Topic 1:MANAGEMENT INFORMATION

Management is a process by which organization is organized and directed towards its goals. The goals of
an organization can be many. Among them are making profit, increasing market share, develop
improved products etc. This endeavour relies on information. This information comes in many forms and
from many sources (within and outside of the organization. This information has to fulfil certain criteria.
The right type of quality information given on time can greatly supports the decision making process. It
also ensures that decision made based on it is the most optimal decision for the organization.
Type of information
Either financial or non financial or even a combination of both. Examples are:Financial

Canteen staff cost

Employee Provident Fund contribution for workers by company

Non financial

Attendance of staff- time coming and leaving work recorded on punch card
Units of electricity used from meter readings
Report by management on workers satisfaction towards cafeteria

Combination

Report which contains cost of food per staff , cost of electricity per day for the cafeteria along
with workers comment on cafeteria services

The term the right type of information referred to above is that information should fulfil certain
criteria. Also some criteria can be more important than others

Some of those criterias are reliable, accurate, relevant , timely , understandable, clear and complete.
In any business there is usually two types of reporting external reporting and internal reporting. External
reporting comes in the form of financial statement.
Financial accounts are prepared for individuals external to an organization while management accounts
are for managers (internal managers) of the organization. Example of financial accounts- balance sheet
cash flow statements, income statements
Internal reporting are for the use the managers within the organization. As mentioned above, the
information can be either financial or non financial.
Example of management accounts or information- budget, variance analysis reports, cost of a
department or segment, daily production record etc.
1

Responsibility centres
Determining what information is needed and also what type report is to be presented by a manager
depends on the structure of the organization and also on the responsibility of the particular manager.
An organisation is basically divided into many departments or segments which can be identified as
responsibility centres. Each responsibility centre will be managed by a manager. That manager is
personally responsible for the centres performance. Responsibility centres can either be revenue or
cost or investment centre.
Centres
Cost

Nature
Production or service location, or item of equipment from which
cost may be determined or accumulated from it. From this cost
can then be charged or attributed to cost unit. Managers
evaluated based on meeting cost targets or on control of costs

Information
Reports
on
cost incurred,
budgeted
costs

Revenue

Part of an organisation which earns revenues. Manager of such

centre is responsible for revenue earned but not cost of the
operations
Part of a business / an organisation which its manager is
responsible for cost incurred and revenues earned. Profit centres
have to report on their profits.
Part of a business which is basically a profit centre with added
responsibility of making investment decisions and financing
decisions and so is evaluated based on profit and also on
feasibility of those investment and financing decisions

Revenue data

Profit

Investment

Profits
Profit margin,
unit profit
ROI ,ROCE
Profit
/investment

In preparing information for management pertaining to a centre only the data relevant to the nature of
the centre should be gathered for the centre.
Responsibility accounting
A system of providing information to management on individual parts of the business by the manager
who is responsible for that individual part ( or segment or centre )
Assessment of investment centre is usually based on Return on Capital Employed (ROCE) as the manager
must be assessed on profits and also profit in relation what has been invested to gain such profit. This to
see how well the investment has generated profit.

ROCE = Net profit/Capital or Net Assets

Management Information and Information Technology

The use of IT has helped the process producing information for management in terms of dealing with
large volume of data with very little error or none at all. Management accounting system is also able to
store large volume of data securely. Processing the data also takes very little time which makes it easier
for manager to plan, control or make decisions. Use of spreadsheet also allow many different
information be extracted from data for example managers can extract the sales data of a specific
product over time or sales of a particualr branch. Communicating the information also becomes very
easy has the output can be transmitted in many ways via email or fax.
In SHORT advantages of using IT includes
Reduces staffing cost, saves time, reduce error, ability to handle large volume of data and possibility of
secure and immediate transmission
Various types of software allow many different analysis to be carried on data, besides processing
routine transactions from sales to payroll and tax computations.

