Chapter One: Introduction to Management Accounting PDF

# Chapter One: Introduction to Management Accounting - Course Name: Management Accounting - I - Course Code: BSAC2208 - Specialization: Accounting And Finance - College of Economics and Business Administration - UTAS - Ibri ## Outcome no 1 - Explain the purposes and role of management accounting...

# Chapter One: Introduction to Management Accounting - Course Name: Management Accounting - I - Course Code: BSAC2208 - Specialization: Accounting And Finance - College of Economics and Business Administration - UTAS - Ibri ## Outcome no 1 - Explain the purposes and role of management accounting within an organization. - Explain data and information, its sources uses and limitations. - Analyze the different sampling techniques and their appropriate methods. - Summarize management information to management. ## Topic 1: Management Accounting - Definition, Purpose and Role ### Essential Reading: - M. N. Arora, Cost and Management Accounting – Theory, Problems and Solutions, Himalaya Publishing House ### Suggested Reading: - P. Periasamy, Textbook of Financial Cost and Management Accounting, Global Media ## Definition of Management Accounting: According to the Institute of Chartered Accountants of England, any form of accounting which enables a business to be conducted more efficiently may be regarded as management accounting. The Chartered Institute of Management Accountants (CIMA) of UK has given a very authoritative and comprehensive definition as follows: "Management accounting is an integral part of management concerned with identifying, presenting and interpreting information used for - (i) formulating strategy; (ii) planning and controlling activities; (iii) decision-making; (iv) optimizing the use of resources; (v) disclosure to shareholders and others external to the entity; (vi) disclosure to employees; and (vii) safeguarding assets." ## Purpose and Role of Management Accounting in an Organization 1. **Allocation of Resources** Management accounting helps decide the best way to use limited resources. For example, it determines how to distribute a budget across various projects, considering factors like available funds and market demand. 2. **Measuring Performance** It tracks how well employees and resources are performing. For instance, it assesses if a department is meeting its performance targets and how efficiently resources are being used. 3. **Assessing Risk** It evaluates potential risks and works to minimize them while aiming to keep profits in check. For example, before launching a new product, management accounting assesses potential risks and prepares strategies to handle them. 4. **Coordinate and Administer** It manages and controls operational activities using tools like budgets and cost standards. For instance, it sets budgets for different departments and forecasts sales to improve overall performance. 5. **Performance Comparison** It compares actual performance against set standards to identify and analyze any differences. For example, it measures actual sales against the sales targets to see if the goals are being met. 6. **Identify Different Forces and Their Impact** It identifies how external factors like economic conditions, social trends, and government regulations affect the organization and takes corrective actions. For example, it adjusts business strategies in response to new government regulations. 7. **Preparation of Reports for Government Agencies** It ensures the organization meets official reporting requirements. For example, it prepares financial statements and reports needed for tax purposes or regulatory compliance. ## Question Time The use of management accounting is a) Optional b) Compulsory c) Legally obligatory d) Compulsory to some and optional to others Management accounting is related with a) The problem of choice making b) Recording of transactions c) Cause and effect relationships 1. A and B 2. B and C 3. A and C ## Topic 2: Data and Information - A diagram that shows the relationship between data, information, and knowledge. The diagram shows data (at the bottom) being processed into information, and then information being processed into knowledge (at the top). ### Essential Reading: - M. Sarngadharan, and M.C. Minimol, Management Information System, Himalaya Publishing House ## Data and Information - Information is the term used to represent data that has been presented in order to alter the understanding of the receiver. - The relation of data to information is that of raw material to finished product. - In other words, data which has been processed into useful and meaningful form is called Information. - For example, “Haseena, UTAS, a, Second year, Diploma, Student, is, in…” is data, and “Haseena is a Diploma Second Year Student in UTAS” is information. ## Sources of Data **Internal Sources of Data:** 1. The Accounting records – Purchase Ledger, Sales Ledger, Financial Statements, Cost Ledgers etc. 2. Personnel Data from Payroll System. 3. Data from Production Department – Machine Capacity, Movement of people, setup costs etc. **External sources of Data:** 4. Primary Sources of Data – Data collected directly from the origin of an item of data. 5. Secondary Sources of Data - Governments; Banks; Newspapers; Trade Journals; Information Bureaux; Consultancies; Libraries; and Information Services. ## Uses of Data: 1. **Informed Decision-Making** Data helps make better decisions by providing relevant information. For example, sales data can guide inventory decisions. 2. **Performance Tracking** Data allows tracking of performance metrics, such as sales figures or employee productivity. For example, monthly sales reports can show whether sales targets are being met. 3. **Identifying Trends** Analyzing data helps spot trends and patterns over time. For example, tracking customer purchase patterns can reveal seasonal buying trends. 