternatives. Decision-making
and planning are linked: you decide to plan in the first place and the plan you make is a collection of
decisions. For example, what to produce or which branch to close.

Management Accounting and Financial Accounting/Reporting:

Management information provides a common source from which is drawn information for two groups
of people.
(a) Financial accounts are prepared for individuals external to an organisation.
- Shareholders - Suppliers
- Customers - Tax authorities
(b) Management accounts are prepared for internal managers of an organisation.
The information used to prepare financial accounts and management accounts is the same.
Management information contains Management Accounting information and Financial Accounting
information.

Differences between Management Accounting and Financial Accounting/Reporting:

Cost accounts
Cost accounting and management accounting are terms which are often used interchangeably.
Cost accounting aims to capture an organisation’s costs of operations, departments or products, and
then classify and analyse this information to produce cost reports.
Cost accounting produces information that is used for both financial accounting and management
accounting.

Cost accounting is part of management accounting.

Cost accounting provides a bank of data for the management accountant to use.
Cost accounts aim to establish the following:
1. The cost of goods produced or services provided.
2. The cost of a department or work section.
3. What revenues have been.
4. The profitability of a product, a service, a department, or the organisation in total.
5. Selling prices with some regard for the costs of sale.
6. The value of inventories of goods (raw materials, work in progress, finished goods) that are still held
in store at the end of a period, thereby aiding the preparation of a statement of financial position of
the company's assets and liabilities.
7. Future costs of goods and services (costing is an integral part of budgeting (planning) for the future).

Cost in details
 A cost unit is a unit of product or service which has costs attached to it. The cost unit is the basic
control unit for costing purposes.
 Direct costs can be traced directly to cost units.
 Overheads (indirect costs) cannot be identified directly with any one product because they are
incurred for the benefit of all products rather than for any one specific product.
 Cost centres are the essential building blocks of a costing system. They act as a collecting place for
overheads before they are analysed further.
Example of a cost card:
Summary:
Prime cost = DM + DL + DE
Manufacturing cost (or Production cost or Factory cost) = Prime cost + Production overheads
Total cost = Manufacturing cost + Non-production overheads

Question 1
Suggest suitable cost units which could be used to aid control within the following organisations.
(a) A hotel with 50 double rooms and 10 single rooms
(b) A hospital

Answer
a) Guest/night
b) Bed occupied/night

Data and information:

Data consists of the facts that are gathered and stored. Data has no clear meaning until it is processed –
analysed and sorted – into information.

Advantages of a computerized accounting system:

A computerized accounting system will normally produce information:
1. More cheaply (because fewer people need to be employed)
2. More accurate (fewer arithmetic errors – though incorrect programs will repeatedly report incorrect
information)
3. Faster (because the processing is automated and computers work very quickly)
4. More specific (because computers can scan through vast amounts of data and report on the note-
worthy events).
5. More complex; such as analysis of sales trends
6. Wider access; because a terminal on everyone’s desk potential gives all access to information
needed.

Question 2
What are the three purposes, described above, for which managers use management information?
A Estimating, investigating and planning
B Planning, controlling and decision-making
C Controlling, buying and selling
D Accounting, manufacturing and auditing

Question 3
Which of the following is information rather than simply data?
1. A random list of the wages of all employees
2. A list of all stock items that haven’t sold at all in the last three months
3. A report showing where expenses are 10% or more over budget
4. A list of all invoices that have to be paid by the company
A 1 and 4 only
B 2, 3 and 4 only
C 2 and 3 only
D All items are information rather than just data

The Features (or qualities or characteristics) of Useful Management

Information:
The features of good management information are often described and remembered using the word
‘ACCURATE’.
Sources and Categories of Information:
1. Internal information
2. External information

Question 4
List examples of internal and external information
Solution
Examples of internal information: sales, purchases, wages and other expenses, inventory held, cost of
producing an item, profitability of an item, receivables, payables, cash in the bank.
Examples of external information: competitors’ prices, interest rates, exchange rates, details about
competing products, technological developments, market size and growth rate, customers’ assessment
of us, forthcoming price changes.

Categories of information:
 Financial/non-financial
 Quantitative/non-quantitative
 Historical/future estimates
 Routine/ad hoc (as and when needed)
 Numerical/graphical

Question 5
List examples of information from each of the above category pairs.
Solution
 Financial/non-financial: Value of sales/number of products sold to customers which needed
maintenance.
 Quantitative/non-quantitative: Market share as a % /customers’ opinions of us
 Historical/future estimates: Costs for the first three months/costs for the next nine months
 Routine/ad-hoc: Monthly management accounts/special report on a customer who went into
liquidation
 Numerical/graphical: A table showing sales per country/a pie chart showing sales in each European
country.

Cost centres, profit centres and investment centres:

A cost centre is also known as a responsibility centre. A responsibility centre is a department or
organisational function whose performance is the direct responsibility of a specific manager. Managers
in a cost centre are responsible for costs only.
Other responsibility centres found in an organisation are as follows:
1. A profit centre is accountable for costs and revenues. Profit centre managers should normally have
control over how revenue is raised and how costs are incurred. Often, several cost centres will
comprise one profit centre.
2. A revenue centre is accountable for revenues only. Revenue centre managers should normally have
control over how revenues are raised.
3. An investment centre is a profit centre with additional responsibilities for capital investment and
possibly for financing, and whose performance is measured by its return on investment.

Question 6
In a garage, costs are associated with each car that comes in for repair.
Cars are therefore:
A Cost centres
B Cost units
C Profit centres
D Investment units

Question 7
If a manager is in charge of an investment centre, which of the following would he or she be
responsible for:
1. Costs
2. Revenue
3. Investment
4. Profit
A 1 and 2 only
B 2 and 3 only
C 1, 2 and 4 only
D 1, 2, 3 and 4

The limitations of cost and management accounting information:

1. Difficulty in making future estimates.
2. Often quantitative and financial only, but undoubtedly matters such as quality and customer service
levels will be important.
3. Can be difficult for a manager with no financial training to understand.
4. Often too inward-looking. (It’s meant for internal managers). For example, perhaps it does not give
information about competitors’ selling prices.

The role of a trainee accountant in a cost and management accounting system:

1. Recording transactions. For example, making posting to the ledgers.
2. Extracting information and presenting it for management use. For example, a comparison of budget
and actual figures for a period.
3. Investigating financial matters. For example, looking into an over-run in a cost.
4. Helping with budget preparation.
5. Helping and supervising more junior staff.

Suitable formats for communicating management information:

Communication tends to be of three possible types:
 Oral/spoken
 Written
 Graphical

Question 8
Your company has just investigated the possibility of opening abroad.
What would be the most suitable format in which to set out the findings?
A Report
B Letter
C Email
D Conversation

Reinforcement Questions