TOPIC 1: ACCOUNTING FOR MANAGEMENT

1) Planning
2) Organization
3) Staffing
4) Budgeting

Management is a sum total of all the activities and are taken by the firm to achieve goals and
objectives that are set out

Management process
It is a series of activities through which the organization goals are achieved includes:

1) Formation for companies policies (planning)

2) Designing organization structure (organizing)
3) Providing leadership (directing)
4) Acquiring labory sources and motivating employees (staffing)
5) Financial planning (budgeting)
6) Making decisions regarding the best coarse action so that the activities can flow smoothly
(coordinating)
7) Performance evaluation (control)

Types of accounting
There are 3 main types of accounting:

1) Financial accounting
2) Management accounting
3) Cost accounting

Financial accounting
It is a branch of accounting which is constant with recording, summarizing and communicating
business transaction through preparation of financial statements according to expected accounting
standards, laws and concept.

Management accounting
It is a system used to provide information required for planning executing and controlling operation
regarding firm assets and communicating with outside parties.

The management accountants participate in making strategic and operational decisions of the firms
as well as in coordinating other operations in the organization.

Cost accounting
It is part of management accounting which provides a formal system to which costs of products and
services are calculated in control.
Differences between management account and financial
accounting

Financial Management

Intended audience - prepared for both They are prepared for internal users only
internal and external that is employees and management.

They show the financial performance and

They are intended to help planning, control
position of the organization over a given
and decision making in a business.
period of time.

Keeping a proper set of accounts and at There is no legal requirement to produce

times publishing them is legally especially accounts. They are prepared only if they
for limited companies. serve a specific purpose.

They focus on historical data and reports on They focus on the present and produce
information from the previous periods. budgets and forecasts for the future.

They mainly contain monentary They contain both monentary and non-
information. monentary information.

Financial statements are prepared for

They are produced at any time when
specific periods of time eg: Quartely, half-
required for decision making and control
year or yearly

Objectives of an organization
An objective is a goal or aim of an organization for an individual

Strategy is a breakdown to achieve the goals of an organization, it is possible course of actual

carried out to enable a firm or an individual to achieve the objective

Objectives of a profit making organization

1) Maximizing the value of shareholders
2) Maximizing profit
3) To gain or increase market share
4) Maximize cost and maximize profit

Anthony’s view of management

He was the writer on management, he suggested the planning, decision making and control into 3
types of management

Strategic planning
It is the process of setting objectives of an organization, possible changes in the objective, resources
to achieve these objectives, as well as policies to guide purchase, use and disposal of these
resources. Example: the senior management may decide that the company increase
their sales by 5% per annum for at least 5 years

Tactical /management planning

It deals with precision of resources, there use, effectiveness and efficiency to achieve an objective
example: The sales director and senior sales manager will make plans to increase sales by 5% per
annum through sale advertising and promotion

Absorption of resources
We use the 4m’s of management:

a) Men
b) Money
c) Machine
d) Material

Efficiency
This is production of optimum output from the input

Effectiveness
This is the use of processes to achieve the set goals example: When a sales manager makes decisions
to produce units 5000 units per month so as to be a 5% per annum

Operational Planning
It ensures that a specific task carried out effectively and efficiently example: The manager of sales
territory specifies the weekly sales target for each sales representative.

Decision making
Management involves making decisions. Decision making involves choosing the best course of
alternatives

The following steps are involved in decision making process:

1) Identify the goals, objectives or a problem

2) Identify the alternatives solutions or opportunities which might be towards achieving the
goal
3) Collect and analyze relevant data about each alternative
4) Make choice of expected outcome and check that the outcome is in line with overall goal
5) Implement the decision
6) Obtain data about actual results
 7) Compare the actual results with the expected outcome
8) Evaluate achievements

NB: From step 1 to step 4 they are used in planning while from step 5 to step 8 they are used in
controlling

There are two stages in the control process as shown down below (step 6 and 7)

Performance object organization (step 6 and 7 explanation)

The set of performance is compared to the actual performance and any deviation is identified and
corrected using corrective measures

Management control system

It is a system which measures and corrects the performance of the activities of subordinates so as to
make sure the objectives of an organization are met as well as the plans used to achieve the goals.

