ACCA (MA) Study Text 2024-25 PDF

Valid from 1 September 2024 to 31 August 2025 ACCA (MA) Exam-focused ACCA Kaplan’s vast classroom experience hel...

Valid from 1 September 2024 to 31 August 2025 ACCA (MA) Exam-focused ACCA Kaplan’s vast classroom experience helps many students pass first time. The books are designed to cover the whole syllabus and they reflect how topics are taught in the classroom, focusing on what will be required of you in the exam. Management Accounting Management Student-friendly Using accessible language and engaging Accounting (MA) formats to help you understand more complex areas, Kaplan simplifies the learning process to make it easier for you to succeed. to 31 August 2025 Valid from 1 September 2024 Written by our expert tutors All Kaplan study materials are written by our subject specialists, experienced tutors who teach the paper so they know what works for students and how best to deliver it. Innovative solutions More than just books, our study materials are supported by a wealth of free online resources, including testing and course assessments. All accessible from our online learning environment MyKaplan. All the resources have been designed to keep you on your study plan and help you pass first time. Kaplan Publishing UK Study Text Study Text ISBN 978-1-83996-656-9 9 781839 966569  ACCA Applied Knowledge ACCA Diploma in Accounting and Business (RQF Level 4) Management Accounting (MA/FMA) Study Text  KAPLAN PUBLISHING’S STATEMENT OF PRINCIPLES LINGUISTIC DIVERSITY, EQUALITY AND INCLUSION We are committed to diversity, equality and inclusion and strive to deliver content that all users can relate to. We are here to make a difference to the success of every learner. Clarity, accessibility and ease of use for our learners are key to our approach. We will use contemporary examples that are rich, engaging and representative of a diverse workplace. We will include a representative mix of race and gender at the various levels of seniority within the businesses in our examples to support all our learners in aspiring to achieve their potential within their chosen careers. Roles played by characters in our examples will demonstrate richness and diversity by the use of different names, backgrounds, ethnicity and gender, with a mix of sexuality, relationships and beliefs where these are relevant to the syllabus. It must always be obvious who is being referred to in each stage of any example so that we do not detract from clarity and ease of use for each of our learners. We will actively seek feedback from our learners on our approach and keep our policy under continuous review. If you would like to provide any feedback on our linguistic approach, please use this form (you will need to enter the link below into your browser). https://docs.google.com/forms/d/1Vc4mltBPrfViy8AhfyKcJMHQKBmLaLPoa_WPqFNf4MI/edit We will seek to devise simple measures that can be used by independent assessors to randomly check our success in the implementation of our Linguistic Equality, Diversity and Inclusion Policy. P.2 KAPLAN PUBLISHING  British library cataloguing-in-publication data A catalogue record for this book is available from the British Library. Published by: Kaplan Publishing UK Unit 2 The Business Centre Molly Millars Lane Wokingham Berkshire RG41 2QZ ISBN 978-1-83996-656-9 © Kaplan Financial Limited, 2024 The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. Printed and bound in Great Britain Acknowledgements We are grateful to the Association of Chartered Certified Accountants and the Chartered Institute of Management Accountants for permission to reproduce past examination questions. The answers have been prepared by Kaplan Publishing. KAPLAN PUBLISHING P.3 P.4 KAPLAN PUBLISHING  Contents Page Chapter 1 Accounting for management 1 Chapter 2 Cost classification 23 Chapter 3 Accounting for materials 61 Chapter 4 Accounting for labour 99 Chapter 5 Accounting for overheads 119 Chapter 6 Absorption and marginal costing 147 Chapter 7 Job, batch and process costing 163 Chapter 8 Service and operation costing 187 Chapter 9 Alternative costing principles 197 Chapter 10 Sources of data 211 Chapter 11 Analysing data 235 Chapter 12 Analytical techniques in budgeting and 273 forecasting Chapter 13 Budgeting 317 Chapter 14 Investment appraisal 369 Chapter 15 Standard costing 409 Chapter 16 Performance measurement 463 Chapter 17 Presenting information 529 Chapter 18 Spreadsheets 547 Chapter 19 PRACTICE QUESTIONS 565 Chapter 20 PRACTICE ANSWERS 615 Index I.1 KAPLAN PUBLISHING P.5 P.6 KAPLAN PUBLISHING  Introduction KAPLAN PUBLISHING P.7  How to use the Materials These Kaplan Publishing learning materials have been carefully designed to make your learning experience as easy as possible and to give you the best chances of success in your examinations. The product range contains a number of features to help you in the study process. They include: (1) Detailed study guide and syllabus objectives (2) Description of the examination (3) Study skills and revision guidance (4) Study text (5) Question practice The sections on the study guide, the syllabus objectives, the examination and study skills should all be read before you commence your studies. They are designed to familiarise you with the nature and content of the examination and give you tips on how to best to approach your learning. The Study Text comprises the main learning materials and gives guidance as to the importance of topics and where other related resources can be found. Each chapter includes: The learning objectives contained in each chapter, which have been carefully mapped to the examining body's own syllabus learning objectives or outcomes. You should use these to check you have a clear understanding of all the topics on which you might be assessed in the examination. The chapter diagram provides a visual reference for the content in the chapter, giving an overview of the topics and how they link together. The content for each topic area commences with a brief explanation or definition to put the topic into context before covering the topic in detail. You should follow your studying of the content with a review of the illustration/s. These are worked examples which will help you to understand better how to apply the content for the topic. Test your understanding sections provide an opportunity to assess your understanding of the key topics by applying what you have learned to short questions. Answers can be found at the back of each chapter. Summary diagrams complete each chapter to show the important links between topics and the overall content of the examination. These diagrams should be used to check that you have covered and understood the core topics before moving on. Question practice is provided at the back of each text. P.8 KAPLAN PUBLISHING  Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to [email protected] with full details, or follow the link to the feedback form in MyKaplan. Our Quality Coordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions. Icon Explanations Definition – Key definitions that you will need to learn from the core content. Key point – Identifies topics that are key to success and are often examined. Illustration – Worked examples help you understand the core content better. Test your understanding – Exercises for you to complete to ensure that you have understood the topics just learned. Supplementary reading – These sections will help to provide a deeper understanding of core areas. The supplementary reading is NOT optional reading. It is vital to provide you with the breadth of knowledge you will need to address the wide range of topics within your syllabus that could feature in an exam question. Reference to this text is vital when self- studying. On-line subscribers Our on-line resources are