HNDB CLASS MANAGEMENT ACCOUNTING CHAPTER 1 Essay

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Pages: 16

UK College of Business & Computing

HND in Business

Management Accounting

Management Accounting

The nature and purpose of cost and management accounting

Contents

1 Accounting for management
2 Cost and management accounting versus financial accounting

Accounting for management

„ Introduction to cost and management accounting
„ Data and information
„ Attributes of good information
„ Planning, decision-making and control
„ Strategic, tactical and operational planning
„ Cost, revenue, profit and investment centres

1 Accounting for management

1.1 Introduction to cost and management accounting

Accounting has several purposes, but the main purposes might be stated as follows.
„ To provide a record of the financial value of business transactions, and in doing so to establish financial controls and reduce the risks of fraud
„ To assist with the management of the financial affairs of an entity
„ To provide information - mainly information of a financial nature.

Accounting information is provided for:
„ Management, so that managers have the information they need to run the company
„ Other users of information, many of them outside the entity. For example, a company produces accounting information for its shareholders in the form of financial statements, and financial statements are also used by tax authorities, investors, trade union representatives and others.

Cost and management accounting is concerned with the provision of information, mainly of a financial nature, for management. A management accounting system is a management information system.

1.2 Data and information

The terms ‘data’ and ‘information’ are often used as if they have the same meaning. However, there is a difference between data and information:
„ Data consists of unprocessed facts and statistics. Data is collected and processed to produce information. Data has no meaning until it has been processed into information.
„ Information has a meaning and a purpose. It is produced from ‘data’. It is processed data that has relevance to a particular useful purpose.

A cost accounting system records data about the costs of operations and activities within the entity. The sources of cost accounting data within an organisation include invoices, receipts, inventory records and time sheets. Many of the documents from which cost data is captured are internally-generated documents, such as time sheets and material requisition notes.

Data is analysed and processed to produce management information, often in the form of:
„ routine reports, or
„ specially-prepared reports, or
„ answers to ‘one-off’ enquiries that are input to a computer system.
Information produced from cost accounting data is management accounting information. Management accounting systems also obtain information from other sources, including external sources, but the cost accounting system is a major source of management accounting information.

1.3 Attributes of good information

Information is only useful to managers if it possesses certain qualities or attributes.
„ Understandable. Information should be understandable to the individuals who use it. For accountants, this often means having to make sure that the figures provided to managers are set out clearly and are properly explained.
„ Purpose and relevance. Information should have a purpose and should be needed by management for a particular reason. Unless information has a purpose it has no value at all and it makes no sense to provide it. The information provided should also be relevant to this purpose.
„ Reliable. Management information must be reliable. This means that the user of the information can rely on the information to make a decision, and should not be worried about whether the information is correct. Information does not have to be 100% accurate. In many cases, information might be…