MA: MANAGEMENT ACCOUNTING AND MANAGEMENT INFORMATION SYSTEM

MANAGEMENT ACCOUNTING AND MANAGEMENT INFORMATION SYSTEM

MANAGEMENT INFORMATION SYSTEMS (MIS) AND CONTROL

A management information system as the term may imply, is a system of providing and communicating information, which will enable managers do their job. The management accountant plays a vital role in assisting management to carry out the responsibilities of planning, controlling, communicating, decision-making, directing and organising through the provision of management information.

Thus, management information is vital to the role of management. Our concern, however, is with how good or bad such systems are, and whether there are any theoretical ‘rules’, ‘laws’, or ‘principles’ which can be applied to improve the quality of information provided at an acceptable cost.

One aim of the management accounting syllabus is to examine the ability of readers to design and evaluate systems for planning and control, that is, to understand MIS concept.

These are relevant to the work of management accountants since their job is to provide information. It is important to state as follows:

• Managers must have information in order to do their work. Every organisation with managers must have an MIS:
• the MIS might be a good one, or it might provide poor-quality information. In the long run, a poor MIS will result in poor management decisions: and
• the MIS might be a formally designed and planned system or it might have grown up in any fashion. Whenever computers are used to provide information, there will probably have been some attempt at a formal design of; at least, part of the organisation’s MIS.
• The aim of management accounting should be to provide a carefully designed, good-quality MIS. There are many ways, however, in which management accounting can be misleading. For example, is using full costs for decision making, or charging uncontrollable costs to a manager’s performance report.

The awareness of the possible pitfalls is important.

MANAGEMENT ACCOUNTING REPORTS AND FEEDBACK

By providing information that is relevant to planning and control decisions, for example, budgetary control information, budgeting information, relevant costs for one-off decisions, profitability reports for profit monitoring such as, management accounting, like any other MIS, should help managers to plan and control the resources of their organisation.

Much of management accounting is concerned with the recording of actual costs for comparison with expectation or budget. This control information is known as “feedback”.

The Qualities required for a good MIS

A good MIS needs to tell managers about the consumption of the organization’s resources and the revenues or other benefits from the use of those resources. It should provide quality information to managers at all levels in the management hierarchy.

Managers use information:

(a). By relating them to other knowledge they already have; and

(b). By asking for other information before making a decision. Using information

with reference to experience and knowledge is a quality of a good management.

Types of Information Necessary

A manager needs to know the types of information necessary for its intended purpose:

• What are his resources? Stock of raw materials, spare machine capacity, labour availability, the balance of expenditure remaining for a certain budget, target date for completion of a job.
• A what rate are his resources being consumed? For example, how fast is his labour force working; how quickly are his raw materials being used up; how quickly are other expenses being included?
• How well are the resources being used? How well are his objectives being met? A manager uses resources based on the information given to him. The board of a company decides how much of available funds should be allocated to any particular activity and the same problem faces the manager of a factory or department, or even a foreman, that is, which machines should he use, which men should be put on certain jobs, etc. Having used information to decide what should be done, a manager then needs feedback (or control information from environment) to decide how well it is being done.

COMPARISON BETWEEN DATA AND INFORMATION

The terms ‘data’ and ‘information’ are often used interchangeably. Technically, data differs from information.

Data is defined as groups of non-random symbols which represent quantities, events, actions and things. Data are made up of characters which may be special symbols, alphabetic and numeric.

Information is a form of data that has been processed and which is meaningful to the user. It must be of real or perceived value for its intended purpose. It also follows that what is information for one purpose or level in the organization may be used as data for further processing into information for a different purpose and level.

Data can be gathered from both internal and external sources which is frequently derived from the day to day operations of the organisation.

It is pertinent to note that data which have been processed using specific identified techniques (planning, decision, controlling, etc.) are compared with alternatives generated in order to produce the required information which will be communicated to the user.

QUALITIES OF MANAGEMENT INFORMATION

Management information is expected to possess the following attributes:

1.  Accuracy – The information must be communicated with sufficient confidence in its accuracy to enable the manager to make valid decisions.
2. Completeness – The information to be given to the manager should be complete so that a decision is not made in ignorance of some of the key facts.
3. Timeliness – Information should be produced at the right time so as to enable useful decisions to be taken.
4. Concise – The manager should be provided only with the information which is useful for the purpose of his need and of a quantity for which he is capable of absorbing.
5. Clarity – The information to be provided to manager should be readily It must reduce ambiguity to the barest minimum.
6. Cost/benefit analysis – The cost of the information to be obtained should be less than the benefit to be derived from the information.

