ACCA MA2
COMPLETE SUBJECT NOTES
BY VERTEX LEARNING SOLUTIONS
VALID UNTIL DEC 2024
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TABLE OF CONTENTS
CHAPTER TOPIC PAGE NO.
1 Management Information 3
2 The Role of Information Technology 14
3 Cost Classification 21
4 Cost Behavior 27
5 Information For Comparison 36
6 Reporting Management Information 41
7 Materials 46
8 Labor 67
9 Expenses 81
10 Overheads And Absorption Costing 86
11 Marginal Costing And Absorption Costing 95
12 Cost Bookkeeping 99
13 Job, Batch & Service Costing 108
14 Process Costing 113
15 Cost-Volume-Profit (CVP) Analysis 118
16 Short-Term Decisions 125
17 Capital Investment Appraisal 129
18 Cash and Cashflows 138
19 Cash And Treasury Management 147
20 Forecasting Cash Flows 155
21 Investing Surplus Funds 167
22 Raising Finance From A Bank 178
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Chapter 1
Management Information
Successful management of any organization depends on information. Management requires
information to help them to plan and control operations and to make informed decisions.
What is Purpose of Management Information?
The purpose of management information is to help managers to manage resources efficiently
and effectively.
How This Purpose Can Be Met?
By planning and controlling operations and by allowing informed decision-making.
Planning
Planning involves establishing an objective or identifying a problem and then choosing a strategy
to achieve the objective or alleviate the problem. In the most basic sense, planning means
formulating ways of proceeding.
We can apply the below four step model to understand planning process.
Step 1 - Establish an objective or identify a problem.
Step 2 - Develop solutions or strategies which might contribute towards achieving the objective
or alleviating the problem.
Step 3 - Collect and analyses relevant date about each alternative solution or strategy.
Step 4 - Decide about which strategy or solution to take. State the expected outcome of the
decision and then check that the expected outcome meets the objective or alleviates the problem
in STEP 1.
Definitions – Must Know
▪ An objective is the aim or goal of an organisation.
▪ A strategy is a possible course of action that might enable an organisation to achieve its
objectives.
Management must plan for both the short term and the long term. A long-range plan is necessary
to anticipate any future needs or opportunities that require action to be taken either now or in
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the future. Planning therefore involves converting the organisation's long-term objectives into a
succession of short-term plans. One such short-term plan is the annual budget.
Control
Control is the action of monitoring something to keep it on course. Most companies will set out
a plan for a future period (for example, a budget) and then compare the actual results during the
period with the budget. Any deviations from the budget can then be identified and corrected as
necessary. Such deviations are known as variances.
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.
Below Flow Chart explains the decision-making process in detail.
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The Qualities of Good Management Information
The qualities of good information are outlined below – in the form of a mnemonic 'accurate'.
Quality Example
Figures should add up, the degree of rounding should be appropriate,
A - Accurate
there should be no mistakes.
Information should include all relevant information – information that is
C - Complete correct but excludes something important is likely to be of little value. For
example, external data or comparative information may be required.
It should not cost more to obtain the information than the benefit derived
C - Cost-beneficial
from having it.
The needs of the user should be borne in mind, for instance senior
U - User-targeted
managers may require summaries.
R - Relevant Information that is not relevant should be omitted.
A - Authoritative The source of the information should be reputable and reliable.
T - Timely The information should be available when it is needed.
Information should be clearly presented, not excessively long, and sent
E - Easy to use using the right communication channel (email, telephone, intranet, hard-
copy report etc.).
Sources Of Management Information
There are many sources of management information. Management information can come from
sources internal or external to the organisation and can be both financial and non-financial.
Internal Sources Of Management Information
Accounting records – including the cost and management accounts – E.g., e receivables ledgers,
payables ledgers, general ledgers, cash books and so on.
Personnel records - Information relating to personnel will be held, probably linked to the payroll
system
Production department records - Much information will be generated by the production
department about machine capacity, fuel consumption, movement of people, materials, and
work in progress, set up times, maintenance requirements and so on.
Detailed time records (especially in service organizations) - Many service businesses – notably
accountants and solicitors – need to keep detailed records of the time spent on various activities,
both to justify fees to clients and to assess the efficiency of operations.
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External Sources Of Management Information
An organisation's files are full of invoices, letters, advertisements and so on received from
customers and suppliers. These documents provide information from an external source. There
are many occasions when an active search outside the organisation is necessary.
▪ A primary source of information is, as the term implies, as close as you can get to the
origin of an item of information: the eyewitness to an event, the place in question, the
document under scrutiny.
▪ A secondary source, again logically enough, provides 'second-hand' information: books,
articles, verbal or written reports by someone else.
Financial And Non-Financial Information For Management
Most organisations require the following types of information for management:
▪ Financial
▪ Non-financial
▪ A combination of financial and non-financial information.
