CHAPTER 1: MANAGEMENT INFORMATION

This is information that is mainly used by managers.

The purpose of management information is to help managers to manage resources efficiently and
effectively, by planning and controlling operations and by allowing informed decision-making.
N/B:
A management information system is the hardware and software used to drive a database system which provides useful
information for management.

The Purpose of Management Information:

Management information is used by managers to:
1. Plan the future of the business. Planning involves establishing an objective or identifying a problem and then
choosing a strategy to achieve the objective or alleviate the problem. For example, future cash flows and whether
borrowing will need to be arranged or whether more employees need to be recruited.
2. Control the progress of the business. Control is the action of monitoring something in order to keep it on course. For
example, whether budgets set in the planning stage will be met.
3. Decision making. Decision-making means choosing between various alternatives. Decision-making and planning
are linked: you decide to plan in the first place and the plan you make is a collection of decisions. For example, what
to produce or which branch to close.

Management Accounting and Financial Accounting/Reporting:

Management information provides a common source from which is drawn information for two groups of people.
(a) Financial accounts are prepared for individuals external to an organisation.
- Shareholders - Suppliers
- Customers - Tax authorities
(b) Management accounts are prepared for internal managers of an organisation.
The information used to prepare financial accounts and management accounts is the same.
Management information contains Management Accounting information and Financial Accounting information.
Differences between Management Accounting and Financial Accounting/Reporting:

Cost Accounts
Cost accounting and management accounting are terms which are often used interchangeably.
Cost accounting aims to capture an organisation’s costs of operations, departments or products, and
then classify and analyse this information to produce cost reports.
Cost accounting produces information that is used for both financial accounting and management accounting.

Cost accounting is part of management accounting. Cost accounting provides a bank of data for the
management accountant to use. Cost accounts aim to establish the following:
a) The cost of goods produced or services provided.
b) The cost of a department or work section.
c) What revenues have been.
d) The profitability of a product, a service, a department, or the organisation in total.
e) Selling prices with some regard for the costs of sale.
f) The value of inventories of goods (raw materials, work in progress, finished goods) that are still held in store at the
end of a period, thereby aiding the preparation of a statement of financial position of the company's assets and
liabilities.
g) Future costs of goods and services (costing is an integral part of budgeting (planning) for the future).

Cost in Details in detail

 A cost unit is a unit of product or service which has costs attached to it. The cost unit is the basic control unit for
costing purposes.
 Direct costs can be traced directly to cost units.
 Overheads (indirect costs) cannot be identified directly with any one product because they are incurred for the
benefit of all products rather than for any one specific product.
 Cost centres are the essential building blocks of a costing system. They act as a collecting place for overheads before
they are analysed further.
Example of a cost card:

Summary:
Prime cost = DM + DL + DE
Manufacturing cost (or Production cost or Factory cost) = Prime cost + Production overheads
Total cost = Manufacturing cost + Non-production overheads

QUESTION
Suggest suitable cost units which could be used to aid control within the following organisations.
(a) A hotel with 50 double rooms and 10 single rooms
(b) A hospital

ANSWER
a) Guest/night
b) Bed occupied/night
Data and Information:
It is the management accountant who will be expected to provide the information, and in order to do so he/she needs to
collect data.
Data consists of the facts that are gathered and stored. Data has no clear meaning until it is processed – analysed and
sorted – into information.

Advantages of a computerized accounting system:

A computerized accounting system will normally produce information:
1. More cheaply (because fewer people need to be employed)
2. More accurate (fewer arithmetic errors – though incorrect programs will repeatedly report incorrect information)
3. Faster (because the processing is automated and computers work very quickly)
4. More specific (because computers can scan through vast amounts of data and report on the note-worthy events).
5. More complex; such as analysis of sales trends
6. Wider access; because a terminal on everyone’s desk potential gives all access to information needed.

Question 1
What are the three purposes, described above, for which managers use management information?
A Estimating, investigating and planning
B Planning, controlling and decision-making
C Controlling, buying and selling
D Accounting, manufacturing and auditing

Question 2
Which of the following is information rather than simply data?
1. A random list of the wages of all employees
2. A list of all stock items that haven’t sold at all in the last three months
3. A report showing where expenses are 10% or more over budget
4. A list of all invoices that have to be paid by the company
A 1 and 4 only
B 2, 3 and 4 only
C 2 and 3 only
D All items are information rather than just data

The Features (or qualities or characteristics) of Useful Management Information:

The features of good management information are often described and remembered using the word ‘ACCURATE’.
Sources and Categories of Information:
The main sources of information are:
1. Internal information
2. External information

Example 11Example 1
List examples of internal and external information
Solution
Examples of internal information: sales, purchases, wages and other expenses, inventory held, cost of producing an
item, profitability of an item, receivables, payables, cash in the bank.
Examples of external information: competitors’ prices, interest rates, exchange rates, details about competing products,
technological developments, market size and growth rate, customers’ assessment of us, forthcoming price changes.