RISK AND INFORMATION PRESENTATION

Risk to a greater or lesser degree is present in all planning and decision making situations. It may be as follows:

• the possibility of machine failure,
• the difficulties of forecasting inflation or exchange rates, and
• the effects of competition, changing tastes, government actions, etc.

Therefore, it is important that the preparer of information for planning and decision making purpose presents the information in a manner which helps the manager to understand the effects of risk on the problem being considered, how risks are likely to affect the range of possible outcomes.

The effects of uncertainties can be presented in reports, statements and analyses in the following ways:

• Results and outcomes are presented as ranges of values rather than single point estimates.
• Three points estimates (high, low and most likely) for analysis and presentation purposes are used.
• Probabilities are associated with the values and outcomes. This is so because of its subjective nature. However, probability has been tested to provide possible valuable insights to the underlying risks.
• Sensitivity analysis may be used. This is a process by which the factors involved in the situation, for example, sales volume, cost per unit, selling price per unit and so on are varied one at a time and the effect on the outcome noted.
• Confidence limits may be applied more so when forecasts are involved.

LEVELS OF INFORMATION

Levels of information within an organisation (as distinct from information provided by an organisation to external users, such as shareholders, the general public, pressure groups, competitors, suppliers, customers, etc.) can be analysed into three:

Strategic information – This is used by top management to plan organisations’ objective. Such information includes future market prospects, the availability and cost of raising new funds, total cash needs, etc. Readers will note that strategic information is orderly used as the management for decision-making, called strategic planning.

Management control information, also known as tactical information, is used by middle management to ensure that the resources of the business are efficiently and effectively employed, (use monitored) to achieve organisation strategic objectives.

Examples are productivity measurements (output per man hour or per machine hour); budgetary control or variance analysis; profit result within a particular department of the organisation; labour turnover statistics within a department; short-term purchasing requirements, etc.

Please note that a large proportion of this information will be generated within the organisation, that is, as feedback and is likely to have an accounting emphasis. Tactical information is usually prepared regularly – perhaps weekly, or monthly (whereas strategic information is communicated irregularly). Tactical information is used for the decision-making called management control.

Operational information is used by ‘front-line’ managers such as foreman or head clerks to ensure that specific tasks are planned and carried out properly within a factory or office.

In the payroll office, for example, operational information relating to day-rate labour will include the hours worked each week by each employee, his rate of pay per hour, details of his deductions and for the purpose of wages analysis, details of the time each man spent on individual jobs during the week. Operational information relates to a level of decision-making called operational control.

Time scale of using Information

“Historic” information might be used immediately (for operational control) but less frequently for management control and only rarely for strategic planning. Information can be collected and stored for future use, although presumably, there will be a limit to its useful life.

Strategic planning may use information gathered several years previously and associate it with current information from within the organisation and from the environment, so as to analyse past trends in order to predict the future.

Management control may also use information several years old (to compare past and current performance) but historic information is more likely to have a limited useful life.

Operational control information has a short life-span in the design of a management information system. Some thought must be given to how long information (or data) should be stored, and to what uses they will eventually be put. One advantage of computers has been the facility to store large volumes of data for a long period in a manageable volume of space.

REPORTING BY EXCEPTION

There are physical and mental limitations to what a manager can read, absorb and understand properly before taking action. An enormous mountain of information, even if it is relevant, cannot be handled. Reports to management must, therefore, be clear and concise, and in many systems control action, works basically on the ‘exception’ principle. This is especially true of tactical information for management control.

Slight variations between actual result and the plan may be considered acceptable, and corrective action is only applied when results exceed established tolerable levels.

Information Flow

Information should be communicated to the managers who need to use it for control action. The structure of information flow – that is, how information is transmitted, from where to whom – is an important consideration in management information systems.

Information flow may be:

• vertical (down or up), or

Vertical Communication

Communicating downwards, that is, from superior to subordinate may be:

• delegation of work, which involves giving information about objectives, job instructions;
• information about procedures and practices in the organisation;
• telling the subordinate what the role of his job is in relation to the objectives of the company as a whole, that is, job rationale;
• informing the subordinate how well or how badly he is doing his job; and
• indoctrination of the company’s goals.

In practice, items (c), (d) and (e) are often too much neglected. The size of the downwards communication loop is normally very small between a superior and his immediate subordinate.

Some information may come from higher management, for example, statements about the goals of the organisation. But communication from the top are often too general in character and too remote from what the employee thinks of as practical reality to have any value.

Communicating upwards, that is, from subordinates to superiors may be analysed into five types:

• Information by subordinates above himself, his performance and his problems;
• Information about others and their problems;
• Comments about organisational practices and policies;
• Suggestions about what should be done and how it could be done; and
• Reports on what has been done.