designed to increase the flexibility of your learning materials and provide you with immediate feedback on how your studies are progressing. If you are subscribed to our on-line resources you will find: (1) On-line reference ware: reproduces your Study Text on-line, giving you anytime, anywhere access. (2) On-line testing: provides you with additional on-line objective testing so you can practice what you have learned further. (3) On-line performance management: immediate access to your on-line testing results. Review your performance by key topics and chart your achievement through the course relative to your peer group. KAPLAN PUBLISHING P.9  Syllabus introduction Syllabus background The aim of ACCA Management Accounting (MA)/FIA Diploma in Accounting and Business is to develop knowledge and understanding of management accounting techniques to support management in planning, controlling and monitoring performance in a variety of business context. Objectives of the syllabus Explain the nature, source and purpose of management information. Explain and apply data analysis and statistical techniques. Explain and apply cost accounting techniques. Prepare budgets for planning and control. Compare actual costs with standard costs and analyse any variances. Explain and apply performance measurements and monitor business performance. Core areas of the syllabus The nature, source and purpose of management information Data analysis and statistical techniques Cost accounting techniques Budgeting Standard costing Performance measurement. ACCA Performance Objectives In order to become a member of the ACCA, as a trainee accountant you will need to demonstrate that you have achieved nine performance objectives. Performance objectives are indicators of effective performance and set the minimum standard of work that trainees are expected to achieve and demonstrate in the workplace. They are divided into key areas of knowledge which are closely linked to the exam syllabus. There are five Essential performance objectives and a choice of fifteen Technical performance objectives which are divided into five areas. The performance objectives which link to this exam are: (1) Ethics and professionalism PO1 (Essential) (2) Evaluate management accounting systems PO12 (Technical) (3) Plan and control performance PO13 (Technical) (4) Monitor performance PO14 (Technical) P.10 KAPLAN PUBLISHING  The following link provides an in depth insight into all of the performance objectives: https://www.accaglobal.com/content/dam/ACCA_Global/Students/per/PER- Performance-objectives-achieve.pdf Progression There are two elements of progression that we can measure: first how quickly students move through individual topics within a subject; and second how quickly they move from one course to the next. We know that there is an optimum for both, but it can vary from subject to subject and from student to student. However, using data and our experience of student performance over many years, we can make some generalisations. A fixed period of study set out at the start of a course with key milestones is important. This can be within a subject, for example ‘I will finish this topic by 30 June’, or for overall achievement, such as ‘I want to be qualified by the end of next year’. Your qualification is cumulative, as earlier papers provide a foundation for your subsequent studies, so do not allow there to be too big a gap between one subject and another. We know that exams encourage techniques that lead to some degree of short term retention, the result being that you will simply forget much of what you have already learned unless it is refreshed (look up Ebbinghaus Forgetting Curve for more details on this). This makes it more difficult as you move from one subject to another: not only will you have to learn the new subject, you will also have to relearn all the underpinning knowledge as well. This is very inefficient and slows down your overall progression which makes it more likely you may not succeed at all. In addition, delaying your studies slows your path to qualification which can have negative impacts on your career, postponing the opportunity to apply for higher level positions and therefore higher pay. You can use the following diagram showing the whole structure of your qualification to help you keep track of your progress. KAPLAN PUBLISHING P.11  Syllabus objectives We have reproduced the ACCA’s syllabus below, showing where the objectives are explored within this book. Within the chapters, we have broken down the extensive information found in the syllabus into easily digestible and relevant sections, called Content Objectives. These correspond to the objectives at the beginning of each chapter. Syllabus learning objective Chapter reference A THE NATURE, SOURCE AND PURPOSE OF MANAGEMENT INFORMATION 1 Accounting for management (a) Describe the purpose and role of cost and 1 management accounting within an organisation.[k] (b) Compare and contrast financial accounting with cost 1 and management accounting.[k] (c) Outline the managerial processes of planning, decision 1 making and control.[k] (d) Explain the difference between strategic, tactical and 1 operational planning.[k] (e) Distinguish between data and information.[k] 1 (f) Identify and explain the attributes of good information.[k] 1 (g) Explain the limitations of management information in 1 providing guidance for managerial decision-making.[k] 2 Sources of data (a) Describe the three main data sources: machine/sensor, 10 transactional and human/social.[k] (b) Describe sources of information from within and 10 outside the organisation (including government statistics, financial press, professional or trade associations, quotations and price list).[k] (c) Explain the uses and limitations of published 10 information/data (including information from the internet).[k] (d) Identify the direct and indirect data capture costs of 10 management accounting information.[k] P.12 KAPLAN PUBLISHING  3 Cost classification (a) Explain and illustrate production and non-production 2 costs.[k] (b) Describe the different elements of non-production 2 costs – administrative, selling, distribution and finance.[k] (c) Describe the different elements of production cost – 2 materials, labour and overheads.[k] (d) Explain the importance of the distinction between 2 production and non-production costs when valuing output and inventories.[k] (e) Explain and illustrate with examples classifications 2 used in the analysis of the product/service costs including by function, direct and indirect, fixed and variable, stepped fixed and semi variable costs.[s] (f) Explain and illustrate the use of codes in categorising 2 transaction.[k] (g) Identify and interpret graphical representations of 2 different types of cost behaviour.[s] (h) Explain and illustrate the concept of cost objects, cost 2 units and cost centres.[s] (i) Distinguish between cost, profit, investment and 2 revenue centres.[k] (j) Describe the differing needs for information of cost, 2 profit, investment and revenue centre managers.[k] 4 Presenting information (a) Prepare written reports representing management 17 information in suitable formats according to purpose.[s] (b) Use data visualisation to present information using 17 table, charts and graphs (bar charts, line graphs, pie charts and scatter graphs).[s] (c) Interpret information (including the tables, charts and 17 graphs) presented in management reports.[s] KAPLAN PUBLISHING P.13  B DATA ANALYSIS AND STATISTICAL TECHNIQUES 1 Sampling methods (a) Explain sampling techniques (random, systematic, 10 stratified, multistage, cluster and quota).[k] (b) Choose an appropriate sampling method in a specific 10 situation. (Note: Derivation of random samples will not be examined).