ACCA PERFORMANCE MANAGEMENT (PM) BPP Learning Media is an ACCA Approved Content Provider. This means we work | closely with ACCA to ensure this Study Text contains the information you need to pass ee In this Study Text which has been reviewed by the ACCA examining team we: + Hightgh the most important elements in he syllabus and the ey sks you wil ned ‘Signpost how each chapter inks othe syllabus and he Study Guide Provide ts of exam focus points dernonsrating what is expected of you in the exam + Emphasis key points in regular fast forward summaries + Test your knowledge in quick quizzes ‘Examine your understanding in our practice question bank «Reference all the important opis in ou ul index BPP’s Practice & Revision Kit also supports the Performance Management syllabus FOR EXAMS IN SEPTEMBER 2019, DECEMBER 2019, MARCH 2020 AND JUNE 2020 <~UCHAM a >< ma BPP LEARNING MEDIAFirs ition 2007 Twelth eition January 2019 IsBN 9781 5097 2405 5 (Previous ISBN 9781 5097 1677 7) eISBN 9781 5097 2432 1 Previous eISBN: 9781 5097 1707 1 British Library Cataloguing-in-Publicaton Data ‘A catalogue record for this book is availble from te Bits Library Published by BPP Learning Media Lid BPP House, Aldine Place 42-144 Uxbridge Road London Wi2 BAA ‘nn bpp.com/leaingmedia Printed in China |Your learning materials, published by BPP Learning | Media Lid, are printed on paper ablaned from | traceable sustainable sources Al ight teseved, Nop otis publication maybe reproduce, sled ina eva sytem or tant, in any fm or by ay means, ecto, mechanical, teopyng,ecading ot cihenise, witout th ror writen permission of BPP Leaing Metin \Weare rate oh Asotin of Chained Certod ozaurianis or permission to reprodwe ps examination ‘questions. 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We upd for reason) Pease nol the e= products are sold on single user ence basis we do not upoly ‘noc’ codes o people wha have bought them secondhand ‘And wat about uti he UK? BPP Learning Mea tives to me ou materials avaible apres student can ato by acl bvitng aangerens, pricing pois and paershigs which ae eat listdon our website tiny minority igor this and indulge incrimiral att by gal photocopying ow material or ‘supporting cxansations al ote at gal and uneticaly inane ra, can you eats hen? BPP LEARNING MEDIAPage Introduction Helping you to pass v ‘Studying Performance Management (PM) vii The exam and exam formulae vil Part A Information, technologies and systems for organisation performance 1 Managing information 3 2 Information systems and data analytics a Part B Specialist cost and management accounting techniques 3 Costing 43 4a Activity based costing 59 4b Target costing n 4c Life cycle costing 79 44. Throughput accounting 89 4e Environmental accounting 105 Part C Decision-making techniques 5 Cost volume profit (CVP) analysis 17 6 Limiting factor analysis 141 7 Pricing decisions 167 8 Short-term decisions: 203 9 Risk and uncertainty 223 Part D Budgeting and control 10 Budgetary systems 251 11 Quantitative analysis in budgeting 289 12 Budgeting and standard costing 305 13 Variance analysis 323 14 Planning and operational variances 349 15 Performance analysis and behavioural aspects: 365 Part E Performance measurement and control 16 Performance measurement in private sector organisations: 383 17 Divisional perlormance and transfer pricing 43 18 Further aspects of performance management 435 Practice question bank 451 Practice answer bank 489 Bibliography 535 Index 539 Review form BPP LEARNING MEDIABPP LEARNING MEDIAHelping you to pass ‘Asan ACCA Approved Content Provider, BPP Learning Media gives you the opportunity to use study materials reviewed by the ACCA examining team. By incorporating the examining team’s comments and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning Media Study Text provides excellent, ACCA-approved support for your studies. These materials are reviewed by the ACCA examining team. The objective ofthe review is to ensure that ‘the material properly covers the syllabus and study guide outcomes, used by the examining team in setting the exams, in the appropriate breadth and depth. The review does nat ensure that every eventuality, Combination or application of examinable topics is addressed by the ACCA Approved Content. Nor does the review comprise a detailed technical check of the content as the Approved Content Provider has its ‘own quality assurance processes in place in this respect. Nisulahis ad ee ee i Before you can qualify as an ACCA member, you not only have to pass all your exams but also full a three year practical experience requirement (PER). To help you to recognise areas of the syllabus that you might be able to apply in the workplace to achieve different performance objectives, we have introduced the 'PER alert’ feature. You will find this feature throughout the Study Text to remind you that what you are learning to pass