TOPIC 2 :COST CLASSIFICATION & BEHAVIOUR

a. Cost classifications used for different purposes in a cost accounting system( function,
controllable, traceability etc)
b. Variable,fixed and mixed(semi-variable, stepped-fixed) costs
c. High-low method to separate semi-variable costs
d. Cost analysis
e. The effect of changing activity levels on unit costs
Cost behaviour
It is important to know how cost behaves over time and also when there are shifts in volume. Consider
the cost structure of the business. This requires analysing the specific types of costs that are to be
incurred and trying to understand their attributes.

VARIABLE COSTS: Variable costs will vary in direct proportion to changes in the level of an activity. For
example, direct material, direct labor, sales commissions, fuel cost for a trucking company, and so on,
may be expected to increase with each additional unit of output.
Assume that GoSound produces digital music players. Each unit produced requires a circuit board (PCB)
that costs $11. For example, $165,000 is spent when 15,000 units are produced (15,000 X $11 =
$165,000). The data are plotted on the graphs. The top graph reveals that total variable cost increases
in a linear fashion as total production rises. The slope of the line is constant. Of course, when plotted
on a "per unit" basis (the bottom graph), the variable cost is constant at $11 per unit. Increases in
volume do not change the per unit cost. In summary, every additional unit produced brings another
incremental unit of variable cost.
The activity base is the item or event that causes the incurrence of a variable cost. It is easy to think of
the activity base in terms of units produced. Actually it can also be hours worked,units sold, purchases
made or others.
FIXED COSTS: The opposite of variable costs are fixed costs. Fixed costs do not fluctuate with changes
in the level of activity. Assume that GoSound leases the manufacturing facility where the portable
digital music players are assembled. Assume that rent is $200,000 no matter the level of production.
The rent is said to be a "fixed" cost, because total rent will not change as output rises and falls. Please
also not that fixed cost per unit declines as production increases.
Many fixed costs are only fixed for a certain level of production. For example, a machine or
manufacturing plant can reach capacity. To increase production beyond a certain level, additional
machinery (or a new plant, additional supervisors, etc.) must be deployed. This will cause a major step
upward in the fixed cost. Fixed costs that behave in this fashion are also called step costs. These costs
are illustrated by the following diagram. It is important to remember that fixed costs are only fixed over
some particular range of activity.This range is normally called the relevant range. By definition the
relevant range refers to the level of activity you expect to operate at, and moving outside that range can
significantly alter the cost structure.

Costs
Costs

Units produced

Units Produced
Variable cost per unit

Variable cost total

Costs

Costs
4

Fixed cost total

Costs

Fixed cost per unit

Costs

Units Produced
Steps cost ( Fixed cost at different ranges)

Units Produced
Mixed cost/Semi Variable

MIXED COSTS: Many costs contain both variable and fixed components. These costs are called mixed or
semi-variable. With a mixed cost, there is some fixed amount plus a variable component attached to an
activity. Mixed costs (because of the variable cost compenent) also change in response to changes in
volume. But, the fixed cost remains unchange. This means the overall change in cost is not directly
proportional to the change in activity.

TOPIC 3 MATERIALS COSTING

1. Classification of materials
Materials is one of the main resources of business. This is especially so for manufacturing, construction
industries and those businesses which make products that they sell themselves.
Different classification of materials
Work in progress

2.
a.
i.
ii.
iii.
iv.
v.
vi.

Explanation
Units that are partly completed and still have to undergo
more production process before becoming finished goods
Materials not yet added into the production process
Completed goods ready for sale but not yet sold
Materials that can be traced directly to cost unit
Materials that cannot be directly attributed to the cost unit

Raw materials
Finished goods
Direct materials
Indirect materials
Documentation
Purchases (1st time)
Requisition-Stores OR production
Supplier selection-Purchasing
Order-Purchasing
Receipt & inspection of goods-Stores/Receiving
Payment Accounts
Other transactions-returns to supplier
Process
Requisition