[s] 2 Analytical techniques in budgeting and forecasting (a) Explain the structure of linear functions and 2 equations.[s] (b) Use high low analysis to separate the fixed and 2 variable elements of total costs including situations involving semi variable and stepped fixed costs and changes in the variable cost per unit.[s] (c) Explain the advantages and disadvantages of using 2 high low method to estimate the fixed and variable element of costing.[k] (d) Construct scatter diagrams and lines of best fit.[s] 17 (e) Analysis of cost data. 12 (i) Explain the concept of correlation coefficient and 12 coefficient of determination.[k] (ii) Calculate and interpret correlation coefficient 12 and coefficient of determination.[s] (iii) Establish a linear function using regression 12 analysis and interpret the results.[s] (f) Use linear regression coefficients to make forecasts 12 of costs and revenues.[s] (g) Adjust historical and forecast data for price 12 movements.[s] (h) Explain the advantages and disadvantages of linear 12 regression analysis.[k] (i) Explain the principles of time series analysis (cyclical, 12 trend, seasonal variation and random elements).[k] (j) Calculate moving averages.[s] 12 (k) Calculation of trend, including the use of regression 12 coefficients.[s] (l) Use trend and seasonal variation (additive and 12 multiplicative) to make budget forecasts.[s] (m) Explain the advantages and disadvantages of time 12 series analysis.[k] (n) Explain the purpose of index numbers.[k] 12 P.14 KAPLAN PUBLISHING  (o) Calculate simple and multi-item (weighted) index 12 numbers for one or more variables, including Laspeyre and Paasche indicies.[s] (p) Describe the product life cycle and explain its 12 importance in forecasting.[k] 3 Summarising and analysing data (a) Describe the five characteristics of big data (volume, 10 variety, velocity, value and veracity).[k] (b) Explain the three types of big data: structured, semi- 10 structured and unstructured.[k] (c) Describe the main uses of big data and data analytics 10 for organisations.[k] (d) Describe the two types of data categorical (nominal 10 and ordinal) and numerical (continuous and discrete).[s] (e) Explain the terms descriptive analysis and inferential 10 analysis.[k] (f) Calculate the mean, mode and median for ungrouped 11 data and the mean for grouped data.[s] (g) Calculate measures of dispersion including the 11 variance, standard deviation and coefficient of variation both grouped and ungrouped data.[s] (h) Calculate expected values for use in decision- 11 making.[s] (i) Explain the properties of a normal distribution.[s] 11 (j) Interpret normal distribution graphs and tables.[s] 11 4 Spreadsheets (a) Explain the role and features of a computer 18 spreadsheet system.[k] (b) Identify applications for computer spreadsheets and 18 their use in cost and management accounting.[s] C COST ACCOUNTING TECHNIQUES 1 Accounting for material, labour and overheads (a) Accounting for materials (i) Describe the systems necessary for the 3 ordering, receiving and issuing of materials from inventory.[k] (ii) Describe the control procedures used to monitor 3 physical and ‘book’ inventory and to minimise discrepancies and losses.[k] (iii) Interpret the entries and balances in the material 3 inventory account.[s] KAPLAN PUBLISHING P.15  (iv) Identify, explain and calculate the costs of 3 ordering and holding inventory (including buffer inventory).[s] (v) Calculate and interpret optimal reorder 3 quantities.[s] (vi) Calculate and interpret optimal reorder 3 quantities when discounts apply.[s] (vii) Produce calculations to minimise inventory costs 3 when inventory is gradually replenished.[s] (viii) Describe and apply appropriate methods for 3 establishing reorder levels where demand in the lead time is constant.[s] (ix) Calculate the value of closing inventory and 3 material issues using LIFO, FIFO and average methods.[s] (x) Explain Just in Time (JIT) as an inventory 3 management approach.[k] (b) Accounting for labour (i) Calculate direct and indirect costs of labour.[s] 4 (ii) Explain the systems used to capture and record 4 labour effort.[k] (iii) Prepare the journal and ledger entries to record 4 labour cost inputs and outputs.[s] (iv) Describe different remuneration methods: time- 4 based systems, piecework systems and individual and group incentive schemes.[k] (v) Calculate the level, and analyse the costs and 4 causes of labour turnover.[s] (vi) Explain and calculate labour efficiency, capacity 4 and production volume ratios.[s] (vii) Interpret the entries in the labour account.[s] 4 (c) Accounting for overheads (i) Explain the different treatment of direct and 5 indirect expenses.[k] (ii) Describe the procedures involved in determining 5 production overhead absorption rates.[k] (iii) Allocate and apportion production overheads to 5 cost centres using an appropriate basis.[s] P.16 KAPLAN PUBLISHING  (iv) Reapportion service cost centre costs to 5 production cost centres (including using the reciprocal method where service cost centres work for each other).[s] (v) Select, apply and discuss appropriate bases for 5 absorption rates.[s] (vi) Prepare journal and ledger entries for 5 manufacturing overheads incurred and absorbed.[s] (vii) Calculate and explain the under and over 5 absorption of overheads.[s] 2 Absorption and marginal costing (a) Explain the importance of, and apply, the concept of 6 contribution.[s] (b) Demonstrate and discuss the effect of absorption and 6 marginal costing on inventory valuation and profit determination.[s] (c) Calculate profit or loss under absorption and marginal 6 costing.[s] (d) Reconcile the profits or losses calculated under 6 absorption and marginal costing.[s] (e) Describe the advantages and disadvantages of 6 absorption and marginal costing.[k] 3 Cost accounting methods (a) Job and batch costing (i) Describe the characteristics of job and batch 7 costing.[k] (ii) Describe the situations where the use of job or 7 batch costing would be appropriate.[k] (iii) Prepare cost records and accounts in job and 7 batch costing situations.[k] (iv) Establish job and batch costs from given 7 information.[s] (b) Process costing (i) Describe the characteristics of process 7 costing.[k] (ii) Describe the situations where the use of 7 process costing would be appropriate.[s] (iii) Explain the concepts of normal and abnormal 7 losses and abnormal gains.[k] KAPLAN PUBLISHING P.17  (iv) Distinguish between by-products and joint 7 products.[k] (v) Value by-products and joint products at the point 7 of separation.[s] (vi) Evaluate the benefit of further processing.[s] 7 (c) Service/operation costing (i) Define the characteristics of service 8 organisations. (ii) Identify situations where the use of 8 service/operation costing is appropriate.[k] (iii) Illustrate suitable unit cost measures that may 8 be used in different service/operation situations.[s] (iv) Carry out service cost analysis in simple service 8 industry situations.[s] 4 Alternative costing principles (a) Explain activity based costing (ABC), target costing 9 and life cycle costing as alternative cost management techniques.[k] (b) Differentiate ABC, target costing and life cycle costing 9 from the traditional costing techniques (note: calculations are not required).[k] D BUDGETING 1 Nature and purpose of budgeting (a) Explain why organisations use budgeting.[k] 13 (b) Describe the planning and control cycle in an 13 organisation.[k] (c) Explain the administrative procedures used in the 13 budgeting process.[k] (d) Describe the stages in the budgeting process 13 (including sources of relevant data, planning and agreeing draft budgets and purpose of forecasting and how they link to budgeting).[k] 2 Budget preparation (a) Explain the importance of principal budget factor in 13 constructing the budget.