Elements of management control systems

1) Planning- This is deciding what to do and identify the desired resources

2) Recording -This is putting in writing the plans and standards of efficiency
- Carrying out the plans and measuring the results achieved
- Comparing actual results against the set of objectives
- Evaluating the comparison and deciding whether further actions are necessary or
not
- Where correlative actions is necessary it should be implemented

TOPIC 2: SOURCES OF DATA

Data- refers to the raw facts and figures. It is unprocessed information which cannot be used to
make a decision

Information- It refers to processed data which is meaningful and can be used to make decisions

Types of data

Data may be classified into 3 main types:

1) Primary and secondary data

Primary data- this is data collected for a specific purpose by the researcher themselves

Secondary data- this is data that has already been collected by someone else eg: print media

2) Discrete and continuous data

Discrete data- this is data which can only take finite and countable numbers eg: The student in FA2
class

Continuous data- this is data which takes any set of values. It is measured rather than counted eg:
The height of FA2 students can range from 5.1- 5.9

3) Sample and population data

Population data- this is data collected from a population eg: Cencus

Sample data- it arrives from investigating a certain range of values

NB: Data can also be classified into quantitative or qualitative data

Quantitative data is in numeric in nature while quantitative data is non- numeric eg: my school fees
is $5000 (quantitative). My school fees is expensive (qualitative)

Sources of data

Data can either be from:

1) An Internal source: This refers to sources within the organization eg: Financial records
organization and documents
2) An external source: This is data obtained from sources outside the organization eg: The
government, newspapers, magazines

Sampling

It refers to a process of selecting sample information obtained from a sample is known as sampling
data

Methods of sampling

There are two major methods of sampling

1) Probability sampling methods

2) Non probability sampling methods

1) Probability sampling methods

In this case every item that population has an equal chance of being selected in samples there are 5
main techniques:

a) Random sampling

In this case every item has an equal chance of being selected from the sample frame.

Sample frame- it is a number list of all the items in a population

b) Stratified sampling

It involves dividing the population into categories known as stratas random samples and they are
selected from each stratum

Advantages of Stratified samples

1) It is representative since samples are selected from different categories

2) Inference can be made about each stratum since each one of them can be randomly
selected
3) Accuracy is increased due to less variation

Disadvantage of stratified sample

1) It requires prior knowledge of the items in the population

 c) Systematic sampling

It works by selecting every nth item after random start

Advantages

1) Easy to use
2) It is cheap

Disadvantages

1) There is a possibility of biased since the sample is chosen through a regular pattern
2) It is not completely random since some items have no chance of being selected

d) Multistage sampling

It involves dividing population into subpopulations and the selecting a sample from the sub
population at random example: if you want to collect data of the views of Kenya regarding security
matters you will consider the whole country then the affected areas IE Mandera, Mombasa and
Nairobi then you choose one and probable probably take a sample of 200 people from each city

Advantages

1) It is cheap
2) It requires less or minimum supervision

Disadvantages

1) Possibility of bias
2) Possibility of the sample being unprepared because the population is heterogeneous

e) Cluster sampling

It was an identifiable part of population with the similar features

Advantages

1) It is cheap
2) It is an alternative level where sample frame is sufficient

Disadvantages

1) It is biased

Advantages of random sample

1) It is free from biased

2) Valid inference can be made

Disadvantages of random sample

1) Possibility of inadequate sample

 2) It is cumbersome if the population is large
3) It is difficult to obtain data from the second items that cover a wide area
4) Possibility of an unpresentative sample
5) Selected items subject to high variation

Non-Probability methods

In this method the possibility of each item being selected as part of the sample is unknown

Under this method the main type of sampling is known as quota sampling- this is the method where
a limited sample frame has been given and therefore the members of the population do not have
any equal chance of being selected.

Advantages

1) It is cheap and easy to understand

2) No sample frame is required
3) It is appropriate for TV audience
4) It provides accurate information

Disadvantages

1) It is biased
2) There is possibility of sampling error

Characteristics of a good information

1) Relevance: Only the necessary information should be included

2) Clarity: Information should be clear and not ambiguous
3) Accuracy: Information should be correct and true
4) Complete: All the details that are required should be included
5) Timing: Information should be produced as when it is required
6) Cost: Information should be obtained at a lower cost
7) Reliable: Information will have a specific level of confidence
8) Value: The value of information should not exit the cost of collecting such information
9) Communication: In any organization there should be free flow of information either
vertically or horizontally
10) Volume: Information should not be too lengthy neither should it be too short it will be brief
and concise
11) Channel of communication: Information should be communicated using the proper
meanings

Topic 3: Cost classification and behavior

Cost can be broadly classified into 2:

1) Production costs :it is cost associatied with the goods produced or purchased for resale
2) Non production cost: It refers to the current year cost example selling and distribution cost

