ACCA-MA: MANAGEMENT ACCOUNTING

CHAPTER 1: FUNDAMENTALS OF MANAGEMENT ACCOUNTING

CHAPTER 1: FUNDAMENTALS OF
MANAGEMENT ACCOUNTING
LEARNING OUTCOME

At the end of the chapter, you should be able to:

TLO A1a : Describe the purpose and role of cost and management accounting within an
organisation.
TLO A1b : Compare and contra financial accounting with cost and management accounting.
TLO A1c : Outline the managerial processes of planning, decision making and control.
TLO A1d : Explain the differences between strategic, tactical and operational planning.
TLO A1e : Distinguish between data and information.
TLO A1f : Identify and explain the attributes of good information.
TLO A1g : Explain the limitations of management information providing guidance for managerial
decision-making.

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ACCA-MA: MANAGEMENT ACCOUNTING
CHAPTER 1: FUNDAMENTALS OF MANAGEMENT ACCOUNTING

Introduction

This chapter explains the purposes and roles of management accounting for an organisation in the
managerial process of planning, monitoring and control, and decision making; and showing the differences
between management accounting and financial accounting.

It also includes a brief introduction of data and information, and their differences.

1.1 Purpose and Role of Cost and Management Accounting Within an Organisation
Learning Outcome (ACCA Study Guide Area A)
A1a: Describe the purpose and role of cost and management accounting within an organisation.

Diagram 1.1: Purpose and role of cost and management accounting within an organisation

In the past, internal reporting for management functions was carried out manually and periodically as a by-
product of the accounting system. Thus, internal reporting gave delayed and very limited information to
management. Applications were then developed to assist the management in payroll, accounts payable
and accounts receivable, sales, inventories and other functions.

The term “Management Information System” or "MIS" refers to a planned system of gathering, processing,
storing and disseminating information necessary to carry out the management functions.

The Cost and Management Accountant may, for instance, use the MIS for the following purposes:
a. Data collection
b. Costing products and services
c. Pricing for new products and services
d. Short term and long-term decisions
e. Preparation of budget statements
f. Analysis of variances between the actual and budgeted results
g. Ad-hoc reporting

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ACCA-MA: MANAGEMENT ACCOUNTING
CHAPTER 1: FUNDAMENTALS OF MANAGEMENT ACCOUNTING

Topic 1.1 Purpose and Role of Cost and Management Accounting Within an Organisation
Learning Outcome (ACCA Study Guide Area A)
A1a: Describe the purpose and role of cost and management accounting within an organisation.

1. What is the purpose of management information?

A. Planning, control and decision-making only
B. Planning, control, decision-making and research and development
C. Planning only
D. Planning and control only

2. Which of the following are uses of the management accounting function?

(May have more than one answer)
A. Improving performance
B. Preparing financial statements
C. Assist in setting selling prices
D. Ascertain costs

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ACCA-MA: MANAGEMENT ACCOUNTING
CHAPTER 1: FUNDAMENTALS OF MANAGEMENT ACCOUNTING

1.2 Comparison Between Financial Accounting and Cost and Management Accounting
Learning Outcome (ACCA Study Guide Area A)
A1b: Compare and contrast financial accounting with cost and management accounting.

Financial Accounting (FA) and Management Accounting (MA)

Financial Accounting should not be confused with Management Accounting. Even though both Financial
Accounting and Management Accounting are prepared using the same data, the data is analysed
differently. Differences between Financial Accounting and Management Accounting can be summarised as
follows:

Diagram 1.2: Differences in “Financial Accounting” and “Cost and Management Accounting”

Financial Accounting Cost and Management Accounting

External users:
 Shareholders
 potential investors
 tax authorities Users Internal management.
 finance providers
 financial analysts

Limited companies, by law, must Legal Entities have no legal obligation to

prepare financial accounts. Requirement prepare management accounts.

Standardised in accordance with the Format of Management discretion depending on

relevant IAS, IFRS and Companies Presentation the use.
Act requirements.