[k] (b) Prepare sales budgets.[s] 13 (c) Prepare functional budgets (production, raw materials 13 usage and purchases, labour, variable and fixed overheads).[s] P.18 KAPLAN PUBLISHING  (d) Prepare cash budgets.[s] 13 (e) Prepare master budgets (statement of profit and loss 13 and statement of financial position).[s] (f) Explain and illustrate 'what if' analysis and scenario 13 planning.[s] (g) Describe the impact of the general economic 13 environment on costs/revenue in budgeting.[k] (h) Explain the importance of considering sustainability in 13 budget preparation. 3 Flexible budgets (a) Explain the importance of flexible budgets in control.[k] 13 (b) Explain the disadvantage of fixed budgets in control.[k] 13 (c) Identify situations where fixed or flexible budgetary 13 control would be appropriate.[k] (d) Flex a budget to a given level of volume.[s] 13 4 Asset budgeting and investment appraisal (a) Discuss the importance of investment planning and 14 control.[k] (b) Define and distinguish between asset and expense 14 items.[k] (c) Outline the issues to consider and the steps involved 14 in the preparation of an asset expenditure budget.[k] (d) Explain and illustrate the difference between simple and compound interest, and between nominal and 14 effective interest rates.[s] (e) Explain and illustrate compounding and discounting.[s] 14 (f) Explain the distinction between cash flow and profit 14 and the relevance of cash flow to investment appraisal.[k] (g) Identify and evaluate relevant cash flows for 14 individual investment decisions.[s] (h) Explain and illustrate the net present value (NPV) and 14 internal rate of return (IRR) methods of discounted cash flow.[s] (i) Calculate present value using annuity and perpetuity 14 formulae.[s] (j) Calculate NPV, IRR and payback (discounted and 14 non-discounted).[s] (k) Interpret the results of NPV, IRR and payback 14 calculations of investment viability.[s] KAPLAN PUBLISHING P.19  5 Budgetary control and reporting (a) Calculate simple variances between flexed budget, 13 fixed budget and actual sales, costs and profits.[s] (b) Discuss the relative significance of variances.[k] 15 (c) Explain potential action to eliminate variances.[k] 15 (d) Define the concept of responsibility accounting and its 13 significance in control.[k] (e) Explain the concept of controllable and uncontrollable 13 costs.[k] (f) Prepare control reports suitable for presentation to 13 management (to include recommendation of appropriate control action).[s] 6 Behavioural aspects of budgeting (a) Explain the importance of motivation in performance 13 management.[k] (b) Identify factors in a budgetary planning and control 13 system that influence motivation.[k] (c) Explain the impact of targets upon motivation.[k] 13 (d) Discuss managerial incentive schemes.[k] 13 (e) Discuss the advantages and disadvantages of a 13 participative approach to budgeting.[k] (f) Explain top down, bottom up approaches to 13 budgeting.[k] E STANDARD COSTING 1 Standard costing systems (a) Explain the purpose and principles of standard 15 costing.[k] (b) Explain the difference between standard, marginal 15 and absorption costing.[k] (c) Establish the standard cost per unit under absorption 15 and marginal costing.[k] 2 Variance calculations and analysis (a) Calculate sales price and volume variance.[s] 15 (b) Calculate materials total, price and usage variance.[s] 15 (c) Calculate labour total, rate and efficiency variance.[s] 15 (d) Calculate variable overhead total, expenditure and 15 efficiency.[s] P.20 KAPLAN PUBLISHING  (e) Calculate fixed overhead total, expenditure and, 15 where appropriate, volume, capacity and efficiency.[s] (f) Interpret the variances.[s] 15 (g) Explain factors to consider before investigating 15 variances, explain possible causes of the variances and recommend control action.[s] (h) Explain the interrelationships between the 15 variances.[k] (i) Calculate actual or standard figures where the 15 variances are given.[k] 3 Reconciliation of budgeted profit and actual profit (a) Reconcile budgeted profit with actual profit under 15 standard absorption costing.[s] (b) Reconcile budgeted profit or contribution with actual 15 profit or contribution under standard marginal costing.[s] F PERFORMANCE MEASUREMENT 1 Performance measurement overview (a) Discuss the purpose of mission statements and their 16 role in performance measurement.[k] (b) Discuss the purpose of strategic and operational and 16 tactical objectives and their role in performance measurement.[k] (c) Discuss the impact of economic and market condition 16 on performance measurement.[k] (d) Explain the impact of government regulation on 16 performance measurement.[k] (e) Explain the impact of sustainability on performance 16 measurement.[k] 2 Performance measurement – application (a) Discuss and calculate measures of financial 16 performance (profitability, liquidity, efficiency and gearing) and non-financial measures.[s] (b) Perspectives of the balance scorecard. 16 (i) Discuss the advantages and limitations of the 16 balance scorecard.[k] (ii) Describe performance indicators for financial, 16 customer, internal business process and innovation and learning.[k] KAPLAN PUBLISHING P.21  (iii) Discuss critical success factors and key 16 performance indicators and their link to objectives and mission statements.[k] (iv) Establish critical success factors and key 16 performance indicators in a specific situation.[s] (c) Economy, efficiency and effectiveness 16 (i) Explain the concepts of economy, efficiency and 16 effectiveness.[k] (ii) Describe performance indicators for economy, 16 efficiency and effectiveness.[k] (iii) Establish performance indicators for economy, 16 efficiency and effectiveness in a specific situation.[s] (iv) Discuss the meaning of each of the efficiency, 16 capacity and activity ratios.[k] (v) Calculate the efficiency, capacity and activity 16 ratios in a specific situation.[s] (d) Resources utilisation (i) Describe measures of performance utilisation in 16 service and manufacturing environments.[k] (ii) Establish measures of resource utilisation in a 16 specific situation.[s] (e) Profitability (i) Calculate return on investment and residual 16 income.[s] (ii) Explain the advantages and limitations of return 16 on investment and residual income.[k] (f) Quality of service 16 (i) Distinguish performance measurement issues in 16 service and manufacturing industries.[k] (ii) Describe performance measures appropriate for 16 service industries.[k] (iii) Explain total quality management (TQM) as a 16 quality management technique.[k] 3 Cost reductions and value enhancement (a) Compare cost control and cost reduction.[s] 16 (b) Describe and evaluate cost reduction methods.[s] 16 (c) Describe and evaluate value analysis.[s] 16 P.22 KAPLAN PUBLISHING  4 Monitoring performance and reporting (a) Discuss the importance of non-financial performance 16 measures.[k] (b) Discuss the relationship between short-term and long- 16 term performance.[k] (c) Discuss the measurement of performance in service 16 industry situations.[k] (d) Discuss the measurement of performance in non-profit 16 seeking and public sector organisations.[k] (e) Discuss measures that may be used to assess 16 managerial performance and the practical problems involved.[k] (f) Discuss the role of benchmarking in performance 16 measurement.[k] (g) Produce reports highlighting key areas for 16 management attention and recommendations for improvement.