It is normal for communication upwards to be restricted so that a subordinate deals with his immediate superior only

This communication^–loop’ will be larger if there is:

• a formal grievances procedure, that is, a channel for official complaints; and

• a formal suggestions procedure, that is, a system of encouraging suggestion for improvement from employees.

Because reporting upwards is usually very restrictive, there are many inherent communication problems (noise). A boss is unlikely to be given information by his subordinates which affects him adversely, and it is also probable that bosses will be told either what they want to hear or what the subordinates want them to hear.

The whole-hearted, well-informed support of all employees involved in producing information is essential to the success of a system. Filling-in time sheets, for example, can be done with widely differing attempts at accuracy by the people concerned.

Horizontal Communication

Horizontal communication is between people at the same hierarchical level in the organisation. It is necessary in two ways:

Formally: to co-ordinate the work of several people and perhaps several

departments, who have to co-operate to carry out a certain operation. For example, a production department manager or foreman might need to work in co-operation with a service department manager or foreman; and an accountant may require the help of a management scientist or statistician;

Informally: to furnish emotional and social support to an individual ‘or a

It is important that formal co-operation should not lead to a situation where a manager accuses another of boundary crossing. Horizontal communications should be an organised procedure or should be made only as a request for assistance, or as a response to such a request.

The information requirements of superiors and subordinates do not always coincide, in practice. What a subordinate wants to know is not always what a superior is prepared to tell him and vice versa. The greater this conflict, the more the likelihood of horizontal communication; as an escape value and also perhaps to get some essential work done which would not otherwise be properly performed.

TIMING OF INFORMATION

Information which is not available until after a decision is made will be useful only for comparisons and longer-term control.

The time value of information may be gauged by:

• the latest event (time) which the information covers: and
• the comparison control stage for which it will be used.

For example, weekly planning meeting in week two requires information about production in week one in order to influence control action by week three at the latest.

The criteria for the time value of information apply to both regular information (daily, weekly, monthly etc.) and ad hoc information (which is gathered on request or at irregular intervals).

In planning for the future, for example, what resources will be required, management gives consideration to the ‘planning horizon’, which is the time at which something will get done if a decision is taken now Future planning calls for forecasts about the situation at that future date.

To make the planning decision, management must have the information it requires first. If the information is late, there will be a delay in implementing the future plan.

Information prepared too frequently can be a serious disadvantage. If for example, a decision is taken at a monthly meeting about a certain aspect of a company’s operations, information to make the decision is only required once a month and weekly reports would be a time consuming waste of effort.

If control-information is provided later than it should be, perhaps because control reports are too infrequent, then the consequence would be unnecessary losses that could have been avoided and would thus be a much more difficult job to get actual results back on the course for achieving targets.

Confidence / Risk

Information must be trusted by the managers who are expected to use it. An important problem is, therefore, how much uncertainty analysis should be incorporated into reporting systems, in order to make the information realistic. In the past, there has been a reliance on historic cost data and a reluctance to recognize uncertainty in estimating.

An important issue in the design of a confidence information system is to decide from

what source data should be collected and to what extent uncertainties in cost estimation and sales demand, etc. should be analyzed. Historic costs provide valuable information for budgetary control but they have restricted value for both routine and once-only planning decisions.

Data generated by routine operations of the organisation can usually be collected easily and cheaply. Special information from non-routine data often requires a lot of planning and involves considerable expense, (much of it must be collected from sources outside the organisation).

For this reason, accounting systems are often unable to supply non-routine data. This situation may change as data base information systems are developed with computer technology and non-routine data can be stored and accessed should a special purpose arise.

The use of probability distributions (perhaps from an analysis of historic information) and expected values or sensitivity analysis, should feature in management amounting information more regularly than it does in practice at the moment.

A risk decision taker, who wished to minimise his risk, for example, by taking a decision where the standard deviation of expected profit is low or by using the minimax cost or minimax regret criteria may value information more highly than a risk seeker, who may be content to base his decision on expected values only.

Management accountants have the jobs of providing useful information to guide management planning and control decision and ‘as the usefulness of quantitative decision models becomes more widely understood by managers^, the demand for information as model inputs will grow’ (Source: Report of the American Accounting Association Committee on Managerial Decision Model 1969).

Sources and Comprehensiveness of Information

Production of large volume of information is not necessarily an advantage and the principle of exception reporting has already been described. Too much information will confuse rather than help the manager receiving it. Information, however, must not only be relevant and easily understood, but also need be detailed.

All sources from which relevant information may be obtained should be tapped and the sources may either be:

• internal, that is, from within the company; or

• external, that is, from the external environment, including information about competitors.

VALUE OF INFORMATION

For information to have value, it must lead a decision-maker to take action which results in reducing costs, eliminating losses, increasing sales, better utilisation of resources, prevention of fraud (audit requirements) or providing management with the consequences of alternative courses of action. Information which is provided but not used has no value.

