1: Information for manageme:
Data isthe raw material for data processing. Information is
data that has been processed in such a way as to make it
‘meaningtul to its user Management information isthe
an ee ee ese a information used by management to run an organisation.
Some qualiies of good information are as follows
Financial and management accounting = Relevance Accuracy
= Clanity = Timeliness
= Completeness = Manageable in volumeTre Financial and
PE SURE Iry| management accounting
Information is most likely to be used for planning, control or decision making in management accounting
Planning invol Maximise profits
anning Involves Maximise shareholder
Establishing objectives value 1 An established organisation should have @
Selecting appropriate Minimise costs system of management reporting that produces
strategies Maximise revenue ‘control information in a specific format at
Increase market share] regularintervals.
oy Efletve contol is not practical without
Management is decision taking. Management at all planning. Planning without control is pointless.
levels within an organisation take decisions. Decision
making involves a choice between alternatives.
Basic elements
Management control system |~————————>
* Planning = Comparing
Is a system which measures end corrects the performance of = Recording ™ Evaluating
subordinates to ensure organisatton’s objectivesplans are beng met, | * Carry out plan ® Corrective actionPlanning, conta io
and decision making | Mes ues I)
The data used to prepare financial accounts and management accounts are the same.
The differences between these accounts arise because the data is analysed diflerenty.
Genre
Prepared for external individuals
Detail performance of a defined period
Legal requirements for limited companies to
prepare FA
Format of published FA determined by
FA cover business as a whole
FA information monetary (mosty)
Historic picture of past operations
eat
Prepared for intemal managers of an organisation
Aid management in recording, planning and
controlling organisation's activities
Help decision-making process
No legal requirements to prepare MA
Format of MA at ciscretion of management
MA can focus on specific areas of an
organisation's activities
MA incorporate non-monetary measures
Historic record and future planning tool
1: Inoration for management2: Cost classificati
The classification of costs is an essential management
accounting technique. Its main uses are as follows.
= Determination of the cost of a unit of product or service
Direct costs and indirect costs = Cost behaviour
Fixed costs and variable costs = Absorption and marginal costing
= "= Cost-volume-profit (CVP) analysis
Other cost classifications
Responsibilty centres and cost unitspor Otter cost Responsbiy contes
tes classicabors anv cst uri
Direct cost Indirect cost (overhead)
is a cost that can be traced in full to the is a cost that is incurred whilst making a
product, service or department that is being product but which cannot be traced
costed, directly to the product, service or
department.
Cen + ete
Direct materials Indirect materials
Direct labour Indirect labour
Incirect expenses
Administration ovethead
Total product cost Selling and distribution overhead
Direct expenses
Total direct costs = prime costFixed cost
is acost which is unaffected by changes in
the level of activity.
oe) Costs may also be
semifxed or semi-
di variable ot mixed
= Rent ofa building esis For gamle, an
= Business rales electricity bill has @
fixed standing charge
and a vatiable cost
per unit of electricity
used.
= Salary of a director
Page 7
Variable cost
is a costwhich tends to vary with the level
of activity
ee ee
Direct materials
Direct labour
Seles commission (varies with
volume of sales)
2: Cost classiestionCoe)
a
Functional costs Product costs Period costs
Discretionary costs Avoidable costs Unavoidable costs
Controllable cost Uncontrollable costfry
Cee
A responsibilty centre is a department or organisational function whose performance is the direct responsi
of a specitic manager.
Cost centre Revenue centre
is a collecting place for costs before they Js a collecting place for revenues before
are analysed further, they are analysed further.
(COST CENTRE MANAGERS ARE
REVENUE CENTRE MANAGERS ARE
RESPONSIBLE FOR COSTS ONLY
RESPONSIBLE FOR REVENUES ONLY
Sey eeu
= Similar to a cost centre Profit centre with additional responsibilities
Responsible for costs and revenues
Responsible for capital investment and
financing
= Responsible for costs and revenues
Page 9 2: Cost classiestionCost behaviour is the way in which costs are affected by
changes in the volume of output. Management decisions
are often based on the ways in which costs behave.
seen Knowledge of cost behaviour is essential for
Cost behaviour patterns = Budgeting
"= Decision making
High-low method = Contre! accountingCo
Costs are influenced by mary factors. The most important factor isthe level of acvty or volume of output.
Level of activity may refer to
Value of items sold
Number of items sold
Number of invoices issued
Number of units of electicity consumed
Basic principles of cost behaviour
As the level of activity rises, costs will usually
tise. It will generally cost more to produce 200
Units of output than it wil to produce 100 units:
of output.
In general, level of activity = volume of outputFixed cost
Graph of fixed cost
Fixed cost
‘Volume of output”Cost behaviour
Graph of variable cost
Variable cost oe Se
‘otume of auipat
Mixed cost Graph of variable cost
a Volime of outNon-linear or curvilinear variable cost
‘Volime of outputle
Variable
Itis generally assumed that costs are one ofthe folowing Fined
The fixed and variable elements of semi-varable Semivariable
costs can be determined by the high-low method.
step 1. Revo sds of cost Staten highest activity evel
tep 1. Review past records of costs
Select period with lowest activity level
Step 2. Adjust for inflation before comparing costs (if needed)
ce Total cost at high activity evel (TCH)
Step 3. Determine Total cost at low activity level (TCL)
Total units at high activity level (TUH)
oS Total units at low activity level (TUL)‘Step 4. Calculate variable cost per unit= _TCH-TCL
TUH-TUL
Ss
Step 5. Determine fixed costs by substituting variable cost per unt at high or low activity level
sSCe CME RC
expected values
Correlation and regression is a very important topic
\ihich forms part of the cost behaviour section of the
syllabus. Make sure that you can reproduce the formulae
required for linear regression anelysis since they are not
- provided in your exam and its vita that you are able to
Coefficient of determination establish finear equations using this method.
Estimating the line of best fit
Enpected values
Correlationcr)
Correlation
is the extent to which the value of a
dependent variable is related to the
value of the independent variable.
EXAM FORMULA
Correlation ne XY-DXEY
coefficient, r=
line x? 05 )"] [ny Y= 1)?
‘THIS FORMULA WILL BE PROVIDED IN YOUR EXAM
Esimating the ine
of best
Cee
Perfectly comelated
= Parily correlated
= Uncorrelated
perfect positive
perfect negative
incorrelatedcng
Pee
Coefficient of determination, 12
ifr=09,22031
Note: we do not conclude that 81% of variations in y are caused by variations in x, We say that 81% of variations
in y can be explained by variations in x.rn Expected
Crt values
Estimating the line of best fit, Y = a + bX (linear relationship)
Ce ren
(draw a graph) Greet)
Plot paits of data for related variables
Produce a scatiergraph Seatiorgaph showing no of bes ft
8 se
Use judgement to cea ee
raw line of best ft yoo
umber of pairs of data
Fixed costs =
intersection of line on erage X value
y axis (a)
Variable cost per unit
= gradient of line (b) raiment
Fixes oment = average Y valueExpected values
‘An expected value is a weighted average value based on probabilities. This can halp in decision making