[k] The examination Examination format The syllabus is assessed by a two-hour computer-based examination. Questions will assess all parts of the syllabus and will contain both computational and non-computational elements: Number of marks Section A 35 two mark objective questions 70 Section B 3 ten mark multi-task questions 30 100 Section B will examine Budgeting, Standard costing and Performance measurement. Note: Budgeting MTQs in Section B can also include tasks from syllabus area B2 Analytical techniques in budgeting and forecasting. B4 Spreadsheets could be included in any of the MTQs, as either the basis for the presentation of information in the question scenario or as a task within the MTQ. Total time allowed: 2 hours KAPLAN PUBLISHING P.23  Examination tips Spend the first few minutes of the examination reviewing the format and content so that you understand what you need to do. Divide the time you spend on questions in proportion to the marks on offer. One suggestion for this exam is to allocate 1 minute and 12 seconds to each mark available, so each 2-mark question should be completed in 2 minutes 24 seconds or approximately 2 and a half minutes. Computer-based examination (CBE) tips Be sure you understand how to use the software before you start the exam. If in doubt, ask the assessment centre staff to explain it to you. Questions are displayed on the screen and answers are entered using keyboard and mouse. At the end of the exam, you are given a certificate showing the result you have achieved. Do not attempt a CBE until you have completed all study material relating to it. Do not skip any of the material in the syllabus. Read each question very carefully. Double-check your answer before committing yourself to it. Answer every question – if you do not know an answer, you don't lose anything by guessing. Think carefully before you guess. The CBE question types are as follows: Multiple choice – where you are required to choose one answer from a list of options provided by clicking on the appropriate ‘radio button’ Multiple response – where you are required to select more than one response from the options provided by clicking on the appropriate tick boxes(typically choose two options from the available list Multiple response matching – where you are required to indicate a response to a number of related statements by clicking on the ’radio button’ which corresponds to the appropriate response for each statement Number entry – where you are required to key in a response to a question shown on the screen. With an objective test question, it may be possible to eliminate first those answers that you know are wrong. Then choose the most appropriate answer(s) as required from those that are left. This could be a single answer (e.g. multiple choice) or more than one response (e.g. multiple response and multiple response – matching). After you have eliminated the ones that you know to be wrong, if you are still unsure, guess. But only do so after you have double-checked that you have only eliminated answers that are definitely wrong. Don't panic if you realise you've answered a question incorrectly. Getting one question wrong will not mean the difference between passing and failing. P.24 KAPLAN PUBLISHING  ACCA Support For additional support with your studies please also refer to the ACCA Global website. Study skills and revision guidance This section aims to give guidance on how to study for your ACCA exams and to give ideas on how to improve your existing study techniques. Preparing to study Set your objectives Before starting to study decide what you want to achieve – the type of pass you wish to obtain. This will decide the level of commitment and time you need to dedicate to your studies. Devise a study plan Determine which times of the week you will study. Split these times into sessions of at least one hour for study of new material. Any shorter periods could be used for revision or practice. Put the times you plan to study onto a study plan for the weeks from now until the exam and set yourself targets for each period of study – in your sessions make sure you cover the course, course assignments and revision. If you are studying for more than one examination at a time, try to vary your subjects as this can help you to keep interested and see subjects as part of wider knowledge. When working through your course, compare your progress with your plan and, if necessary, re-plan your work (perhaps including extra sessions) or, if you are ahead, do some extra revision/practice questions. KAPLAN PUBLISHING P.25  Effective studying Active reading You are not expected to learn the text by rote, rather, you must understand what you are reading and be able to use it to pass the exam and develop good practice. A good technique to use is SQ3Rs – Survey, Question, Read, Recall, Review: (1) Survey the chapter – look at the headings and read the introduction, summary and objectives, so as to get an overview of what the chapter deals with. (2) Question – whilst undertaking the survey, ask yourself the questions that you hope the chapter will answer for you. (3) Read through the chapter thoroughly, answering the questions and making sure you can meet the objectives. Attempt the exercises and activities in the text, and work through all the examples. (4) Recall – at the end of each section and at the end of the chapter, try to recall the main ideas of the section/chapter without referring to the text. This is best done after a short break of a couple of minutes after the reading stage. (5) Review – check that your recall notes are correct. You may also find it helpful to re-read the chapter to try to see the topic(s) it deals with as a whole. Note-taking Taking notes is a useful way of learning, but do not simply copy out the text. The notes must: be in your own words be concise cover the key points be well-organised be modified as you study further chapters in this text or in related ones. Trying to summarise a chapter without referring to the text can be a useful way of determining which areas you know and which you don't. P.26 KAPLAN PUBLISHING  Three ways of taking notes: Summarise the key points of a chapter. Make linear notes – a list of headings, divided up with subheadings listing the key points. If you use linear notes, you can use different colours to highlight key points and keep topic areas together. Use plenty of space to make your notes easy to use. Try a diagrammatic form – the most common of which is a mind-map. To make a mind-map, put the main heading in the centre of the paper and put a circle around it. Then draw short lines radiating from this to the main sub- headings, which again have circles around them. Then continue the process from the sub-headings to sub-sub-headings, advantages, disadvantages, etc. Highlighting and underlining You may find it useful to underline or highlight key points in your study text – but do be selective. You may also wish to make notes in the margins. Revision The best approach to revision is to revise the course as you work through it. Also try to leave four to six weeks before the exam for final revision. Make sure you cover the whole syllabus and pay special attention to those areas where your knowledge is weak. Here are some recommendations: Read through the text and your notes again and condense your notes into key phrases. It may help to put key revision points onto index cards to look at when you have a few minutes to spare. Review any assignments you have completed and look at where you lost marks – put more work into those areas where you were weak. Practise exam standard questions under timed conditions. If you are short of time, list the points you would include or specify the calculations that you would include in your answer and then read the model answer, but do try to complete at least a few questions under exam conditions. If you are stuck on a topic find somebody (e.g. your tutor or, where appropriate, a member of Kaplan’s Academic Support team) to explain it to you. Read good newspapers and professional journals, especially ACCA's Student Accountant – this can give you