4. **Predictive Analysis** Data can be used to forecast future outcomes based on past trends. For example, historical sales data can help predict future sales. 5. **Problem Solving** Data helps identify issues and find solutions. For example, customer feedback data can highlight common problems and areas for improvement. 6. **Strategic Planning** ## Limitations of Data 1. **Incomplete Data** - Data might be missing or incomplete, leading to inaccurate conclusions. - For example, if customer feedback data is only from a small sample, it may not represent the whole customer base. 2. **Data Quality Issues** - Poor quality data can lead to incorrect insights. - For example, data with errors or inconsistencies can mislead decision-making. 3. **Over-Reliance on Data** - Relying too much on data can overshadow other important factors. - For example, focusing solely on sales data might ignore customer satisfaction levels. 4. **Data Privacy Concerns** - Collecting and using data can raise privacy issues. - For example, personal data must be handled according to privacy regulations to protect customer information. 5. **Bias in Data** - Data can be biased if not collected or analyzed properly. - For example, if data is collected from a non-representative sample, it can lead to skewed results. 6. **Data Overload** - Too much data can be overwhelming and hard to analyze. - For example, having excessive amounts of data without proper tools can make it difficult to extract meaningful insights. ## INFORMATION ### Meaning of Information - Information refers to data that has been processed, organized, or structured to provide meaningful context and insights. It is data that has been interpreted and presented in a way that makes it useful for decision-making, communication, or understanding. ## Usefulness of Information 1. **Processed Data:** Information is created when raw data is analyzed and given context. For example, a list of numbers becomes information when it is organized into a sales report showing trends. 2. **Contextual Value:** Information provides meaning and relevance by adding context. For example, knowing that a company's sales increased by 20% last quarter helps understand its business performance. 3. **Decision-Making Tool:** Information helps in making informed decisions by offering insights and understanding. For example, market research information helps businesses plan their strategies. 4. **Communication:** Information is used to convey messages or share knowledge. For example, a weather report provides information about the expected weather conditions. 5. **Actionable Insight:** Information can guide actions and strategies. For example, customer feedback information can lead to improvements in products or services. ## Attributes of Good Information 1. **Time-related attributes including:** - (a) **Timeliness** available at the right time - (b) **Currency/up to date** up to date - (c) **Frequency and** Number of times - (d) **Time period** 2. **Content-related attributes including:** - (a) **Accuracy** - (b) **Relevance** - (c) **Completeness and** - (d) **Brevity** 3. **Form-related attributes including:** - (a) **Clarity** - (b) **Detail** - (c) **Order** - (d) **Presentation and** - (e) **Media** ## Utilities of Information - **Form Utility** Form utility refers to the value added to information through its transformation into a useful format or structure. For example: A raw dataset is converted into a comprehensive report or a visual dashboard. For instance, converting sales data into a graph that highlights trends and patterns makes the information more understandable and useful for decision-making. - **Place Utility** Place utility involves making information available at the location where it is needed. For example: A company’s financial reports are accessible via a cloud-based platform, allowing team members to view and analyze the data from any location. This ensures that decision-makers can access critical information no matter where they are. - **Time Utility** Time utility refers to providing information when it is needed, ensuring it is timely and relevant. For example: A real-time inventory management system updates stock levels instantly, allowing a business to make immediate decisions about restocking or promotions. This ensures that information is available at the right time to take action. - **Possession Utility** Possession utility refers to the value gained from owning or having access to information. For example: A software license that grants access to a specialized data analysis tool allows users to perform complex data tasks and generate insights. This access gives users ownership of powerful capabilities that can enhance their business operations or personal projects. ## Question Time An example of qualitative data is: a) Product cost b) Customer satisfaction c) Net income d) Inventory cost e) Net worth. 2. Possession Utility provides value through: A) Making information available in a specific format B) Accessing information at the right location C) Owning or having access to information D) Providing information when it is needed 3. Which type of utility ensures that information is accessible where it is needed? A) Form Utility B) Place Utility C) Time Utility D) Possession Utility ## Topic 3: Sampling Techniques - A picture of a group of people with different colors representing different parts of a population, an arrow pointing upwards, indicating the process of selecting a sample from the population. - A chart with 6 bars showing different results of sampling. - A pie chart showing the results of a different type of sampling. ### Essential Reading: - CR Kothari, Research Methodology – Methods and techniques, New Age International Limited ## Sampling Techniques ### Census Survey - All items in any field of inquiry constitute a ‘Universe' or ‘Population.’ A complete enumeration of all items in the 'population' is known as a census inquiry. - All items are covered. - Accuracy is highest. ### Sample Survey - When field studies are conducted by collecting data from selected respondents, the selected respondents are called a 'sample' and the selection process is called 'sampling technique.’ - The survey so conducted is known as ‘sample survey’. ## Sampling Techniques ### Probability Sampling - Probability sampling is also known as ‘random sampling' or 'chance sampling'. - Under this sampling design, every item of the universe has an equal chance of inclusion in the sample. - It is, so to say, a lottery method in which individual units are picked up from the whole group not deliberately but by some mechanical process. - An illustration of a probability sampling method, with a group of people divided into different categories (multi-stage sample, systematic sample, and simple random sample), with arrows pointing towards the process of selecting a sample from each category. ## Sampling Techniques ### Non-Probability Sampling - Each item in the population does not carry equal chance of being included in the sample. - Also known as deliberate sampling, purposive sampling and judgment sampling. - Sample are selected deliberately by the researcher; his choice concerning the items remains supreme. - Sample selected purposively on the basis that the small mass that they select out of a huge one will be typical or representative of the whole. - An illustration of non-probability sampling, with a group of people, a magnifying glass focusing on some people, indicating the process of selecting a sample that does not represent the whole population. ## Sampling Techniques ### Systematic Sampling - In Systematic Sampling, the most practical way of sampling is to select every ith item on a list. - An element of randomness is introduced into this kind of sampling by using random numbers to pick up the unit with which to start. - For instance, if a 4 per cent sample is desired, the first item would be selected randomly from the first twenty-five and thereafter every 25th item would automatically be included in the sample. - An illustration of systematic sampling, with a group of people numbered 1 through 9, and arrows pointing to numbers 3, 6, and 9, indicating the process of systematically selecting every third person. ## Probability Sampling Techniques ### Stratified Sampling - This technique is applied when the population is not homogenous. - The population is divided into several sub-populations that are individually more homogeneous than the total population (the different sub-populations are called 'strata’) and then we select items from each stratum to constitute a sample. - Since each stratum is more homogenous than the total population, sampling results in more precise estimates for each stratum and by estimating more accurately each of the - An illustration of stratified sampling, with a group of people divided into 3 categories (1-4, 5-8, 9-12), with arrows pointing to the process of selecting a sample from each category. ## Probability Sampling Techniques ### Cluster Sampling - The population is divided into a number of smaller non-overlapping clusters and then to randomly select a number of these smaller clusters), with the ultimate sample consisting of all (or samples of) units in these small clusters. - Thus in cluster sampling the total population is divided into a number of relatively small subdivisions which are themselves clusters of still smaller units and then some of these clusters are randomly selected for inclusion in the overall sample. - An illustration of cluster sampling, with a group of people divided into 3 clusters, and arrows pointing to the process of selecting a sample from each cluster. ## Probability Sampling Techniques ### Multi-Stage Sampling: - Multi-stage sampling is a further development of the principle of cluster sampling. - Suppose we want to investigate the working efficiency of banks in Oman and we want to take a sample of few banks for this purpose. The first stage is to select large primary sampling unit such as regions in a country. Then we may select certain wilayats and interview all banks in the chosen wilayats. This would represent a two-stage sampling design with the ultimate sampling units being clusters of wilayats. - A diagram that shows the stages of multi-stage sampling, starting from the first stage of cluster sampling. ## Non Probability Sampling Non-probability sampling techniques do not give every member of the population a known or equal chance of being selected. These techniques are often used for exploratory research and may not support generalization to the entire population. Common non-probability sampling techniques include: ### 1. Convenience Sampling - Selecting individuals who are easiest to reach. For example, surveying people who are readily available at a specific location. - An illustration of convenience sampling, with a group of people, and arrows pointing to the process of selecting a sample from the group who are available and accessible. ## Non Probability Sampling (contd...) ### 2. Judgmental or Purposive Sampling - Selecting individuals based on the judgment of the researcher, often because they possess specific characteristics. For example, interviewing experts in a particular field. - An illustration of judgmental or purposive sampling, with a group of people, and a hand selecting some people who are "chosen" to be in the sample. ## Non Probability Sampling (contd...) ### Snowball Sampling - Asking initial participants to refer others to be included in the sample. This is useful for hard-to-reach populations. For example, studying a niche community by asking members to introduce you to other members. - An illustration of snowball sampling, with a single person at the top of a pyramid, followed by more people below, indicating the process of the initial person referring others in the community. ## Non Probability Sampling Techniques ### Quota Sampling: - Quotas are fixed for each strata with some restrictions on how they are to be filled. - The