Department/Person
Stores or

Document
Purchase requisition

Supplier selection
Order
Receipt
&inspection
Payment

Purchasing
Purchasing
Stores/*Receiving
Purchase
Accounts

Tender forms, Quotations

Purchase order
Delivery note/Goods received note
Sales invoice from supplier
Cheque,

3. Material issues and stock - cost of material according to FIFO,LIFO and WAM
Example
Date
3/11
11/11
21/11

First in first out(FIFO)

Date
3/11
5/11

Receipts
400@60
300@70
300@80

Receipts
400@60

Issues
200

Date
5/11
14/11
22/11
27/11

Balance
400@60
200@60

Issues
200
200
200
200

24000
12000
6

@60 }12000
11/11

300@70

14/11
21/11

200@60
300@70
200 @60}12000

300@80

22/11

200@70}14000

27/11

100@70}
100@80}15000
53000

31/11
Last in first out (LIFO)
Date
3/11
5/11
11/11

Receipts
400@60

22/11

Issues
200@60 12k

300@70

14/11
21/11

33000

200@70 14k
300@80

200@80}16000

27/11

200? 15k

31/11

57000

300@70
300@70
300@80
100@70
300@80

21000

200@80
200@80

16000
16000

Balance
400@60
200@60
200@60
300@70
200@60
100@70
200@60 12K
100@70 7K
300@80 24K
200@60
100@70
100@80

200@60

45000
31000

24000
12000
33000
19000

43000

27000

12000

Weighted average method (WAM)--calculated every time new batch of materials is received.
Date
Receipts
Issues
Balance
3/11
400@60
400@60
24000
5/11
200@60
200@60
12000
11/11
300@70
200@60
300@70
500 TC 33000
500@66}33K
14/11
200@66
300@66
19800
21/11
300@80
300}19800
300@80} 24000
600 TC 43800
600@73}43800
22/11
200@73
400@73
?
27/11

200@73

200 73

31/11

200@73

Note: if use periodic weighted average method average price is computed once for each period
Cost of opening +all receipts/units total ( opening =receipts units)
0 +24000+21000+24000/1000= 69. All issues valued at this price .

Input requirements & Wastage

Computing material input requirements, control measures to deal with wastage. Connection if no
wastage INPUT =OUTPUT, with wastage (losses)
Input wastage = Output
When there is wastage materials ordered must consider and allow for waste. Meaning may have to
order more since some materials may lost thus reducing output at the end. If wastage is a normal part of
production wastage rate should be set. Monitor the actual wastage against this set wastage rate. If
wastage is significant it must be investigated. Reasons for wastage being significant are:Inexperienced workers
Old machines or machine always breaking down
Change in production process
Using materials of low quality
Estimate set too low , and have to be revised
This section deals with the quantity to be ordered taking into account wastage %.
Wastage rate is 5%.This means output will be 100-5 =95% of input.
Input = Output x 100/(100-waste %)
Example

1. Waste rate is 5% of input. If 200 units are added as input.

Output will be 200 (5%x200) =190
2. If we needed an output of 200 units then obviously we must use input of more than 200.
The input should be
Input= 200 x(100/95) = 200x1.05263.....= 210 units to be input
OR
200/0.95 ( sometimes called grossing up given that 200 equals 0.95 so dividing by 0.95 will give the
100% i.e the input. = 210 units

Material Stock control

Monitoring stock
8

Stocktaking-counting and recording of physical stock

a.
periodic- usually every year
b.
continuous- throughout the year items of stock are checked on rotation basis. By the end of the
year all items of stock have been checked or counted at least once. High
value items need to be
checked more frequently.
Inventory costs
1.
Purchase costs
2.
Holding /carrying/storage
3.
Ordering
4.
Stock-outs
5.
Economic order quantity
EOQ = {(2 Oc D)/Hc}
a.

Example -Basic-without discount

Annual demand is 36,750 units. Cost $12 per unit. Ordering cost from carriage inwards $200 per order.
Holding one unit of stock costs $1.20 per annum. Compute EOQ.

b.
With volume discount
Assume for the above for each order of 5000 discount is 2% and 2% for orders of 7,500 and more. Work
out the annual costs for the above at the EOQ and also at levels which discount is obtained.