an advantage in the exam. Ensure you know the structure of the exam – how many questions and of what type you will be expected to answer. During your revision attempt all the different styles of questions you may be asked. KAPLAN PUBLISHING P.27  Further reading You can find further reading and technical articles under the student section of ACCA's website. Technical update This text has been updated to reflect Examinable Documents September 2023 to August 2024 issued by ACCA. P.28 KAPLAN PUBLISHING  FORMULAE AND TABLES Regression analysis y = a + bx ∑ y b∑ x a= − n n n ∑ xy − ∑ x ∑ y b= n ∑ x 2 − (∑ x)2 n ∑ xy − ∑ x ∑ y r= (n ∑ x 2 − (∑ x)2 ) (n ∑ y 2 − (∑ y)2 ) Economic order quantity 2C 0 D = Ch Economic batch quantity 2C 0 D =  D C h 1 −   R Arithmetic mean Σx Σfx x= x= (frequency distribution) n Σf Standard deviation 2 Σ( x − x )2 Σfx 2  Σfx  σ= σ= −   (frequency distribution) n Σf  Σf  Variance =σ2 Co-efficient of variation σ CV = x Expected value EV = ∑px KAPLAN PUBLISHING P.29  Present value table Present value of 1, i.e. (1 + r)−n Where r = discount rate n = number of periods until payment Periods Discount rate (r) (n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 (n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 P.30 KAPLAN PUBLISHING  Annuity table 1 – (1+ r)–n Present value of an annuity of 1, i.e. r Where r = discount rate n = number of periods Periods Discount rate (r) (n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 8.495 12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606 (n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 12 6.492 6.194 5.918 5.660 5.421 5.197 4.968 4.793 4.611 4.439 13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 KAPLAN PUBLISHING P.31  Standard normal distribution table x –μ z= σ 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.0 0.0000 0.0040 0.0080 0.0120 0.0160 0.0199 0.0239 0.0279 0.0319 0.0359 0.1 0.0398 0.0438 0.0478 0.0517 0.0557 0.0596 0.0636 0.0675 0.0714 0.0753 0.2 0.0793 0.0832 0.0871 0.0910 0.0948 0.0987 0.1026 0.1064 0.1103 0.1141 0.3 0.1179 0.1217 0.1255 0.1293 0.1331 0.1368 0.1406 0.1443 0.1480 0.1517 0.4 0.1554 0.1591 0.1628 0.1664 0.1700 0.1736 0.1772 0.1808 0.1844 0.1879 0.5 0.1915 0.1950 0.1985 0.2019 0.2054 0.2088 0.2123 0.2157 0.2190 0.2224 0.6 0.2257 0.2291 0.2324 0.2357 0.2389 0.2422 0.2454 0.2486 0.2517 0.2549 0.7 0.2580 0.2611 0.2642 0.2673 0.2704 0.2734 0.2764 0.2794 0.2823 0.2852 0.8 0.2881 0.2910 0.2939 0.2967 0.2995 0.3023 0.3051 0.3078 0.3106 0.3133 0.9 0.3159 0.3186 0.3212 0.3238 0.3264 0.3289 0.3315 0.3340 0.3365 0.3389 1.0 0.3413 0.3438 0.3461 0.3485 0.3508 0.3531 0.3554 0.3577 0.3599 0.3621 1.1 0.3643 0.3665 0.3686 0.3708 0.3729 0.3749 0.3770 0.3790 0.3810 0.3830 1.2 0.3849 0.3869 0.3888 0.3907 0.3925 0.3944 0.3962 0.3980 0.3997 0.4015 1.3 0.4032 0.4049 0.4066 0.4082 0.4099 0.4115 0.4131 0.4147 0.4162 0.4177 1.4 0.4192 0.4207 0.4222 0.4236 0.4251 0.4265 0.4279 0.4292 0.4306 0.4319 1.5 0.4332 0.4345 0.4357 0.4370 0.4382 0.4394 0.4406 0.4418 0.4429 0.4441 1.6 0.4452 0.4463 0.4474 0.4484 0.4495 0.4505 0.4515 0.4525 0.4535 0.4545 1.7 0.4554 0.4564 0.4573 0.4582 0.4591 0.4599 0.4608 0.4616 0.4625 0.4633 1.8 0.4641 0.4649 0.4656 0.4664 0.4671 0.4678 0.4686 0.4693 0.4699 0.4706 1.9 0.4713 0.4719 0.4726 0.4732 0.4738 0.4744 0.4750 0.4756 0.4761 0.4767 2.0 0.4772 0.4778 0.4783 0.4788 0.4793 0.4798 0.4803 0.4808 0.4812 0.4817 2.1 0.4821 0.4826 0.4830 0.4834 0.4838 0.4842 0.4846 0.4850 0.4854 0.4857 2.2 0.4861 0.4864 0.4868 0.4871 0.4875 0.4878 0.4881 0.4884 0.4887 0.4890 2.3 0.4893 0.4896 0.4898 0.4901 0.4904 0.4906 0.4909 0.4911 0.4913 0.4916 2.4 0.4918 0.4920 0.4922 0.4925 0.4927 0.4929 0.4931 0.4932 0.4934 0.4936 2.5 0.4938 0.4940 0.4941 0.4943 0.4945 0.4946 0.4948 0.4949 0.4951 0.4952 2.6 0.4953 0.4955 0.4956 0.4957 0.4959 0.4960 0.4961 0.4962 0.4963 0.4964 2.7 0.4965 0.4966 0.4967 0.4968 0.4969 0.4970 0.4971 0.4972 0.4973 0.4974 2.8 0.4974 0.4975 0.4976 0.4977 0.4977 0.4978 0.4979 0.4979 0.4980 0.4981 2.9 0.4981 0.4982 0.4982 0.4983 0.4984 0.4984 0.4985 0.4985 0.4986 0.4986 3.0 0.4987 0.4987 0.4987 0.4988 0.4988 0.4989 0.4989 0.4989 0.4990 0.4990 P.32 KAPLAN PUBLISHING Chapter 1 Accounting for management Chapter learning objectives Upon completion of this chapter you will be able to: distinguish between data and information identify and explain the attributes of good information outline the managerial processes of planning, decision making and control explain the difference between strategic, tactical and operational planning describe the purpose and role of cost and management accounting within an organisation compare and contrast financial accounting with cost and management accounting explain the limitations of management information in providing guidance for managerial decision-making. One of the PER performance objectives (PO1) is to take into account all relevant information and use professional judgement, your personal values and scepticism to evaluate data and make decisions. You should identify right from wrong and escalate anything of concern. You also need to make sure that your skills, knowledge and behaviour are up-to-date and allow you to be effective in you role. Working through this chapter should help you understand how to demonstrate that objective. KAPLAN PUBLISHING 1 Accounting for management 1 Management, Cost and Financial accounting Management and Cost accounting Managers usually want to know about the costs and the profits of individual products and services. In order to obtain this information, details are needed for each cost, revenue, profit and investment centre. Such information is provided by cost accounting and management accounting systems. Cost accounting is a system for recording data and producing information about costs for the products produced by an organisation and/or the services it provides. It is also used to establish costs for particular activities or responsibility centres. Cost accounting involves a careful evaluation of the resources used within the enterprise. The techniques employed in cost accounting are designed to provide financial information about the performance of the enterprise and possibly the direction that future operations should take. The terms ‘cost accounting’ and ‘management accounting’ are often used to mean the same thing. Management accounting has cost accounting at its essential foundation. 2 KAPLAN PUBLISHING  Chapter 1 Financial accounting Financial accounting involves recording the financial transactions of an organisation and summarising them in periodic financial statements for external users who wish to analyse and interpret the financial position of the organisation. The main duties of the financial accountant include: maintaining the bookkeeping system of the nominal ledger, payables control account, receivables control account and so on and to prepare financial statements as required by law and accounting standards. Information produced by the financial accounting system is usually insufficient for the needs of management for decision making. Differences between management accounting and financial accounting The following illustration compares management accounting with financial accounting. Illustration 1 – Management versus financial accounting Management Financial accounting accounting Information Internal use e.g. External use e.g. mainly managers and shareholders, payables, produced for employees. lenders, banks, government. Purpose of To aid planning, To record the financial information controlling and decision performance in a period and making. the financial position at the end of that period. Legal None. Limited companies must requirements produce financial accounts. Formats Management decide Format and content of on the information they financial accounts intending require and the most to give a true and fair view