actual selection of the items for the sample is left to the interviewer's discretion. - Very convenient and is relatively inexpensive. - Do not possess the characteristic of random samples. - Quota samples are essentially judgment samples and inferences drawn on their basis are not amenable to statistical treatment in a formal way. For example, interviewing a certain number of people from each demographic group based on researcher's judgment. - An illustration of quota sampling, with a group of people divided into 3 categories (1st class, 2nd class, 3rd class), with percentages representing the numbers of people in each category. ## Topic 4: Reporting to Management ### Essential Reading: - M.N. Arora, Cost and Management Accounting – Theory, Problems and Solutions, Himalaya Publishing House ## Essentials of Effective Reports 1. **Good Form and Content:** The reports should be in a suitable form. It should have suggestive title, subheadings and paragraph divisions. The name of the recipient of the report should be indicated on the top of the report. The contents of the report should follow a logical sequence. 2. **Promptness** The importance of promptness in reporting cannot be overemphasised. The report should be put up as quickly as possible. Information delayed is information denied. If there is considerable time lag between occurrence and reporting, opportunity for an action may be lost or some wrong decisions may be taken in the absence of information. 3. **Accuracy** The report must be correct within the margin of error allowed, otherwise management may lose faith in the reports. What is an allowed margin of error will depend upon the purpose for which the report is prepared. Attempts at accuracy should not result in giving unnecessary details or in delaying reporting. 4. **Comparison** Wherever possible, reports of actual performance should show a comparison either with a past performance or predetermined target. This facilitates a correct assessment of the current performance. 5. **Simplicity** Simplicity means the presentation of operating information in a clear manner. Presentation of information in a clear manner requires exact and simple definitions of financial terms, precise use of technical terms and careful summarization of operating information should be compared with the advantage gained from the report or the loss sustained by not reporting. 6. **Needs of different levels of management:** Reports are prepared to meet the needs of different levels of management. The details to be shown in the report should be designed to suit those levels. 7. **Use of visual aids:** Visual aids like charts and diagrams should be used in reports, where-ever possible. These facilitate quick grasp of the significant trends and leave a lasting impression in the mind of the user. 8. **Controllability** While reporting against plans and targets, variances require analysis into controllable and uncontrollable. Many accountants are of opinion that only controllable variances should be included in the report. However, much depends upon the circumstances. It may be advisable to show the uncontrollable costs also thereby giving the recipient a complete story. ## Reports to Different Levels of Management ### Top Management Level The top level management comprises Board of Directors, Managing Director or General Manager, Assistant General Manager. 1. Periodical Profit and Loss Account and Balance Sheet. 2. Master budget. 3. Capital budget. 4. Reports on research and development activities. 5. Management ratios-showing overall financial position, e.g. return on capital employed, gross profit ratio, liquidity ratios. etc. 6. Summaries of cost of production in various departments, showing element-wise classification. 7. Plant utilisation reports. ### Middle Management Level This comprises the heads of various departments such as Sales Manager, Production Manager etc. 1. Reports on material price and usage variances. 2. Reports on labour rate and efficiency variances. 3. Overhead variance reports. 4. Idle time report. 5. Report on wastage of materials. 6. Report on production. 7. Idle capacity report. ### Junior or Operating Management Level This comprises supervisors, foremen, section chiefs etc. 1. Material usage variance report. 2. Labour efficiency variance report. 3. Reports on over-time work. 4. Labour productivity report. 5. Material spoilage report. 6. Idle time report. ## Classification of Reports ### Reports to Different Levels of Management 1. **Descriptive Form:** These are written in narrative or descriptive style. These should be in proper format with suitable headings, sub-headings and paragraphs. The language used in the report should be simple and clear. As these types of reports do not make use of tables and diagrams, they are less effective as compared to reports using graphs and diagrams, etc. 2. **Tabular Form:** In this type of reports, data is presented in the form of tables. Such tables may be designed to show comparison with budgeted or past performance. This form of reporting is usefully employed in presenting cost data, profit or loss, comparative profitability, etc. Such reports are definitely more effective than descriptive reports because important figures may be written in bold type or may be underlined so as to attract the eye of the recipient. 3. **Graphical Form:** Factual information is often clearer and easier to understand if presented in graphical or pictorial form. This itself justifies the use of graphs in reports to management. Graphic presentation makes an otherwise dull and confusing data interesting and attractive and is considered to be the most appealing form of reporting. - Types of Graphs - Simple Bar Charts - Multiple Bar Charts - Sub Divided Bar Charts - Percentage Bar Charts - Pie- Charts ## References: - https://egyankosh.ac.in/bitstream/123456789/84020/3/ Unit-1.pdf - https://ebookcentral.proquest.com/lib/momp/reader.action?docID=3011311&ppg=14 ## Thank You