Answer
Compute at 3500, 5000 and 7500 annual costs which comprises of purchase cost, holding and ordering
cost. Compare and choose the lowest cost.

Purchase cost
Cost x order units
Holding cost
Average stock x holding cost
Qty/2 x 1.2
Ordering cost
No of order x200
Total

at 3500
441000

at 5000

3500/2 x1.2

5000/2 x 1.2

at 7500

2100
2100
445200

436650

435455

6.
Stock levels
a.
Reorder level(ROL)
Maximum supply lead time x Maximum usage (demand)
b.

Maximum stock level

9

ROQ+ROL- ( min lead time x min usage/dd)

c.
Minimum stock level
ROL- (Ave lead time x ave usage)
Example
Minimum lead time
Maximum lead time
Maximum usage
Minimum usage
Reorder quantity

3 days
7 days
500 units per day
300 units per day
5,400 units

Reorder level = 7 x500= 3500

Maximum stock level

Minimum stock level

= ROQ+ROL-( min. lead time x min. usage)

= 5,400 + 3,500- ( 3 x 300)
=
=ROL (average lead time x ave usage)
= 3500- ( 5 x 400) = 1500 units

10

TOPIC:LABOUR COSTING
Labour remuneration methods can be based on time or working hours or output based or piecework.
Additionally elements like overtime pay and incentive schemes like group bonus or individual bonus can
also be added to the wage schemes.
Basic pay
Fixed basic amount usually payable every month or fortnightly.can also be based on hourly rate paid at
the normal working hours for whole period.
Overtime
Working beyond basic working hours/normal hours. Overtime is paid at a rate higher than basic hourly
rate.Overtime premium( the excess over basic rate) is indirect cost unless it is for a special job or order.
E.g Basic week 40 hours, Rate per hour is $6.Overtime is time and half.If worked 45 hours then
Weekly pay = Basic +OT = 45 x 6+ (5 x0.5x 6)
= 270 +15
Note OT premium is indirect cost, basic pay during overtime hours is direct cost
Incentive schemes
a. Piecework
Paid at rate per unit ,regardless of time spent on the job
i. Advantages
1. Motivate workers
2. Cost
ii. Disadvantages
1. Quality
2. New workers
b. Differentiated piecework
Increased piecerate as higher target is achieved
E.g
0-99 units /week
1.50 per unit
Next 100-119units/week
1.75 per unit
Next120 or more units/week 2.00 per unit
If 102 unit how much is the weekly pay 153.50
Bonus schemes
c. Time saved bonus
d. Discretionary bonus
e. Group bonus
f. Profit sharing (fr year end profit)
Labour Turnover
Ratio relating to the workforce is calculated to determine stability and to see whether the business is
able to retain workers.

11

Measures the number workers leave the business and are replaced during a period against
ave empee during a the period
Number of replacements x 100
Average number of empee
COST OF LABOUR TURNOVER
Replacement costs
Selection and placement
Cost due to inefficiencies of new employees
Training costs
Delay in operations while selection process
Increased in wastage, spoilage, rejects due to inexperience
Machine breakdown due inexperience
Preventative costs
To prevent employees leaving
o Better benefits- medical dental maternity etc
o Better working conditions hours
o Pension schemes
o Better opportunity for advancements
o Further education
Other labour ratios
Productivity/Eff.

SH act o/p/AH

Capacity
Volume/Activity

AH/BH
SH act o/p/BH OR Eff ratio x Cap ratio

IT ratio

IH/TH

Absent
Overtime costs

Absent days/Tot. days paid

Ot cost/Total Labour costs

Labour records- Mainly refer to documents which collect information about workers from personal
employee deatils like pay, EPF contribution, pension number, attendance records and work done
Personal details- EPF number, tax file number,maritla status number of dependants, loan deductions,
travelling allowance claims etc.
Attendance- sign in book, punch cards , swipe cards etc
Work done- Time sheets, job cards

12