Nature of Include both monetary and non-

Monetary nature.
Information monetary measures.

Time Horizon Include both historical record and future

Historical record of past operations.
planning tool.

i. Present the performance of an

i. Aid management record, plan and
entity over a period (SOPL)
Purpose control the operations
ii. Present the financial position of
ii. Aid internal decision-making
the entity at the end of the
process
period. (SOFP)

Concentrate on the business as a Focus on specific areas of business

whole, summarising all transactions Scope operations, such as production and
from different functions. sales.

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ACCA-MA: MANAGEMENT ACCOUNTING
CHAPTER 1: FUNDAMENTALS OF MANAGEMENT ACCOUNTING

Topic 1.2 Comparison Between Financial Accounting and Cost and Management Accounting
Learning Outcome (ACCA Study Guide Area A)
A1b: Compare and contrast financial accounting with cost and management accounting.

1. In comparison with a financial statement prepared in conformity with generally accepted accounting
principles, a managerial accounting report is more likely to:
A. Be used by decision makers outside of the business organization.
B. Focus upon the operation results of the most recently completed accounting period.
C. View the entire organization as the reporting entity.
D. Be tailored to the specific needs of an individual decision maker.

2. Which of the following are characteristics of management accounting information?

A. Forward looking
B. Legally required
C. Concerned with cost control
D. Follows clearly defined standards

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ACCA-MA: MANAGEMENT ACCOUNTING
CHAPTER 1: FUNDAMENTALS OF MANAGEMENT ACCOUNTING

1.3 Managerial Processes: Planning, Decision Making and Control

Learning Outcome (ACCA Study Guide Area A)
A1c: Outline the managerial processes of planning, decision making and control.

Diagram 1.3: Managerial processes

Managerial Processes
Planning
 Planning  A goal is a desired end-point,
for e.g. to maximise profits.
i. Identifying goals and objectives.  An objective is a specific,
ii. Identifying alternative strategies that might lead towards measurable and time-
achieving the goals and objectives. targeted step towards
achieving the goal for e.g. to
iii. Gathering and analysing data for each alternative course increase company profits by
of action and to carry out SWOT analysis. 50% within 6 months.
 A strategy is a possible
course of action that might
 Decision Making lead towards achieving the
Decision making involves Managers who have to make decision objective, e.g. to open two
between alternative courses of action that might contribute new branches at Location A
and Location B for better
towards achieving the objectives. Management accountant plays accessibility.
a vital role in providing useful information so that informed
decision can be made by the managers.
i. Deciding on a course of action (stating the expected
outcome).
ii. Implementing the decision.

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ACCA-MA: MANAGEMENT ACCOUNTING
CHAPTER 1: FUNDAMENTALS OF MANAGEMENT ACCOUNTING

 Control
Control is a process of monitoring a decision made. The actual results would be compared to the
expected results of the decision, so that corrective actions can be taken when necessary.
i. Gathering and analysing data on the actual outcome.
ii. Comparing and evaluating the actual outcome against the expected outcome.
iii. If necessary, taking corrective action to bring the actual outcome closer to the expected
outcome.

a.

b.

Topic 1.3 Managerial Processes: Planning, Decision Making and Control

Learning Outcome (ACCA Study Guide Area A, Topic):
A1c: Outline the managerial processes of planning, decision making and control.

1. Decision making means:

A. Choosing between alternatives.
B. Controlling business activities.
C. Planning out a strategy.
D. Deciding on usage of resources.

2. The following are activities of management, EXCEPT:

A. Planning resources’ consumption.
B. Controlling the macro environment.
C. Applying appropriate measures to avoid wastage during production.
D. Choosing the best option between using part-time workers and full-time workers.

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ACCA-MA: MANAGEMENT ACCOUNTING
CHAPTER 1: FUNDAMENTALS OF MANAGEMENT ACCOUNTING

1.4 Strategic, Tactical and Operational Planning

Learning Outcome (ACCA Study Guide Area A)
A1d: Explain the difference between strategic, tactical and operational planning.

