MANAGEMENT ACCOUNTING

THE ROLE AND SCOPE OF MANAGEMENT

ACCOUNTING

SOLUTIONS 1

Updated January 2018

Valid for exams in 2018

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 Management Accounting

First published 2015

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 1: The role and scope of management accounting

Table of contents
Exercise Solution 1.1 ................................................................. 4
Exercise Solution 1.2 ................................................................. 5
Exercise Solution 1.3 ................................................................. 6
Exercise Solution 1.4 ................................................................. 9
Exercise Solution 1.5 ............................................................... 11
Exercise Solution 1.6 ............................................................... 12
Exercise Solution 1.7 ............................................................... 14

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 Management Accounting

Exercise Solution 1.1

Stakeholders Likely uses of accounting information

Owners / shareholders Assessing their investment in the
organisation, for example how secure the
investment is and the prospects for future
dividends.
Management For use in the day to day running of the
business including planning, decision
making and control.
Employees Assessing job security. Negotiating
salaries/bonuses.
Government Calculating taxation owed e.g. income,
corporation and sale taxes. Gathering
economic statistics.
Lenders Assessing credit worthiness.
Suppliers Assessing likelihood, volume and value of
future business.
Customers Assessing the reliability of future supplies.
Specialists/consultants Provision of investment advice.
General public Assessing the general impact of the
organisation. Assessing value for money.

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 1: The role and scope of management accounting

Exercise Solution 1.2

Factor Management Financial accounting

accounting information information
Why produce? Not legally required but Legally required
necessary to manage the
business
Level of Approximate figures and Accurate figures
accuracy / or estimates often used (particularly those
recording
transactions)
Level of Often focussed on a Reports on the whole
coverage (whole specific part of an of the organisation
organisation or organisation or a specific
part) activity
Format of the Flexible. Management Follows set principles
information decides what information and accounting
is included and how it is standards
presented
Forward looking, Both historic and future Historic (reports past
historic or both? looking (as a planning performance)
mechanism)
Frequency of Produced as required by Produced annually
preparation management
(monthly/weekly/daily/on
demand)
Users of the Usually for internal use For outside parties
information

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Exercise Solution 1.3

(a) Management accounting
Management accounting can be defined as providing
information for use by management in planning, decision
making and control.
The management accounting function has a number of purposes
including:

 Providing information to help managers make better

decisions. This includes assisting with problem solving i.e.
giving managers an idea of the consequences of possible
actions.

 Providing useful information for planning, decision making

and control (including performance measurement). This
means directing the attention of management to key issues
in order that they can take action to control these areas.

 Providing costing information. Establishing the cost of

activities and products remains a key part of management
accounting.
(b) Management accounting information and financial accounting
information
The main similarities between management and financial
accounting information:

 Both measure the activities taking place within the

organisation using money.

 They usually use the same accounting and finance systems

as sources of data.
The main differences:
Management accounting information:

 The main purpose of management accounting information

is to help managers make sound decisions.

 The format and level of detail is decided by management,

rather than by regulation.

 The users are usually internal to the business.

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 1: The role and scope of management accounting

 The information provided is intended to influence decisions

that will impact the future.

 Information produced can be strategic, tactical and

operational.

 Information may be routine, or produced to satisfy a

specific request (‘ad hoc’).

 Complete accuracy is often unnecessary (although

information should be ‘error-free’).

 Produced as required by management.

 Often focussed on a specific part of an organisation, or a

specific activity.
Financial accounting information:

 Financial accounting records are a historic record

maintained and published for accounting purposes.

 The financial accounts are prepared for a mainly external

audience.

 Regulated externally (through legislation, International

Accounting Standards, external audit.)

 Published financial statements are legally required, and, in

general, produced annually.

 The information is based on the recording of transactions

(with relevant accounting adjustment). The accounting of
transactions must be accurate and precise.
(c) KPIs
Key Performance Indicators (KPIs) are measures implemented
to indicate how effectively an organisation is performing an
activity that is important to the organisation’s success.
In a doctor’s surgery, both financial and non-financial KPIs are
required to provide a rounded picture of how well the surgery is
performing.
Financial KPIs would relate to cost of running the surgery, and
how this compares to budgeted costs.

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Relevant non-financial KPIs should cover factors such as quality

of service (including patient satisfaction) and the percentage of
appointments that commence on-time.
An example of a financial KPI in a doctor’s surgery would be for
the cost per patient appointment to be below £x.
A non-financial indicator would be for 95% of appointments to
start within the allotted appointment time.
(d) VFM
VFM is sometimes said to include ‘three Es’: Economy, Efficiency
and Effectiveness in the use of an organisation’s resources.
Value for money includes both financial and non-financial
factors, for example the quality of service provided. The aim of
VFM is not to reduce expenditure, it is to ensure that maximum
value is obtained from the use of public resources.
External auditors often focus on ensuring that public bodies are
not wasting resources and are achieving value for money.

