CHAPTER 1

Accounting Information Systems

1 The nature of information
Accounting information systems (AIS) produce information for control and decision making. Information is data which has been processed into an organised and meaningful form

The characteristics of useful information

All useful information exhibits the following characteristics. Verifiable Objective Timely Comparable Reliable Understandable Relevant

Contingency theory of management accounting

The contingency theory of management accounting is based on the premise that there is no one appropriate accounting system applicable to all circumstances and all organisations. The phrase It depends on may sound frustrating but it summarises what contingency theory is about.

ACCA PAPER F5- FOCUS NOTES The design of an AIS, therefore, depends on: the market the product or service the management style the information requirements of management the state of technology and systems the state of management theory and management accounting theory.

Contingency theory asks which contingency factors are important such as changes to the environment, the organisation structure or decision making style. If the environment is dynamic, for example, this will increase the degree of uncertainty which will increase the need for a management accounting system to be able to respond. This could be through the use of quantitative techniques to evaluate uncertainty or through the application of new management accounting techniques such as target costing. If the organisation becomes more decentralised with semiautonomous divisions, this may require the management accounting system to derive an appropriate transfer pricing policy as an aid to performance evaluation and goal congruent decision making.

Chapter 1 Accounting Information Systems

Control systems

Characteristics of control systems

All control systems have four essential characteristics. A budget, standard or target is set. The system measures actual results using the same basis as for the budget, standard or target. A comparison is made between the budget, standard or target and the actual results. Control action is taken based on the comparison.

More often than not, control action is reactive rather than proactive. Proactive control action (feed forward control) requires the manager to anticipate that the process is out of control. Reactive control action (feedback control) refers to action taken after the actual results are known.

Management by exception feedback control

If an adverse variance is viewed as exceptional management would investigate its cause. Management must decide whether negative or positive feedback control action is required. Negative feedback control seeks to dampen the effect of any deviation from the control data. Positive feedback control seeks to amplify any deviation.

ACCA PAPER F5- FOCUS NOTES If we assume that management wish to reduce the adverse variation then they must use negative feedback control, which may involve, for example, reducing costs.

Feedforward control
It is useful to distinguish between an ex-ante standard and an ex-post standard. A standard set at the start of a period is an ex-ante standard. A standard changed or revised in the light of additional information at the end of a period is an ex-post standard. Period 1 Start Ex-ante standard $50 per unit $50 Actual cost per unit $55 ___ Compare $5 === (adverse) Period 2 End/Start . . . . . .

If, on investigation of the variance, it was found that the standard needed to be changed because of real world economic conditions during Period 1 (for example a world shortage of material) then the $5 adverse variance (as information) is not relevant for control purposes.

Chapter 1 Accounting Information Systems If a more realistic standard is $60 per unit then the management accountant should use this ex-post standard to establish more useful information. Period 1 Start Ex-ante standard $50 Period 2 End/Start . . . . . . Revise Ex-post standard $60 Actual Compare $55 ___ $5 === favourable

Management can now investigate the cause of this $5 favourable variance. This information is more relevant for control purposes. Feedforward control involves the prediction of outputs which are expected from the system at some future point in time. If the prediction differs from what is desired, actions are taken to minimise these expected differences. Management would therefore feedforward the ex-post standard from Period 1 to become the ex-ante standard for Period 2.

ACCA PAPER F5- FOCUS NOTES

Programmed and non-programmed decisions

Programmed information is prepared on a regular basis in a set format which can easily be compared with previous results. Non-programmed information occurs on an irregular basis and there is no easy basis for comparison.

Programmed and non-programmed information

Programmed and non-programmed decisions

Programmed decisions are taken in a situation where the values of the input variables and the operation of the decision model itself are sufficiently known for accurate estimates of the output variables to be produced. Non-programmed decisions cannot be taken in conditions of certainty since management must use their judgement to decide the values for the relevant decision variables.

Classification of cost information

Typical cost information classifications for decision making are as follows. Classification by behaviour for example fixed and variable costs. Classification by function and expense type for example marketing and advertising expenditure. Classification by controllability for example, business rates may not be controllable by managers, whereas production wages are. Classification by relevance for example sunk costs and unavoidable costs are irrelevant for decision making.