Session 1 The Nature, Source and Purpose of Management Accounting Main contents: 1. Data and information 2
1. Data and information
2. The managerial processes of planning, decision making and control
3. Responsibility accounting
4. Management accounting and financing accounting
5. Presentation of management information
1.1 Data and Information
· Data consists of raw materials, which include numbers, letters, symbols, facts, events and transactions, that 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 to the person who receives it. (for decision making purpose)
The attributes of good information can be identified by the “ACCURATE” as shown below:
· Accurate: accurate enough for the purpose
· Complete: all the necessary information
· Cost- effective: benefit > costs
· Understandable: clear and easy to understand
· Relevant: relevant to purpose
· Accessible: the best way to communicate with the related person
· Timely: be available at the right time
· Easy to use: by management
1.2 The Managerial Process of Planning , Decision Making and Control
Information for management is likely to be used for planning, control and decision making objectives:
An objective is the aim or goal of an organization. A strategy is a possible course of action that might enable an organization or an individual to achieve its objective.
· Planning involved the following two factors:
Establishing the objectives
Selecting appropriate strategy to achieve those objectives
· The link between structure and strategy ( understanding)
1). Structure follows strategy: organizations develop strategies in order to cope with the changes in structure of an organization
2) Strategy follows structure: the strategy of an organization is determined or influenced by the structure of the organization.
· Planning can be either short-term (tactical planning) or long-term (strategic-planning)
At a strategic level, senior managers formulate long-term objectives and plans, and seek proper strategy to achieve these long-term goals.
At a tactical level, senior managers make short-term plans for the efficient and effective use of an organization’s resources.
e.g. annual plans or budgets
At an operational level, managers take day-to-day decisions about what to do next and who to deal with problems arise.
1.3 Responsibility accounting
Responsibility accounting is a system of accounting that segregates revenue and costs into areas of personal responsibility in order to monitor and assess the performance of each part of an organization.
The main responsibility centers are:
Cost center – the performance of a cost center manager is judged on the extent to which cost targets have been achieved.
Revenue center – Within an organization, this is a centre or activity that earns sales revenue. And whose manager is responsible for the revenue earned but not for the costs incurred.
Profit center – A part of the business whose manager is responsible and accountable for both costs and revenue. The performance of a profit center manager is measured in terms of the profit made by the centre.
Investment center – A profit center with additional responsibilities for investment and possibly also for financing, and whose performance is measured by its return on capital employed (ROCE).
1.4 Summary of management accounting and financial accounting