your ACCA exams is equally useful to the fulfilment of the PER requirement, Your achievement of the PER should now be recorded in your online My Experience record Studying can be a daunting prospect, particularly when you have lots of other commitments. The different features of the Study Text, the purposes of which are explained fully on the Chapter features page, will help you whilst studying and improve your chances of exam success, Our Study Texts are completely focused on helping you pass your exam. Our advice on Studying PM outlines the content of the exam, the necessary skills you are expected to be able to demonstrate and any brought forward knowledge you are expected to have. Exam focus points are included within the chapters to highlight when and how specific topics were examined, or how they might be examined in the future. Exam references are provided to the September 2016 and December 2016 full exams. Subsequently, only a selection of constructed response questions (CRO) have been released by ACCA and these have also been referenced in relation to the month in which they were released eg 12/17 for the ‘September/December 2017 sample questions, which is not necessarily the same as the exam in which they actually appeared. Exam references post December 2016 do not represent a full exam. The references should be taken as a guide. BPP Learning Media and ACCA do not advocate question spotting Testing yourself helps you develop the skills you need to pass the exam and also confirms that you can recall what you have learnt We include Questions — lots of them — both within chapters and in the Practice Question Bank, as well as Quick Quizzes at the end of each chapter to test your knowledge of the chapter content. BPP | MEDIAChapter features Each chapter contains a number of helpful features to guide you through each topic. Topic list What you will be studying in this chapter and the relevant section numbers, together with ACCA syllabus references. Puts the chapter content inthe context ofthe syllabus as Introduction ae " Study Guide Links the chapter content with ACCA guidance. Highlights how examinable the chapter content is likely to be and the ways in which it could be examined. Exam Guide ‘What you are assumed to know from previous studies/exams, xm) ‘Summarises the content of main chapter headings, allowing you to preview and review each section easily. Demonstrate how to apply key knowledge and Examples techniques. Key terms Definitions of important concepts that can often earn you oes ‘easy marks in exams. ‘When and how specific topics were examined, or how ‘they may be examined in the future. Exam focus points Formulae that are not given in the exam but which have to be learnt. Gives you a useful indication of syllabus areas that closely relate to performance objectives in your Practical Experience Requirement (PER), Gives you essential practice of techniques covered in the chapter. Real world examples of theories and techniques. Aull lst of the Fast Forwards included in the chapter, providing an easy source of review. ‘A quick test of your knowledge of the main topics in the chapter. Found at the back of the Study Text with more comprehensive chapter questions. Cross referenced for easy navigation, = ere MEDIAStudying PM The Performance Management (PM) exam requires candidates to be able to apply management accounting techniques in business environments. The key question you need to be able to answer is ‘what does it ll actualy mean’. Modern technology is capable of producing vast amounts of management accounting information but it has to be used to help managers make good decisions and manage effectively. The emphasis in this exam is therefore on practical elements and application to the real world The exam does nat set out to trick you: it wil be fair. 1 What PM is about ‘The aim of this syllabus is to develop knowledge and skills in the application of management accounting techniques. It covers a number of specialist techniques, decision-making, budgeting and standard costing, concluding with how business performance should be managed and controlled. PM is the middle exam in the management accounting section of the qualification structure. Management ‘Accounting (MA) concerns just techniques and Advanced Performance Management (APM) thinks strategically and considers environmental factors. PM requires you to be able to apply techniques and think about their impact on the organisation, 2 What skills are required? © Youre expected to have a core of management accounting knowledge from your MA studies. © To deal with the objective test questions, you will need to demonstrate understanding of the subject across the entire syllabus. © Forthe longer questions, you will be required to carry out calculations, with clear workings and a logical structure. © You will be required to interpret data, © You will be required to explain management accounting techniques and discuss whether they are appropriate for a particular organisation. © You must be able to apply your skills in a practical context. 