RIFT VALLEY UNIVERSITYMARI-GORO CAMPUSACCOUNTING AND

FINANCELEVEL – IV
Unit of Competence:
Providing Management Accounting Information
Module Title:
Providing Management Accounting Information
LG Code:LSA ACF4M12 0322TTLM Code:LSA ACF4M12 0322
INTRODUCTION
Welcome to the module
Manage Overdue Customer Accounts
This learner’s guidew a s p r e p a r e d t o h e l p y o u a c h i e v e t h e r e q u i r
ed competence in “
ACCOUNTING ANDFINANCE LEVEL – IV”
. This will be the source of information for you to
a c q u i r e knowledge attitude and skills in this particular occupation with
minimum supervision or helpfrom 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

Read through the Learning Guide carefully. It is divided into sections that cover all
the knowledge, skills and attitude that you need.

Read Information Sheets and complete the Self-Check at the end of each sectionto
check your progress

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.
When you are ready, ask your trainer for institutional assessment and provide
youwith 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 andanalyze
operating and cost data, prepare budget reports and review costing systems
integrity tocalculate 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 dataLO2.Analyze dataLO3. Prepare budgeted reports
LO4Review 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 informationRequirements
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 costs4.2.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 inaccordance with organizational policies and procedures
LO.2 Analyze data
Costs are assigned
to specified products, services and organizational units and data
isreconciled to ensure calculations are accurate and comply with organizational
procedures
Interpretation of revenues and costs is supported by valid analysis and is consistent
withthe 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 clea
r 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 ma
n a g e m e n t 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 DATAWhat is cost
data in business?

Cost data means factual information concerning the cost of labor, material,
overhead, andother 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 theinformation used in a dissertation to substantiate the
claims made by a writer
. To getthe 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
therelevant range of activity specified in determining the revenue and
costinformation.
2.Revenue-
Total revenue fluctuates in direct proportion to units sold.
Revenue per unit is assumed to remain constant,
and fluctuations in per-unit revenuefor 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
.
Variablec o s t s e x i s t i n a l l f u n c t i o n a l b u s i n e s s a r e a s i n c l u d i n g p r
o d u c t i o n , distribution, selling and administration.
4.Fixed Costs-
Total fixed costs remain constant: thus, per unit fixed cost decreases
asvolume increases and increases as volume decreases
. F i x e d c o s t s include both fixed factory overhead and fixed selling and
administrativeexpenses.
5.Mixed Costs-
Mixed costs must be susceptible to separation in to their variable and fixed
elements.
LO-2: ANALYZE DATAWhat is meant by data analysis?
Data Analysis is
the process of systematically applying statistical and/or logical techniquesto 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 onrelevant objectives.
2)Collecting the Data:
Once the question is defined, gather the necessary data to address it. This can
involvecollecting data from various sources, such as surveys, databases, or external
datasets. Ensurethe 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
involvesidentifying 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 stepincludes creating visualizations, reports, or presentations that convey the
key insights derivedfrom the analysis.
6)Embracing Failure:
Acknowledge that not all analyses will yield the desired results or insights.
Embracing failureinvolves learning from unsuccessful attempts, refining your
approach, and iterating on theanalysis 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
conciseoverview of the results, making it easier for others to grasp the main
takeaways withoutdelving 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 whathas
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 dataand
statistical models.
Prescriptive Analytics:
Recommends actions to optimize outcomes by suggesting the bestcourse of action
based on analysis results.
LO-3: PREPARE BUDGETED REPORTS
3 . 1 . M e a n i n g o f a B u d g e t
A budget is a comprehensive and coordinated plan, expressed in fina
ncial terms, for theoperations and resources of an enterprise for some specific
period in the future. The commitmentof 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 allactivities and operations are
considered when it is prepared.
2. It is expressed in financial terms
- For operational purposes; a budget is always quantified infinancial terms.
3. It is a plan for the firm's operations and resources-
A budget is a mechanism to plan for thefirm's over all operations or activities.
The two aspects of every operation are revenues andexpenses. The budget
must plan for and quantify revenues and expenses related to a
specificoperation.
4. It is a future plan for a specified period-
A budget is meaningful only when it is related to aspecific 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 andinfluencing the events.
3 . 2 . . P u r p o s e o f B u d g e t i n g
Budgeting is systematic and formalized approach for stating and
communicating the
firm'sexpectations and accomplishing the planning, coordination, an
d 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 . T o s t a t e t h e f i r m ' s e x p e c t a t i o n s ( g o a l s ) i n c l e a r , f o r m a l
t e r m s t o a v o i d c o n f u s i o n a n d t o facilitate their attainability. (
Planning)
2.To communicate expectations to all concerned with the
m a n a g e m e n t o f t h e f i r m s o t h a t 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
i n s u c h a w a y t h a t t h e u s e o f r e s o u r c e s i s 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 betaken. (
Control)3 . 3 . T y p e s o f B u d g e t s
There are many different ways of classifying budgets. Thus, budgets may be
classified based oncapacity, 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
a n d will remain unchanged
irrespective of changes in the level of activity. These budgets are suitable for
planning purposes but are inadequate for evaluating howwell 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
specifiedrange.
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. Acontinuous or perpetual
budget, also known as a
rolling
or
revolving budget
, i s a 1 2 - month budget that rolls forward one month or quarter as the
current month or quarter iscompleted.
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
thevarious functional activities of an organization. The functional b
udgets are further categorized into the following classes:1.
Physical budget-
The physical budgets provide information about physical units likesales,
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 consolidatedsummary of the various