A decision taken on the basis of information received also has no actual value. It is only the action taken as a result of a decision which realize actual value of the information for a company.

Value may, therefore, be considered as:

• Intrinsic: information has a value inherent in itself, for example, a company knows there is a new machine which could increase output by 30%

• Potential: If a decision is taken to buy the machine in the example above, there is the possibility of making a certain profit and this is the potential values of the information.

• Actual: If the machine is bought, the actual extra profit earned will be the actual value of the information.

The expected value of information would be assumed to be the maximum amount, a user would be willing to pay for it. After the event, value measured in retrospect is of little value because it does not help the decision in advance as to whether the information is worth the cost of its collection. The information required for the preparation of statutory reports has a latent value because it prevents the consequences of what would happen if the company failed to produce them. The cost of collecting information bears no relation to its value. An item of information which leads to an actual increase in profit of N90 is not worth having if it costs N100 to collect it.

The cost of collecting information typically consists of:

• the costs of the MIS designers and installers; the wages and salaries of employee operating the system; professional fees, for example, consultancy fees;

• the costs of equipment used in the information system and supplies, such as, paper consumed; and
• training costs;

Value and Frequency

The value of information must also relate to the frequency of its provision and to the level in the management hierarchy where it is sent and used:

• front-line supervisors need more regular control information perhaps weekly or daily; and

• middle managers and senior managers might need information less frequently, say monthly, half yearly or yearly.

The benefits (value) from feedback of control information are usually a once only gain. Once the fault has been identified and put right, there should be no scope for further improvement, and repeated feedback of control information should be of little value until the system gets out of control again. Arguably, continuous monitoring and reporting may be unnecessarily costly. At the very least, the principle of reporting by exception should be used.

The value of information also relates to:

• the ability of the receiver to understand it and use it;

• the purpose or decision for which it is intended to help; and
• the quality and availability of other information from different sources as

complements^.

A user will value information more if it changes his decision from what it would otherwise have been to a more optimal decision on the basis of the information provided.

COMPUTERS (INFORMATION TECHNOLOGY)

Computers enable more data to be processed than would be possible by manual methods, and in most mid-sized companies, a management information system depends, at least to some extent, on their use.

The costs of computers are high and it is necessary to decide whether the values of information which would be obtained using them is worth the cost of their installation and operation.

Although, computers often justify their expense, there may always be some areas, where their application will be uneconomical. If a detailed study of costs and value is made, it will be clear where computer could be used to advantage.

No company should embark on a programme to develop a major computer information system except to meet a specific properly evaluated need. It is also necessary to remember that although computers can process large volumes of data quickly, the information actually reported to management should be concise and selective.

A computer should be a means of boiling a mass of data down to key facts on which action should be taken.

CLASSES OF REPORTS

Management Report

This refers to various statements prepared solely for the use of management^, for example, the budget, sales reports, etc. Management reports have no set standards and format.

Corporate Report

• Objective: the fundamental objective of corporate reports is to communicate economic measurements or an information about the resources and performance of the reporting entity useful to those having reasonable rights to such information.
• Users of corporate reports:

• The management;
• Existing and potential shareholders;

• Existing and potential holders of debentures and loan, providers of short-term loans and finance;

• labour unions and employees, including existing, potential and past employees;
• Financial and investment analysts;

• The government and government agencies;
• The auditors;

• The public at large;
• The competitors.

Contents of the Annual Report: The contents of the annual report and accounts of a company can broadly be categorised as those complying with the requirements of professional bodies or industry associations, standards and other regulatory framework or laws.

In addition to information falling under broad categories, it is common to find, in a company’s annual report and accounts, certain information which is published, not because it is required by law or by any professional organisation but as a matter of commercial convention and prudence. An example of this is the chairman’s statement.

The annual report and accounts of companies published usually consist the following:

• The Chairman’s statement
• The Director’ s report
• Basic financial statements, that is:

• the statement of accounting policies;
• the balance sheet:

• the profit and loss account; and

• the notes on the accounts;

• A statement of cash flow;
• The auditors’ report;

• The Audit Committee’s report;

• A statement of value added. In some cases, this is presented in the form of pictorial illustration;
• A five year financial summary;

• Some other information such as directors shareholdings and shareholders with more than 10% of the equity shares;
• An employment report;

• A statement of transactions in foreign currencies; and

• A statement of the future prospect.

CONCLUSIONS

Various packages are utilized for the purpose of managing information and they include: executive information system which permits rapid information retrieval and work by exception reporting and ‘drilling down’ the data and sensitivity analysis which ensures the assessment of the effects of uncertainty.