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Lecture 02 Topic 1B Management Accounting Systems (Complete)

Management accounting systems use responsibility accounting to provide information flows both top-down and bottom-up. Organizations must establish clear reporting structures and define responsibilities. Accounting information systems classify transactions by accounts and responsibility centers, then code them for reporting. Coding structures like block codes and group codes help classify, summarize, and retrieve accounting data in a structured way. Responsibility centers and charts of accounts are key components that enable responsibility accounting.

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138 views5 pages

Lecture 02 Topic 1B Management Accounting Systems (Complete)

Management accounting systems use responsibility accounting to provide information flows both top-down and bottom-up. Organizations must establish clear reporting structures and define responsibilities. Accounting information systems classify transactions by accounts and responsibility centers, then code them for reporting. Coding structures like block codes and group codes help classify, summarize, and retrieve accounting data in a structured way. Responsibility centers and charts of accounts are key components that enable responsibility accounting.

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kitasa swaalihiin
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Lecture 02 Topic 1B

Management Accounting Systems


In managerial accounting information system information flows in two directions.

 Top-down flow. Originates from events that occur at the top management level
 Bottom-up flow. When events occur at the lower levels

Organizations Structure
 Provides the environment through which information flows.
 For management AIS to function properly this environment must have the following
characteristics;
(1) The organization must establish a structure that distinguishes each of its segments.
(2) The organization must issue a clear statement of authority and responsibility for
the manager of each segment.
(3) Each employee should report to only one higher-level manager.
(4) Top management should clearly define all superior-subordinate relationships
among employees.

Policy Statements
 Identify managements’ expectations concerning the behaviour of the organization
employees.
 Provides guidelines for employees on how to carry out specific duties contained in job
description.
 Common policy statements includes Financial Regulations and Accounting Manuals.
 Also code of conduct/ethical guidelines.

Class Activity
Find copies of accounting manuals and financial regulations of any company and identify
key differences.

Data Accumulation
 Responsibility accounting systems provides top-down and bottom-up information flows.
 This system produces a performance report for each responsibility centre summarizing
budgeted costs and revenues to provide top-down flow, and actual costs and revenues for
bottom-up flow (see illustration 2.9, p. 33).
 The system accumulates much of data by the processes of classification and coding.
Classification
 This occurs when the system groups transactions by responsibility centres and by account
from the chart of accounts.
Example: During a particular months, the system may classify TShs. 910,000 labour
expenditure as a production department A’s wages and salaries expense. In manual IS,
accountant perform this classification, while on a computer-based, either a person or
computer may do it.

Coding
 This occurs when the system assigns to a transaction a combination of characters that
distinguish the classifications to which it belongs.
 This is done through/using a Chart of Accounts
 The overall objective is providing information for decision making

Advantages of Coding in AIS


1. Concisely represent large amounts of complex information that would otherwise be
unmanageable
2. Provide a means of accountability over the completeness of the transactions processed.
3. Identify unique transactions and accounts within a file
4. Support the audit function by providing and effective audit trail.
Responsibility accounting system classifies a transaction in two ways.
(1) According to the proper account in the Chart of Accounts
(2) According to the Responsibility Centre
The system then codes the transactions using the proper account code for that account and the
proper responsibility code for that responsibility centre.

i. Responsibility Codes
Codes that distinguish each responsibility centre from others in the organization chart (See
Illustration 2-12, p. 36).

Using this method, the responsibility centre with the most zeros in its codes is at the highest level
in organization structure.
ii. Accounting Codes
 In financial AIS, each account in the chart of accounts has a unique account code.
 Helps to uniquely identify each account in the chart of accounts for each responsibility
centre.
Illustration: Account Codes

Other 710 Wages 720 Supplies Total Cost by


Code Description
Accounts and Salaries Expense Responsibility

1000 President TShs. X TShs. X TShs. X TShs. XX

2000 Vice-President Counsel X X X XX

Vice-President
3000 X X X XX
Manufacturing

3100 Superintendent Factory 1 X X X XX

3200 Superintended Factory 2 X X X XX

3300 Superintendent Factory 3 X X X XX

Total Cost by Account XX XX XX XXX

From the above illustration, wages paid to people working in the office of President will be charged
to 900-810. Likewise supplies used in the office of President will be changed to 1000-720 etc.

iii. Budget Codes


These work like Account codes however, when designing the system the designer add one digit to
the account code to distinguish between budgeted and actual amounts. E.g. assume the digit 0
indicates actual amounts and the digit 9 signifies budget amounts, then the actual wages and
salaries expense for the office of President is recorded in account 1000-0-710 while the budgeted
amount will be recorded in 1000-9-710.

Types of Coding Structure


(1) Sequential Codes
 Assigns unique identifiers to data items in sequence.
 Accountants commonly assign them to the documents processed by an AIS. These
include cheques, sales orders, purchase orders, invoices etc.
 Easy-to-use sequential codes enable an accountant to keep a record of documents
on hand and to identify their unauthorized use.
 Example cheques issued by cash payment system have unique identifying numbers
in an increasing sequence e.g. Cheque No. 10034, cheque No. 10035, etc.
 However sequential codes are less flexible.
(2) Block Codes
 System designer here reserve certain adjacent numbers in the sequence for certain
classification.

Examples

Account Category Block

Current Assets 100-199

Property, Plant and Equipment 200-299

Current Liabilities 300-399

Long-term Debt 400-499

Stakeholders Equity 500-599

Revenue 600-699

Expenses 700-799

Block codes – allow future expansion of the chart of accounts.

(3) Group Codes


 An extension of a block codes in which the position of each character in the group
has significance.
 The position represents a different characteristics of the data classification.
 Usually are used as account codes and has the form of xxxx-x-xxx
1000-0-710
Responsibility Actual/Budgeted FS Account
 Often group codes are structured so that the interpretation of each succeeding digit
depends on the digit immediately to its left.
Advantages of Group Codes: it is easy to add or delete items/groups without affecting
others. Also one can reassign meaning to a group of codes without affecting other items.

(4) Mnemonic Codes


 Identify data items with combination of letters and numbers.
 The design team chooses the combination so that clerks can more easily remember
the associated data items.
 Help to prevent errors in data entry. E.g. shortened version of customers’ names.
 However, if there are many similar data items, the mnemonics many also be similar
which may confuse clerks and cause errors. E.g. customers many have similar
names etc.
Additional Notes
(1) Coding structures help to classify, summarize and retrieve data.
(2) Coding structures should be adaptable to changing needs within a company e.g. A three
digit employee code becomes inadequate once a company hires more than 999
employees.
(3) Furthermore, producing comparable information from data codes in different ways
require different systems; maintaining redundant system is expensive and inefficient.
Accountants, therefore participating in system design must choose an appropriate coding structure.

Review Questions (Boockholdt, J. L. Chapter 2 Questions 2-24, 2-25)

Responsibility Centre an organizational unit where a manager controls financial measures


recorded and reported by a managerial accounting information system. It may be either a cost
centre (e.g. production department), a profit centre (e.g. sales office, regions, divisions), or an
investment centre (e.g. subsidiary).
Chart of Accounts is a created list of the accounts used by a business entity to define each class
of items for which money or the equivalent is spent or received.

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