functional budgets
. It coordinates all the financial projectionsin an organization’s
individual budgets into a single company-wide set of budgets for
aspecified time period. The master budget incorporates the impact of both
operating andfinancing decisions. The term “master” in master budget stands to
reflect the fact that themaster budget is a comprehensive, company-wide set
of budgets.
3 . 4 . A d v a n t a g e s o f B u d g e t i n g
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 providingdefinite 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. Theenterprise
objectives, budget goals, plans, authority and responsibility and
procedures toimplement plans are clearly written & communicated through
budgets to all individuals inthe 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 productivityof 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 m
gt time andenergy considerably.9.
Efficiency: -
Budgeting measures efficiency, permits mgt self-evaluation and indicates
the progress in attaining the enterprise objectives.
3 . 5 . L i m i t a t i o n s o f B u d g e t i n g
Budgeting is a systematic approach to the solution of problems. But it is not
foolproof; it suffersfrom certain problems and limitations. Mgt must consider the
following limitations in using the budgeting system as a device to solvemanagerial
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 ina short period.
Business conditions change rapidly; therefore, budgeting program should
becontinuously adapted.3.
Implementation: -
A skillfully prepared budgetary program will not itself improve
themanagement of an enterprise unless it is properly implemented.4.
Management complacency
: - B u d g e t i n g i s a m g t t o o l - a w a y o f m a n a g i n g , n o t t h e ma
nagement. 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
goalsconflict with enterprise objectives. This confuses means with the end results.
Budget goals7.
Unrealistic targets
: - Budgeting will lower morale & productivity if unrealistic targets areset 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 amaster budget, which is a comprehensive set of an
organizations budgetary schedules and proforma (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 andcapital
budgets as well as its proforma financial statements. These budgets are theultimate
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 inthat it is based on a
single, most probable level of output demand. The demand level of sales
or s e r v i c e q u a n t i t i e s s e l e c t e d f o r u s e i n t h e p r e p a r a t i o n o f t h e
m a s t e r b u d g e t a f f e c t s a l l organizational components.
The budgetary process in a manufacturing organization can be shown as
under.PurchasingDepartment.(Raw. Materials)PersonnelDepartment.
(Labor)OperationsManagement(Overhead)Capacity(Capitalfacilities)Sales
Dept.Productiondept. WIPFinishedGoodsAccountsReceivable Non
FactoryOperations(Selling andAdm. Exp.)CashReceipts
DebtServiceP a y r o l l A / P a y Other Payables
Cash DisbursementsTreasurer (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 essentialingredient 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 in
clusion in a budget. The master budget has 3
functions:1 . I t i l l u s t r a t e s h o w t h e a c t i v i t i e s o f t h e d i f f e r e n t d
e p a r t m e n t s i n t e r a c t w i t h i n t h e organization.2 . I f s u m m a r i z e s t h e
budgets of the individual departments- all of which are based
o n 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
quantitiesexpected 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 th
e 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 beestimated. The manufacturing cost budget is the summary
of each manufacturing costelements- DM & DL & OH costs.

Capital budgeting is making of long-term planning decisions for investments plans

for theacquisition of various properties such as building machinery equipment etc.

The cash budget is into sections that show cash receipts, cash disbursements, cash
surplusor 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 . B e t t e r p l a n n i n g 2 . C o n t r o l o f p e r f o r m a n c e 3
.Communication and coordination

Budgets indicate mgt how profitable the firm is expected to be, and the resources
that areexpected to be generated or used during the forthcoming budget periods.

When changes from normal operating activities are being considered, a

budget can alsoinform 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 andhas 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 sameway when a buyer buys products, and the recording is done based on
the price paid. In short, thecost 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 threeelements can be direct and indirect, i.e., direct materials and
indirect materials, direct labour andindirect 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
andusage 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