Recording Management Information
▪ Financial accounts are prepared for individuals external to an organisation whereas
management accounts are prepared for internal managers of an organisation. There are
several differences between financial accounts and management accounts.
▪ Cost accounting produces information that is used for both financial accounting and
management accounting.
Financial Accounts and Management Accounts
Management information provides a common source from which is drawn information for two
groups of people.
▪ Financial accounts are prepared for individuals external to an organisation.
• Shareholders
• Suppliers
• Customers
• Tax authorities
▪ Management accounts are prepared for internal managers of an organisation. The
information used to prepare financial accounts and management accounts is the same.
The differences between the financial accounts and the management accounts arise because
the information is analyzed in different ways.
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Financial Accounts Management Accounts
Management accounts can be generated for
Financial accounts are prepared primarily for
any period, (e.g., hourly, daily, weekly) and are
external use and detail the performance of an
used to aid management plan and control the
organisation over a defined period and the
organisation's activities and to help the
situation at the end of that period.
decision-making process.
Limited companies must, by law, prepare There is no legal requirement to prepare
financial accounts. management accounts.
The format of management accounts is
The format of published financial accounts is
entirely at management discretion: no strict
determined by law and by accounting
rules govern the way they are prepared or
standards. In principle the accounts of
presented. Each organisation can devise its
different organisations can therefore be easily
own management accounting system and
compared.
format of reports.
Financial accounts concentrate on the Management accounts can focus on specific
business, aggregating revenues and costs from areas of an organisation's activities.
different operations, and are an end in Information may be produced to aid a decision
themselves. rather than to be a product of a decision.
Management accounts incorporate non-
monetary measures. Management may need
Most financial accounting information is of a
to know, for example, tons of aluminum
monetary nature.
produced, monthly machine hours, or miles
travelled by salesmen.
Financial accounts present an essentially Management accounts are both an historical
historic picture of past operations. record and a future planning tool.
Cost Accounts
Cost accounting and management accounting are terms which are often used interchangeably.
It is not correct to do so.
Cost accounting aims to capture an organisation’s costs of operations, departments or products,
and then classify and analyses this information to produce cost reports. Cost accounting produces
information that is used for both financial accounting and management accounting.
The purpose of management accounting is to provide managers with whatever information they
need to assist them in planning and controlling operations and in decision-making.
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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.
▪ The cost of goods produced, or services provided.
▪ The cost of a department or work section.
▪ What revenues have been.
▪ The profitability of a product, a service, a department, or the organisation in total.
▪ Selling prices with some regard for the costs of sale.
▪ 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.
▪ Future costs of goods and services (cost is an integral part of budgeting (planning) for the
future).
It would be wrong to suppose that cost accounting systems are restricted to manufacturing
operations, although they are probably more fully developed in this area of work. Service
industries, government departments and welfare activities can all make use of cost accounting
information. Within a manufacturing organization, the cost accounting system should be applied
not only to manufacturing but also to administration, selling and distribution, research and
development and all other departments.
What You Need To Know As A Trainee Accountant
▪ If the trainee accountant knows all about the costs incurred or revenues earned, he may
also be asked to do the following types of tasks
▪ To assess how profitable certain products or departments are.
▪ To review the costs of products.
▪ To put a value on inventories of goods (such as raw materials) which are unsold at the
end of a period. The valuation of inventory is a very important part of cost accounting.
For the trainee accountant to provide all this information, the organization must have a cost
accounting system which can analyze cost information quickly and easily.
The trainee accountant may also need to provide information on future costs of goods and
services. This is an integral part of the planning or budgeting process.
By comparing current costs with budgeted costs, the trainee accountant should be able to
highlight areas which show significant variances. These variances should then be investigated.
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Most cost accounting systems should be capable of producing regular performance statements,
though the trainee accountant himself is likely to be the person producing them and distributing
them to the relevant personnel.
Basics of Costs
Definitions – Must Know
▪ 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 analyzed further.
A cost center is also known as a responsibility center. A responsibility center is a department or
organizational function whose performance is the direct responsibility of a specific manager.
Other responsibility centres found in an organisation are as follows.
▪ A profit center is accountable for costs and revenues. Profit center managers should
normally have control over how revenue is raised and how costs are incurred. Often,
several cost centres will comprise one profit center.
▪ A revenue center is accountable for revenues only. Revenue center managers should
normally have control over how revenues are raised.
▪ An investment center is a profit center with additional responsibilities for capital
investment and possibly for financing, and whose performance is measured by its return
on investment.
Overheads
Overheads (or indirect costs) include costs that go into the making of the pen that you do not see
when you dismantle it.
Direct And Indirect Costs
To summarize so far, the cost of an item can be divided into the following cost elements.
(a) Materials
(b) Labor
(c) Expenses
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Each element can be split into two, as follows.
Product Costing
Job, batch and process costing are methods used to cost end products.