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Exercise Solution 1.4

(a) What level of decision is involved?
From the point of view of the print unit manager this is a
strategic decision. It has significant implications for the long
term direction and viability of the print unit.
From the point of the view of the local authority as a whole, this
is a tactical decision. The proposed change to the print unit’s
way of operating is unlikely, in itself, to have a major impact on
the authority. There may be an authority-wide strategy to
improve the financial position by generating extra income where
possible. The decision regarding the print unit would then be a
tactical one relating to the implementation of that strategy.
(b) What information would you need to make the decision?
The information needed would include:

 Current spare capacity in the print unit

 Scope for expanding capacity

 Cost of winning external business (advertising etc)

 Capital and revenue costs of carrying out additional work

 Potential sources of external business and expected level of

demand

 Location of local competitors

 Competitors’ prices

 Legal or organisational constraints on local authority

trading
(c) Where would you find this information?
Some information, for example production capacity and costs
should either be available, or be relatively easy to establish,
using existing management accounting data. For external costs
such as advertising quotes should be sought from potential
suppliers.
Information relating to the likely demand for print unit services
is more difficult to obtain. Market research may be required to
establish the level of competition, the prices charged and the

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potential number of customers the print unit could expect to

gain.
In practice,the forecast demand will always be an estimate,
subject to judgement. To an extent, these forecasts depend
upon other decisions, for example how much to spend on
advertising and what prices to charge.
Information about the location of competitors and their prices
can usually be obtained relatively easily. For example,
competitors are likely to have a website, which may include
prices.
The local authority’s legal officer would be able to clarify any
legal or policy constraints on external trading.

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Exercise Solution 1.5

Examples of data

 A list of telephone numbers

 A list of students
 A list of transactions
 The current temperature (weather)
Examples of information

 A contacts directory
 An analysis of student attendance
 Financial statements
 A weather forecast

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Exercise Solution 1.6

The key point to be aware of when completing this exercise is that
the qualities may conflict with another.
(a) Accuracy: The manager requires the results of the user survey
to be correct (free from error). However, results that are error-
free could still be misleading as they only reflect the views of
those customers customer who completed the survey. The
views of these customers may not match the views of the
centre’s users overall (although the results are the best
indication the centre has). Also, in the interests of conciseness
and clarity, the results are likely to be summarised rather than
presented in full.
Completeness: The larger the number of survey respondents,
and the more detail collected from each, the more complete the
information will be. However, when communicating the findings
of the survey, if excessive detail is provided the overall clarity of
the information will reduce. The manager will use the
information to benchmark performance. Therefore, the
information should be summarised and presented in a way that
allows for useful comparison. For example, the manager may
require the percentage of customers who rate the centre as
Excellent, Satisfactory or Poor.
Frequency: To measure performance over time requires
regular information. However, it would be unrealistic to expect
users to complete a survey more than two or three times a
year. One option could be to contact different users at different
times, perhaps using email with a link to an online survey.
The more often the feedback is provided, the more concise it
will need to be to enable the manager to easily identify and
track trends.
(b) How should the findings be communicated
The information should be summarised, with the facility for the
manager to see specific comments from any user as required,
for example those who rated the centre as poor (or excellent).
To enable trends to be identified and to provide context,
comparison with prior periods is required. The comparison over
time could be presented in the form of line graphs or bar charts,
tracking the percentage of users in each category over time.

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If the feedback was sought in response to a particular change at

the centre rather than as an ongoing measure of performance,
it may be appropriate to present the findings to staff and other
stakeholders with a formal presentation.

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Exercise Solution 1.7

The Southside council CYPS department is likely to have three main
tiers of management: strategic, tactical and operational. Each level
will be concerned with different types of decisions, and will
consequently require different types of information.
Types of decision
Managers at the strategic level will consider the services the
department provides, and how they are delivered. For example,
strategic managers would make decisions relating to how to ensure
the number of school places provided reflects changing population
numbers.
Tactical managers will be concerned with developing and monitoring
procedures to implement the strategic plan (passed down from
strategic management). For example, tactical decisions may relate
to school admissions policies and the selection of appropriate partner
organisations to deliver services to schools.
Operational managers make decisions concerned with the day to day
operation of the service. This is likely to involve dealing with queries
relating to specific applications to attend a school, agreeing term
dates and arranging for inspection by council auditors.
Information required
Strategic decision: the number of school places required over the
next 5 years.
Relevant information would include: birth rates, migration patterns,
future housing development plans, impact of economic factors on
demand, demographic make-up of children, government funding
plans
Tactical decision: the selection of an organisation to provide school
meals.
Relevant information would include: government guidelines on
nutrition, available budget, current catering provider, number of
pupils per school requiring meals, kitchen facilities at each school
Operational decision: whether a school place is available now in a
specific school.
Relevant information: The number of students the school can
accommodate and the current number of students enrolled.

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Strategic management accounting at CYPS

Strategic management accounting involves supporting and
participating in strategic planning for the department.
Ways in which a strategic management accountant could help the
CYPS include:

 Tailoring the planning and control systems to meet the strategic

needs of the department. The control of spending is likely to be
an important objective, systems must provide the information
required to achieve this.

 Integrating financial and non-financial information to provide a

complete picture of performance.

 Analysing the external environment in which the council

operates. This would include monitoring changes in government
spending plans which would affect service provision and
regulatory provisions that will need to be factored in to the way
the department does business.

 Developing an understanding of the competitive environment

and the department marketing needs. This may involve, for
example, comparing services with those provided by other
schools.

 Designing and providing systems that track key performance

indicators

 Suggesting ways to improve performance.

 Identifying value activities and ensuring the delivery of value by

the organisation.

 Interpreting financial and non-financial data to inform key

strategic decisions and to shape future strategies.

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 Management Accounting

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London E1 8AN

+ 44 (0)20 75435600

Email: CustomerServices@cipfa.org

Website: www.cipfa.org.uk

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