useful way of should follow accounting presenting it. standards and company law. Nature of Financial and non- Mostly financial. information financial. Time period Historical and forward- Mainly a historical record. looking. KAPLAN PUBLISHING 3 Accounting for management Test your understanding 1 The following assertions relate to management accounting: (i) The purpose of management accounting is to provide accounting information to the managers of the business and other internal users. (ii) Management accounts are only concerned with the cost of goods, services and operations. Which of the following statements are true? A Assertion (i) and (ii) are both correct B Only assertion (i) is correct C Only assertion (ii) is correct D Neither assertion (i) or (ii) is correct 2 The nature of good information Data and information ‘Data’ means facts. Data consists of numbers, letters, symbols, raw facts, events and transactions which have been recorded but not yet processed into a form suitable for use. Information is data which has been processed in such a way that it is meaningful to the person who receives it (for making decisions). The terms data and information are often used interchangeably in everyday language. As data is converted into information, some of the detail of the data is eliminated and replaced by summaries which are easier to understand. Test your understanding 2 What, if any, is the difference between data and information? A They are the same B Data can only be figures, whereas information can be facts or figures C Information results from sorting and analysing data D Data results from obtaining many individual pieces of information 4 KAPLAN PUBLISHING  Chapter 1 Attributes of good information Information is provided to management to assist them with planning, controlling operations and making decisions. Management decisions are improved when they are provided with better quality information. The attributes of good information can be identified by the ‘ACCURATE’ acronym as shown below: Accurate The degree of accuracy depends on the reason why the information is needed. For example: a report on the performance of different divisions of a business may show figures to the nearest dollar, or nearest thousand dollars. when calculating the cost of a unit of output, managers may want the cost to be accurate to the nearest cent. Complete Managers should be given all the information they need, but information should not be excessive. For example: a complete control report on variances should include all standard and actual costs necessary to aid understanding of the variance calculations. production managers will need the variance analysis relating to material usage where-as purchasing managers with need the variance analysis relating to material prices. Cost-effective The value of information should exceed the cost of producing it. Management information is valuable, because it assists decision making. If a decision backed by information is different from what it would have been without the information, the value of information equates to the amount of money saved as a result. Illustration 2 – Marginal cost versus marginal benefit Production costs in a factory can be reported with varying levels of frequency ranging from daily (365 times per year) to annually (once per year). Costs and benefits of reporting relate to the frequency of reporting. Information has to be gathered, collated and reported in proportion to frequency and costs will move in line with this. Initially, benefits increase sharply, but this increase starts to tail off. A point may come where ‘information overload’ sets in and benefits actually start to decline and even become negative. If managers are overwhelmed with information this can actually get in the way of completing a job. KAPLAN PUBLISHING 5 Accounting for management This can be shown graphically: Understandable Use of technical language or jargon must be limited. Accountants must always be careful about the way in which they present financial information to non- financial managers. Relevant The information contained within a report should be relevant to its purpose. Redundant parts should be removed. For example: the sales team may need to know the total cost of producing a unit to calculate the selling price but will not need to know the breakdown into material, labour and overhead costs. Authoritative Information should be trusted and provided from reliable sources so that the users can have confidence in their decision making. Timely Information should be provided to a manager in time for decisions to be made based on that information. Easy to use We must always think about the person using the information we provide and make sure the information meets their needs. 6 KAPLAN PUBLISHING  Chapter 1 Data, Information, Knowledge and Wisdom The arrival of the Internet has made it much easier for organisations and individuals to access data at the right time and the right place. However, at the same time the Internet has opened up questions about data being error free and about who can have access to it. As well as the issue of data quality there is the question of how data, information and knowledge relate to one another. Russell Ackoff was one of the first people to speak of there being a hierarchy which he referred to as the Data Information Knowledge Wisdom (DIKW) Hierarchy. According to this model, data are simple facts or figures or maybe even a photograph or an illustration. In this form data is unstructured and uninterrupted. Information comes from processing or structuring data in a meaningful way. Another way of looking at this is that information is interpreted data. An interesting story is told by Joan Magretta in her book ‘What Management is?’ about Steve Jobs that clearly illustrates the difference between data and information. Despite its small share of the total market for personal computers, Apple has long been a leader in sales to schools and universities. When CEO Steve Jobs learned that Apple’s share of computer sales to schools was 12.5 per cent in 1999, he was dismayed, but unless you’re an industry analyst who knows the numbers cold, you won’t appreciate just how dismayed he was. That’s because, in 1998, Apple was the segment leader with a market share of 14.6 per cent. And, while Apple slipped to the number two spot in 1999, Dell grew and took the lead with 15.1 per cent. Alone each number is meaningless. Together they spell trouble, if you’re Steve Jobs, you see a trend that you’d better figure out how to reverse. This isn’t number crunching, its sense making. (Magretta, 2003, p. 123) In this example the 12.5 per cent was data and when it was seen in conjunction with the 15.1 per cent it became information. Knowledge is again different to data and information. Knowledge is much more personal and the presence or absence of knowledge can normally only be seen through the actions of individuals. When knowledge is written down it effectively becomes information. Finally with respect to wisdom it is difficult to define this concept. Wisdom has something to do with understanding or insight. It is to do with achieving a good long-term outcome in relation to the circumstances you are in. KAPLAN PUBLISHING 7 Accounting for management 3 Mission statements Before any planning can take place the mission of the business needs to be established. The mission statement is a statement in writing that describes the overall aims of an organisation, that is, what it is trying to accomplish. In other words, it sets out the whole purpose of the business. There are four key elements to a mission statement: Purpose – why does the business exist and who does it exist for? Strategy – what does the business provide and how is it provided? Policies and culture – how does the business expect its staff to act/behave? Values – What are the core principles of the business? The mission should express what the business wants to achieve overall and the aims and objectives managers produce should all work towards achieving this. Mission statements will have some or all of the following characteristics: Usually a brief statement of no more than a page in length Very general statement of entity culture States the aims of the organisation States the business areas in which the organisation intends to operate Open-ended (not in quantifiable terms) Does not include commercial terms, such as profit Not time-assigned Forms a basis of communication to the people inside the organisation and to people outside the organisation Used to formulate goal statements, objectives and short term targets Guides the direction of the entity's strategy and as such is part of management information. 