Elements of production cost

There are two major costs that are incurred in the production process
 1) Direct cost this is a cost which is directly attributable to the final product example: In
producing wheat flour the cost of wheat is a direct cost
They are categorized into three
1) Direct material- This is the cost of the substances used in making a product or
offering a service
2) Direct Labour- these are specific costs of the workforce used to make a product
or a service
3) Direct Overhead/ Expenses- It refers to expenses which are incurred in
manufacturing a product or producing a service

Prime Cost- This refers to the total of direct material and direct labor and direct overheads

Conversion cost this refers to the sum total of direct labor and direct overhead

2) Indirect cost- These are cost incurred in the course of production process
- They occur in different forms which are:
a) Indirect material
b) Indirect labor example: a cleaners salary or supervisor salary
c) Indirect overhead example: fuel cost

There are other cost incurred including

a) Functional cost

Costa classified as functional based on the activities which the company’s is performing

1) Manufacturing cost- These are costs that begin with a sequence of operational from the
supplying of raw materials to the factory, conversion through labor, up to the finished
product example: direct material direct labor and direct overheads
2) Administration cost – These are cost or expenses incurred in policy formulation directing ,
controlling and support operations of the business they are not production related example:
Office rent
3) Selling and distribution cost – Selling costs are regard when seeking to create demand and
stimulate demand for the product while distribution cost is the cost of dispatching goods to
the customer
4) Research and development cost- Research cost is the cost of searching new ideas or
improving products or services while development costs these are specifically incurred to
improve and implement the production process of a new material or the method of
production
5) Finance cost – This is the cost incurred from a business loan (Interest expense)

b) A relevant cost

This is the cost that influences the future decisions made by the management.

For a cost to be considered as a relevant cost it must satisfy one with the following conditions:

1) It should be a future cost ie cost incurred in the past example research and development
costs which cannot be covered if not a relevant cost such costs that are incurred in the past
are known as sunk cost and are irrelevant
 2) It should lead to a cash flow
3) It should be an incremental cost
4) It should be an opportunity cost which is the cost of best alternative that is forgone

Cost classification according to behavior

This costs that are related to the number of units produced, they include

1) Fixed cost

This is a cost which remains constant irrespective of the number of units produced example: Rent,
Depreciation, Insurance premium

It can be illustrated as follows:

2000
Costs($)

100 500 1000

Units produced

2) Variable cost

It changes with the number of units produced as the units increase variable cost example: Direct
material and direct labor cost

It can be illustrated as follows:

3) Semi-variable cost
These are partly variable and partly fixed costs.

They remain constant up to a certain level beyond which they become a lumpsum example utility
bills such as electricity

It can be illustrated as follows

Cost code

It is a classification system that uses numbers in letters as codes to represent a certain cost, it can be
manual or computerized

In cost coding we classify the cost first and then allocate a code example: Selling and distribution for
2015 can be coded chronologically example SD1015 to represent the selling and distribution costs
for January 2015

Some of the following factors are considered in cost coding

1) Nature of cost
2) Cost center
3) Department

Definitions of terms used in coding

1) Cost center- It is a place of collecting costs before further classification it can either be a
department, project or overhead
2) Profit center- it is a place or location that accounts for both revenue and costs whose
difference give rise to profit (revenue-cost)
3) Revenue center- It is a place for accountable for revenues
4) Investment center- It is a place or location where accounts for capital expenditure and
return on investment is measured of how well capital is utilized
 5) Responsibility center- It is a department or a section of the organization that is charged with
certain tasks and is controlled by specific manager examples sales department controlled by
sales manager
6) Cost units- It is a unit of product or service to which cost can be related example direct
material and direct labor
7) Cost object- It is an activity which identifies the different cost of items

TOPIC 3: Cost estimation method

This is an attempt to predict the future cost using historical data. It is done by formulating and
budgeting purposes

There are two methods used:

1) High Low method

2) Linear Equation method

1) High low method

It is a statistical technique that is used to predict cost it assumes that total cost is subdivided into
fixed and variable cost

It also assumes two levels of activity ie highest and lowest

The following procedure is followed when using a high low method:

a) Determine the highest and lowest level of activity

b) Determined total cost at the highest level
c) Department of total cost at the lowest level
d) Calculate the variable cost per unit

Total cost at the Total cost at

= -
Variable cost highest level the lowest level
per unit
Units at the Units at the
-
highest level lowest level

e) Calculate the total fixed cost

Total Total
Total
= fixed + variable
cost
costs costs

Example 1:

A company incures the following costs at various activity levels

Total Cost ($) Activity level (Units)

250500 5000
 312500 7500
400000 10000

Using high low method calculate:

a) Variable cost per unit

b) Fixed Cost
c) Total cost if 11500 units were produced

SOLUTION

a) Variable cost per unit

Total cost at the Total cost at the

= -
Variable cost highest level lowest level
per unit
Units at the Units at the
-
highest level lowest level