Diagram 1.4: Strategic, tactical and operational planning

Strategic Planning Tactical Planning Operational Planning

Planned by Top management Middle management Operational management

Long-term Medium-term Short-term

Time span
(longer than one year) (within one year) (daily and monthly)

Specific department, Specific day-to-day

Scope Whole organisation
division or function task

Frequency Low (Irregular) Medium (Regular) High (Frequent)

c.

d.

Topic 1.4 Strategic, Tactical and Operational Planning

Learning Outcome (ACCA Study Guide Area A)
A1d: Explain the difference between strategic, tactical and operational planning.

1. The following statements refer to different types of planning in a large organisation:

(i) Strategic planning is concerned with both quantitative and qualitative matters.
(ii) Tactical planning is concerned with setting long term objectives.
(iii) Operational planning is concerned with a time horizon starting one year from now.

Which of these statements is/are correct?

A. i only.
B. i and ii.
C. ii and iii.
D. ii only.

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ACCA-MA: MANAGEMENT ACCOUNTING
CHAPTER 1: FUNDAMENTALS OF MANAGEMENT ACCOUNTING

2. _______is a process by which senior management make medium-term, detailed plans for the next
year, for e.g. Employees’ productivity measurements.

A. Operational planning
B. Tactical planning
C. Strategic planning

1.5 Data and Information

Learning Outcome (ACCA Study Guide Area A)
A1e: Distinguish between data and information.

Diagram 1.5: Data and information

Example

Data in this example is a response collected from survey forms that rate customer satisfaction of each of
the company products on a scale of 1 to 10 or a record that shows the daily mean temperature for each
day in 2008.

Information are tables and charts produced based on data collected from customers to meet certain
objectives such as to determine the number of customers who like product A, product B and so on, or an
analysis that identifies the mean temperature for the year, the months with the highest and lowest mean
temperature, and the days with the highest and lowest temperature in 2008.

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ACCA-MA: MANAGEMENT ACCOUNTING
CHAPTER 1: FUNDAMENTALS OF MANAGEMENT ACCOUNTING

a.

b.

Topic 1.5 Data and Information

Learning Outcome (ACCA Study Guide Area A)
A1e: Distinguish between data and information.

True or False?

1. Data is information that has been processed in such a way as to

be meaningful to its recipients.

2. Data is the raw material for data processing.

3. Data on its own is meaningless.

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ACCA-MA: MANAGEMENT ACCOUNTING
CHAPTER 1: FUNDAMENTALS OF MANAGEMENT ACCOUNTING

1.6 Attributes of Good Information

Learning Outcome (ACCA Study Guide Area A)
A1f: Identify and explain the attributes of good information.

Diagram 1.6: Attributes of good information

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ACCA-MA: MANAGEMENT ACCOUNTING
CHAPTER 1: FUNDAMENTALS OF MANAGEMENT ACCOUNTING

Attributes Explanations
Relevant Information must be relevant to the purpose for which a manager wants to use it.

A user should have all the information he needs for decision making. Without a
Complete
complete picture, the user may make an unsuitable decision.

Accurate Incorrect information could result in serious and damaging consequences.

Information must be clear to the user. If the user does not understand the information
properly, he would not be able to use it correctly. Lack of clarity is one of the causes of
Clear
communication breakdown. It is therefore important to choose the most appropriate
presentation medium or channel of communication.

Information must be reliable, which includes the sources of the information. Unreliable
Reliable information would affect the quality of the decision made as the assumption
formulated may not be accurate.

Information provided to a decision maker must be timely, which means it is not

Timely outdated. Information which is outdated may cause monetary loss within an
organisation as the decision made based on that information may not be accurate.

Appropriate Information must be channelled to the user using the appropriate channel of
communication to facilitate user to understand the information. For example, it is
channel of
easier for user to understand the graph if it is sent via email rather than through a
communication
verbal explanation on the phone.