Categories of information:
 Financial/non-financial
 Quantitative/non-quantitative
 Historical/future estimates
 Routine/ad hoc (as and when needed)
 Numerical/graphical

Example 2
List examples of information from each of the above category pairs.
Solution
 Financial/non-financial: Value of sales/number of products sold to customers which needed maintenance.
 Quantitative/non-quantitative: Market share as a % /customers’ opinions of us
 Historical/future estimates: Costs for the first three months/costs for the next nine months
 Routine/ad-hoc: Monthly management accounts/special report on a customer who went into liquidation
 Numerical/graphical: A table showing sales per country/a pie chart showing sales in each European country.

Cost Centres, Profit Centres and Investment Centres:

A cost centre is also known as a responsibility centre. A responsibility centre is a department or
organisational function whose performance is the direct responsibility of a specific manager. Managers in a cost centre are
responsible for costs only.
Other responsibility centres found in an organisation are as follows:
1. A profit centre is accountable for costs and revenues. Profit centre managers should normally have control over how
revenue is raised and how costs are incurred. Often, several cost centres will comprise one profit centre.
2. A revenue centre is accountable for revenues only. Revenue centre managers should normally have control over
how revenues are raised.
3. An investment centre is a profit centre with additional responsibilities for capital investment and possibly for
financing, and whose performance is measured by its return on investment.

Question 3
In a garage, costs are associated with each car that comes in for repair.
Cars are therefore:
A Cost centres
B Cost units
C Profit centres
D Investment units
Question 4
If a manager is in charge of an investment centre, which of the following would he or she be responsible for:
1. Costs
2. Revenue
3. Investment
4. Profit
A 1 and 2 only
B 2 and 3 only
C 1, 2 and 4 only
D 1, 2, 3 and 4

The Limitations of Cost and Management Accounting Information:

1. Difficulty in making future estimates.
2. Often quantitative and financial only, but undoubtedly matters such as quality and customer service levels will be
important.
3. Can be difficult for a manager with no financial training to understand.
4. Often too inward-looking. (It’s meant for internal managers). For example, perhaps it does not give information about
competitors’ selling prices.

The role of a trainee accountant in a cost and management accounting system:

1. Recording transactions. For example, making posting to the ledgers.
2. Extracting information and presenting it for management use. For example, a comparison of budget and actual figures
for a period.
3. Investigating financial matters. For example, looking into an over-run in a cost.
4. Helping with budget preparation.
5. Helping and supervising more junior staff.

Suitable Formats for Communicating Management Information:

Communication tends to be of three possible types:
 Oral/spoken
 Written
 Graphical

Question 5
Your company has just investigated the possibility of opening abroad.
What would be the most suitable format in which to set out the findings?
A Report
B Letter
C Email
D Conversation

Computer Systems
Input methods
 Keyboard
 Bar-code scanning
 RFID tags ‘Radio frequency identification tags’ - Commonly used in inventory tracking where each unit has a
unique tag. Cheap, accurate but inflexible
 Mouse (or other pointing device, such as touch screens) - Best for making choices and selections.
 Voice input - Accuracy is Improving rapidly
 Smart cards/magnetic strip cards
 Optical mark readers - Used for specialist applications such as multiple choice exam answer sheets
 Cameras - For example, face recognition as used for security and some social networking sites.
Output methods
 Printers - Ink-jet or laser. A great range of speed is available. Can be colour or black and white. These are used to
produce hard output.
 VDU (visual display unit)/monitor/screen - Fast. Used for temporary output and there is no cost of consumables.
Can be used in conjunction with touch screen input.
 Voice output - speakers
 3D printers

File storage
 Hard discs - Most personal computers have an internal hard drive where most of their data is stored.
It is also possible to have external drives. These can be very useful for the transfer or backing-up of data.
 USB sticks/memory sticks - Interchangeable solid state memory. Excellent for data transfer and small backups.
 ‘The cloud’ - Instead of holding data locally, it can be uploaded to ‘the cloud’. The data is then stored on third
party file-servers at a remote location.
 CDs and DVDs - Becoming less common, though can still be used to transfer data and to back-up data. Often
they are write-once only, meaning that data once written cannot be changed. This is useful for archive purposes.
 Tapes - Rare now, but still used for back-up of data.

Processing
 Personal computers and laptops - Small computers.
 Mainframe - Mainframe computers are computers primarily used by large companies and governments for bulk
processing.
REINFORCEMENT QUESTIONS