400000-250500
=
10000-5000

149500
=
5000

= $ 29.9 per unit

b) Fixed Cost

= Fixed = Total - Variable

Cost Cost costs U can either use at the highest level or
= 400000- (29.9*10000) lowest level
= $101000

Lowest level

= Fixed = Total - Variable

Cost Cost costs
= 250500- (29.9*5000)
= $101000

c) Total cost for 11500 units

Total Total
Total
= fixed + variable
cost
costs costs
 = 101000 + (29.9*11500)
= $444850

Example 2:

A company has recorded the following data:

Total Cost ($) Activity level (Units)

13500 700
18300 1100
15000 950

a) Calculate the variable cost per unit

b) Calculate the fixed cost
c) Calculate the total cost of producing 1200 units

SOLUTION

a) Variable cost per unit

Total cost at the Total cost at the

= -
Variable cost highest level lowest level
per unit
Units at the Units at the
-
highest level lowest level

18300 - 13500
=
1100 - 700

4800
=
400

= $ 12 per unit

b) Fixed cost
 = 13500 - (12*700)
= $5100
= Fixed = Total - Variable
Cost Cost costs U can either use at the highest level or
= 18300 - (12*1100) lowest level
= $5100

Lowest level

c) Total cost of producing 1200 units

Total Total
Total
= fixed + variable
cost
costs costs

= 5100 + (12*1200)
= $19500

High low with step- fixed cost

Stepped cost tend to be fixed at first up to a certain point beyond which they are available

TOPIC 5: Presenting information

Presenting, disseminating and interpreting information

The management accountant is involved in the presentation, dissemination and interpretation of

information. The information can be presented, disseminated and interpreted

The management accountant is called the information manager because management accounting is
concerned with the collection of data it, analyzes and processing into formation and the
interpretation and communication of the information so as to assist management with planning
control and decision making

Written reports

There are a variety of formats and styles of reports

1) You may think of reports as extensive, complex documents, but a single page may be
sufficient in many contexts
2) Routine reports are produced at a regular intervals an example of a routine report is
a budgetary control report, the preparation of which we will be looking at her later
in the texts. Special reports may be commissioned for “one-off” planning and
decision making purposes, such as a report on a purpose project or a particular issue
3) Reports may be for professional purposes or they may be for a wider audience who
will not allow necessarily understand or require the same information

Reports are going to be useful. The information contained in a business report might be used in
several ways:

1) To assist management : They rarely have time to carry out their own detailed investigations
into their matters on which they make decisions their time moreover is extremely expensive
2) As a permanent record and source of reference: details need to be confirmed and recalled in
the future
3) To convert information: of suggestions to other interested parties example in a report for
committee

Reports and their purpose

It reports are usually intended to initiate a decision or action. The decisions or actions might be the
following types:

1) Control action : If the report describes what has happened in the past, a control action may
be taken in an attempt to prevent a repeat of this behavior
2) Planning decisions: Reports that are commissioned to advice on a certain cause of action will
include a recommendation about what decision should be taken

The report and report users

1) A special “one-off” report will be commissioned by a manager, who will make a decision on
the basis of what the report tells them.
For example: The board of directors of company might call for a report of the
financial viability of a new product or investment and they’ll accept to decide whether or not
to undertake the product development or investment on the basis of the report’s finding
2) Routine reports such as performance report, by be required because they are a part of
established procedures
3) Some reports arise out of a particular event in which regulations prescribe the writing of a
report .For example: A leaving report must be written following an employee’s resignation
4) An individual responsibilities often include the requirement to write reports. The Secretary
at a meeting might have to report to members the procedure and decision taken.

The report writers should communicate information in an unbiased way

Information should be communicated impartially, so that the report user can make their own
judgments. This has the following implications:

1) Any assumptions, evaluations and recommendations by the report writers should be clearly
“signaled” as such
2) Points should not be over-weighted or omitted as irrelevant without honestly evaluating
how objective the selection is
3) Facts and finding should be balanced against each other
4) A firm conclusion should be reached if possible. It should be clear how and why it was
reached

Timeliness

As with all information a report may be unused at all if it is not produced on time

The time scale within the report user is working must be known and the time available to produce
the report planned accordingly

The format of reports

The formal request is made by her superior for a report to be prepared such as in a formerly worded
memorandum or letter.

It is likely that the format and style of the report is expected to be formal as well

The purpose of reports and their subject matter vary widely, but these are certain generally
accepted principles of report writing