Information is valuable to an organisation as it assists the user in decision making.

Cost-effective However, it is important to ensure that the cost incurred to collect the information
does not exceed the value or benefit of the information.

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ACCA-MA: MANAGEMENT ACCOUNTING
CHAPTER 1: FUNDAMENTALS OF MANAGEMENT ACCOUNTING

c.

d.

Topic 1.6 Attributes of Good Information

Learning Outcome (ACCA Study Guide Area A)
A1f: Identify and explain the attributes of good information.

1. Which of these statements is/are correct?

i. Information must be relevant to the purpose for which a manager wants it.
ii. Information should be accessible via the appropriate channels of communication and to the
right people.
iii. The cost of producing information should be greater than the value of the benefits of that
information to management.

A. i, ii and iii
B. i and ii only
C. i and iii only
D. ii and iii only

2. Information should be _____ because using incorrect information could cause serious and
damaging consequences.
A. Timely
B. Complete
C. Accurate
D. Clear

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ACCA-MA: MANAGEMENT ACCOUNTING
CHAPTER 1: FUNDAMENTALS OF MANAGEMENT ACCOUNTING

1.7 Limitations of Management Information

Learning Outcome (ACCA Study Guide Area A)
A1g: Explain the limitations of management information in providing guidance for managerial decision-
making.

Diagram 1.7: Limitations of management information

Limitations:
i. Management accounting information such as monthly management reports are not tailor made for
decision making purpose. The information can be general, representing the whole organisation or
the division or a function within the organisation.

ii. Management accounting information are based on historical, present and future data. Decision
making require futuristic information that can be used to estimate the possible outcome of a
decision.

iii. Management accounting information are internally oriented. Decision making require assessment
of external opportunities and threats.

iv. Global environment causes prices and rates to change. Changing values directly affect the costing
function. Therefore, serves as a limitation.

v. Decision makers need to deal with risk and uncertainties imposed by uncertain future events and
environmental factors. Conventional management accounting information does not provide enough
assistance to clarify uncertainties and risk.

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ACCA-MA: MANAGEMENT ACCOUNTING
CHAPTER 1: FUNDAMENTALS OF MANAGEMENT ACCOUNTING

e.

f.

Topic 1.7 Limitations of Management Information

Learning Outcome (ACCA Study Guide Area A)
A1g: Explain the limitations of management information in providing guidance for managerial decision-
making.

1. Which of the following are weaknesses of management accounting?

(May have more than one answer)
A. They do not have a fixed format, making comparisons difficult.
B. They have flexible formats that make comparison difficult.
C. They are not relevant for decision-making.
D. Highly subjective information may skew results.

2. The main limitation of cost accounting information is that:

A. It (information) cannot be delayed.
B. It must be purely financial.
C. It has to be complete.
D. It has to be accumulated by cost accountants.

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ACCA-MA: MANAGEMENT ACCOUNTING
CHAPTER 1: FUNDAMENTALS OF MANAGEMENT ACCOUNTING

1.8 Chapter 1 Summary

Chapter 1: Summary of Fundamentals of Management Accounting

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ACCA-MA: MANAGEMENT ACCOUNTING
CHAPTER 1: FUNDAMENTALS OF MANAGEMENT ACCOUNTING

1.9 Chapter 1 Understanding Checker: Answer

Topic 1.1 Purpose and Role of Cost and Management Accounting Within an Organisation
1. A
2. A, C&D

Topic 1.2 Comparison Between Financial Accounting and Cost and Management Accounting
1. D
2. A, C

Topic 1.3 Managerial Processes: Planning, Decision Making and Control

1. A
2. B

Topic 1.4 Strategic, Tactical and Operational Planning

1. A
2. B

Topic 1.5 Data and Information

1. False
2. True
3. True

Topic 1.6 Attributes of Good Information

1. B
2. C

Topic 1.7 Limitations of Management Information

1. A, B, D
2. C

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