8 KAPLAN PUBLISHING  Chapter 1 Kaplan UK's mission statement is: Kaplan helps individuals achieve their educational and career goals. We build futures one success story at a time. Our core values define our company culture and provide the framework for what we deliver to our customers and employees each day. Integrity – We hold ourselves to the highest ethical standards in everything we do. Knowledge – We offer expert resources to help you achieve your academic and career best. Support – We give you the tools you need to succeed. Opportunity – We open doors and broaden access to education. Results – We're dedicated to helping you achieve your goals – we succeed when you succeed. Examples of mission statements Honda Maintaining a global viewpoint, we are dedicated to supplying products of the highest quality, yet at a reasonable price for worldwide customer satisfaction. The Walt Disney Company The mission of The Walt Disney Company is to entertain, inform and inspire people around the globe through the power of unparalleled storytelling, reflecting the iconic brands, creative minds and innovative technologies that make ours the world’s premier entertainment company. Microsoft UK To empower every person and every organization on the planet to achieve more. Cadbury Cadbury means quality; this is our promise. Our reputation is built upon quality; our commitment to continuous improvement will ensure that our promise is delivered. Battersea Dogs’ & Cats’ Home We aim to never turn away a dog or cat in need of help, caring for them until their owners or loving new homes can be found, no matter how long it takes. We are champions for, and supporters of, vulnerable dogs and cats, determined to create lasting changes for animals in our society. KAPLAN PUBLISHING 9 Accounting for management 4 Planning, decision making and control The main functions that management are involved with are planning, decision making and control. Illustration 3 – Planning, decision making and control Here, management prepare a plan, which is put into action by the managers with control over the input resources (labour, money, materials, equipment and so on). Output from operations is measured and reported (‘fed back’) to management, and actual results are compared against the plan in control reports. Managers take corrective action where appropriate, especially in the case of exceptionally bad or good performance. Feedback can also be used to revise plans or prepare the plan for the next period. 10 KAPLAN PUBLISHING  Chapter 1 Planning Planning involves establishing the objectives of an organisation and formulating relevant strategies that can be used to achieve those objectives. In order to make plans, it helps to know what has happened in the past so that decisions about what is achievable in the future can be made. For example, if a manager is planning future sales volumes, he/she needs to know what the sales volumes have been in the past. Planning can be either short-term (tactical planning) or long-term (strategic planning). Planning is looked at in more detail in the next section of this chapter. During the planning process the mission statement of a business is used to produce effective aims and objectives for employees and the company as a whole. Aims and objectives should be SMART: Specific – are the objectives well defined and understandable? Measurable – can achievement of the objectives be measured so that completion can be confirmed? Attainable/Achievable – can the objectives set be achieved with the resources and skills available? Relevant – are the objectives relevant for the people involved and to the mission of the business? Timed – are deadlines being set for the objectives that are achievable? Are there any stage reviews planned to monitor progress towards the objective? By following the SMART hierarchy a business should be able to produce plans that lead to goal congruence throughout the departments, centres and/or regional offices (the whole business). Levels of planning There are three different levels of planning (known as ‘planning horizons’). These three levels differ according to their time span and the seniority of the manager responsible for the tasks involved. Strategic planning 'Strategic planning' can also be known as 'long-term planning' or 'corporate planning'. It considers: the longer term (five years plus) the whole organisation. Senior managers formulate long-term objectives (goals) and plans (strategies) for an organisation as a whole. These objectives and plans should all be aiming to achieving the company's mission. KAPLAN PUBLISHING 11 Accounting for management Tactical planning Tactical planning takes the strategic plan and breaks it down into manageable chunks i.e. shorter term plans for individual areas of the business to enable the strategic plan to be achieved. Senior and middle managers make short to medium term plans for the next year. Operational planning Operational planning involves making day-to-day decisions about what to do next and how to deal with problems as they arise. All managers are involved in day to day decisions. A simple hierarchy of management tasks can be presented as follows: Strategic, tactical and operational planning The table shown below illustrates the three different categories of planning. Private school Profit-seeking (fees are charged to business attend) Objective (mission) To provide a high To achieve a 20% quality of education return on capital so that, within five every year. years, 95% of pupils To increase earnings achieve grades A or per share by 10% B in their final every year for the examinations. next five years. 12 KAPLAN PUBLISHING  Chapter 1 Strategic plans Reduce class sizes. Cut costs by 15% in domestic markets. Raise new funds to Expand into markets invest $1 million in in Asia. new equipment and facilities. Increase domestic market share by 10% Attract the highest in the next five years. quality of teacher by paying good salaries. Tactical plans Set a target for this Carry out a cost year for examination reduction program results. next year. Increase the number Establish business of teachers by 10% relationships with by the end of the customers in Asia year. and carry out market Plan the launch of a research. fund-raising Increase the size of campaign. the work force in order to improve total sales. Operational plans Prepare teaching Obtain prices from schedules for the more than one next term. supplier before Monitor the marks purchasing materials. gained by students in Offer a bulk purchase mock examinations. discount of 10% to a Provide whiteboard major customer. training to teaching staff. Test your understanding 3 The Management Accountant has communicated a detailed budget to ensure that cost savings targets are achieved in the forthcoming period. This is an example of: A Operational planning B Tactical planning C Strategic planning D Business plannin