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 volumeTre 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 actionPlanning, 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 management2: 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 unitspor 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 costFixed 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 classiestionCoe) a Functional costs Product costs Period costs Discretionary costs Avoidable costs Unavoidable costs Controllable cost Uncontrollable costfry 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 classiestionCost 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! accountingCo 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 outputFixed 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 outNon-linear or curvilinear variable cost ‘Volime of outputle 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 sSCe 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 Correlationcr) 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 incorrelatedcng 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 valueExpected values ‘An expected value is a weighted average value based on probabilities. This can halp in decision making