Job Costing
Job costing is a process of finding out the cost that is associated with a job or work, which helps
analyze the applicable per unit cost of each job in the entire production. The job can be
understood as a specific work or contract or batch, which is done or completed to achieve any
goal.
For example, a furniture maker may make a table, say, to a customer's specific requirements.
From start to finish the costs incurred to make that table are identifiable. It will cost so much for
the tabletop, so much for the legs, and so on. This form of costing is known as job costing.
Batch Costing
Batch costing is a cost accounting method used by companies that manufacture or produce goods
in batches. The production process is divided into batches, and the costs incurred during the
production of each batch are recorded separately. It helps businesses improve operations by
providing cost information to facilitate effective decision-making.
An item like a pen, however, will be produced as one of a batch of identical items, because it
would clearly be uneconomical to set up the machinery, employ labor and incur overheads to
produce each pen individually. There might be a production run of, say, 5,000 pens. The cost of
producing 5,000 pens would be calculated and if we wanted to know the cost of one pen, we
would divide this total by 5,000. The answer would however be a fraction of a cent, and this is
not very meaningful information. This method of costing is called batch costing, and it applies to
many everyday items. So far as costing techniques are concerned, job and batch costing are much
the same
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Process Costing
Another approach can be used when the product results from a series of continuous or repetitive
operations or processes and is not distinguishable as a separate unit of product until the final
stage. For example, oil refining, brewing, sugar refining or chemical processing. The output of
one process becomes the input to the next until the finished product is made in the final process.
It is not possible to build up cost records of the cost per unit of output because production in
progress is an indistinguishable homogenous mass. There is often a loss in process due to
spoilage, wastage, evaporation and so on.
Service Costing
Service organisations do not make or sell tangible goods. Service costing is used by organisations
operating in a service industry (for example electricians, hotels, rail companies) or by
organisations wishing to establish the cost of services carried out by some of their departments
(for example the staff canteen, computer department or distribution).
Cost Codes
A cost code is a brief reference designed to help with the classification of items by assisting with
entry, collection and analysis.
Once costs have been classified, a coding system can be applied to make it easier to manage the
cost data, both in manual systems and in computerized systems.
A cost code is a brief reference designed to help with the classification of items by assisting with
entry, collection and analysis.
Coding systems can take many forms, but an efficient and effective coding system should
incorporate the following features.
▪ The code must be easy to use and communicate.
▪ Each item should have a unique code.
▪ The coding system must allow for expansion.
▪ The code should be flexible so that small changes in a cost's classification can be
incorporated without major changes to the coding system itself.
▪ The coding system should provide a comprehensive system, whereby every recorded item
can be suitably coded.
▪ The coding system should be brief, to save clerical time in writing out codes and to save
storage space in computer memory and on computer files. At the same time codes must
be long enough to allow for the suitable coding of all items.
▪ The likelihood of errors going undetected should be minimized.
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▪ Code numbers should be issued from a single central point. Different people should not
be allowed to add new codes to the existing list independently.
▪ Codes should be uniform (that is, have the same length and the same structure) to assist
in the detection of missing characters and to facilitate processing.
▪ The coding system should avoid problems such as confusion between I and 1, O and 0
(zero), S and 5 and so on.
▪ The coding system should, if possible, be significant (in other words, the actual code
should signify something about the item being coded).
▪ If the code consists of alphabetic characters, it should be derived from the item's
description or name (that is, mnemonics should be used).
Types Of Code
Sequential (or Progressive) Codes
Numbers are given to items in ordinary numerical sequence, so that there is no obvious
connection between an item and its code.
For example: 000042 4cm nails
000043 Office stapler
000044 Hand wrench
Block (Group Classification) Codes
These are improvements on simple sequences codes, in that a digit (often the first one) indicates
the classification of an item. For example:
4NNNNN Nails
5NNNNN Screws
Mnemonic Codes
Meaning of mnemonic is a learning technique to aid the memory. Under this type of coding the
code means something, it may be an abbreviation of the object being coded. A well-known
example of this type of code is the three-letter coding used for airports. For example:
LAX Los Angeles SIN Singapore CAI Cairo LHR London Heathrow
Hierarchical Codes
In a hierarchical coding system, each digit represents a classification, and each digit further to the
right represents a smaller subset than those to the left. For example:
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3 = Screws 32 = Round headed screws
31 = Flat headed screws 322 = Steel (round headed) screws
Faceted Codes
These are a refinement of group classification codes, in that each digit of the code gives
information about an item. For example
▪ The first digit: 1 Nails 2 Screws 3 Bolts etc.…
▪ The second digit: 1 Steel 2 Brass 3 Copper etc.…
▪ The third digit: 1 50mm 2 60mm 3 75mm etc.…
The Advantages Of A Coding System
▪ A code is usually briefer than a description, thereby saving clerical time in a manual
system and storage space in a computerized system.
▪ A code is more precise than a description and therefore reduces ambiguity.
▪ Coding facilitates data processing.
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