3 How to improve your chances of passing © There is no choice in this exam; all questions have to be answered. You must therefore study the entire syllabus, there are no short-cuts, © You should then practise extensively on examination-style questions. Practice will improve your ability to answer questions well, and should enable you to answer them more quickly. BPP's Practice & Revision Kit contains questions on all areas of the syllabus. © Keep an eye out for articles, as the examining team will use Student Accountant to communicate with students, © Read journals etc to pick up on ways in which real organisations apply management accounting and think about your own organisation if that is relevant. 4 Brought forward knowledge You wil need a good working knowledge of basic management accounting from ACCA MA. Chapter 3 ofthis ‘Study Text revises elements of costing, and further revision material is provided in other chapters, such as those on CVP analysis and variance analysis. If you struggle with the examples and questions used to revise this kknowiedge, you should go back and revisit your previous work. The examining team will assume you know this material and it may form part of an exam question BPP aN wines EE MEDIAThe exam and exam formulae Computer-based exams It will only be possible from exams in June 2019 for candidates to sit Applied Skills exams as a computer- based exam (CBE). Paper-based exams will not be run in parallel. Exam duration ‘The syllabus is assessed by a computer-based exam (CBE) format. With effect from June 2019 for TX and ‘September 2019 for all Applied Skills exams, seeded questions have been removed from CBE exams and the exam duration is 3 hours for 100 marks. Prior to the start of each exam there will be time allocated for students to be informed of the exam instructions. For more information on these changes and when they will be implemented, please visit the ACCA website. Format of the exam The exam format is the same irrespective of the mode of delivery and will comprise three exam sections: _| Obj ctive test (OT) | 18 questions x 2 marks 30 B Objective test (OT) case | 3 questions x 10 marks 30 | | Each question will contain 5 sub-parts each worth 2 marks _| | | Constructed Response i 2 questions x 20 marks 40 (Long questions) [To | 400 Section A and B questions willbe selected from the entre syllabus. Section A will contain objective test questions and will be marked automaticaly as either correct or incorrect by the computer. The responses to each question or sub-part in the case of OT cases are marked automatically as either correct or Incorrect by compute. ‘The 20 mark Section C questions will mainly focus on the following syllabus areas but a minority of marks can be drawn from any other area of the syllabus: + Information, technologies and systems for organisation performance (syllabus area A) + Decision making techniques (syllabus area C) + Budgeting and control (syllabus area D) + Performance measurement and control (syllabus area E) ‘The responses to these questions are human marked, Syllabus and Study Guide ‘The complete Performance Management (PM) syllabus and study guide can be found by visiting the exam resource finder on the ACCA website, BE een Bre MEDIABPP LEARNING MEDIA Exam formulae Set out below are the formulae you will be given in the exam. If you are not sure what the symbols ‘mean, or how the formulae are used, you should refer to the appropriate chapter in this Study Text. Chapter in ‘Study Text Demand curve 7 P =a-bd change in price change in quantity a price when Q=0 MR =a~2b0 Learning curve 1" Where Y= cumulative average time per unit to produce x units a= the time taken for the first unit of output x =the cumulative number of units b =the index of learning (log LA/log 2) LR = the learning rate as a decimalBPP BEE en Eins MEDIAInformation, technologies and systems for organisation performance BPP LEARNING MEDIA aAaAw,rvuBPP LEARNING MEDIA1 The role and benefits of information systems in FAT). (0) organisations I At) [2 Costs of information systems {6 Sources of management accounting information | information for contre | 8 Costs of information - A2 (0), (a) ‘Accountants are surounded by data and information andthe volume of itis only getting bigger. In this chapter we look at information systoms, thelr ole within organisations and thelr costs and benefits. We also explain the uses of the internet, intranet, wireless technology and networks. We then move on to the principal controls and provedures involved in ‘generating and cstributing information, as wel as information secur ‘We also look intemal and extemal sources of management information including financial accountng records, government agencies and consumer panels. We then consider the costs of information.Study guide [at | Managing information (a) | Explain the role of information systems in organisations. | A {b) | Discuss the costs and benefits of information systems. (6) | Explain the uses ofthe internet, intranet, wireless technology and networks. ; (@ | Discuss the principal controls required in generating and distributing ; internal information. (2) | Discuss the procedures that may be necessary to ensure security of highly a | confide Information the ot fo external eoneurmption Sources of information Identify the principal internal and external sources of management, a | | accounting information (0) | Demonstrate how these principal sources of management information might a | bee used for control purposes. | Identify and discuss the direct data capture and process costs of management accounting information. unt —_ | (@)__| Identify and discuss the indirect costs of producing information. I 2 Exam guide The topics covered in this chapter could form part of a scenario question in the exam or could feature as an objective test question in Section A or B. Ensure that you are able to discuss these topics as well as. being able to answer OT questions. i 1 | One of the competences you require to fulfil performance objective 12 of the PER is to monitor new | | developments in management accounting and consider their potential impact on performance and to | | management accounting systems. This data forms reports to management and is key for control and monitoring performance. In this chapter we look at information sources and procedures that may be | necessary to ensure security of highly confidential information. | 1 The role and benefits of information systems in organisations HESEEEDWD 6 garisations require intormation systems fora range of purposes Supporting operations: = Processing and recording transactions Supporting managerial activities: Decision making Planning Performance measurement Control BPP LEARNING MEDIA,Key term @ BPP LEARNING MEDIA | An Information system is a combination of hardware, software and communications capability, where information is collected, processed and stored. The role of an information system encompasses more than just activity automation. Information systems can be used to improve processes within organisations as well as externally with suppliers and customers. Organisations need information systems to enable them to capture and generate the information that ‘managers need for planning, control and decision-making purposes. We shall consider the needs of management further in Chapter 2 when we look atthe types of information system. Information systems also have more general roles to play within an organisation. For example, they improve communication, allow better operations and manufacturing, enhance products and services provided and provide opportunities to reduce costs. 1.1 Recording transactions Information about each business transaction or event is required for a number of reasons. Documentation of transactions can be used as evidence in a case of dispute. There may be a legal requirement to record transactions, for example for accounting and audit purposes. Detailed information ‘on production costs can be built up allowing a better assessment of profitability 1.2 Decision making Information is also required to make informed decisions. Information and information systems enable Informed decisions to be made. Information used by information systems may be classified as internal and external. 1.3 Planning Planning requires knowledge of, among other things, available resources, possible timescales for implementation and the likely outcome under alternative scenarios, Information systems can provide a number of planning fools. 1.4 Performance measurement Just as individual operations need to be controlled, overall performance must be measured in order to enable comparisons against budget or plan to be made. This may involve the collection of information ‘on, for example, costs, revenues, volumes, timescales and profitability. The collection, analysis and presentation of such data can be performed by information systems, 1.5 Control Once a plan is implemented, its actual performance must be controlled. Information is required to assess whether it Is proceeding as expected or whether there is some unexpected deviation from the plan. It may consequently be necessary to take some form of corrective action. Information systems can be used to monitor and control the outcomes of plans. 1.6 Factors that make information a valuable commodity Information is now recognised as a valuable resource, and a key tool in the quest for a competitive advantage, Easy access to information, the quality of that information and speedy methods of exchanging the information have become essential elements of business success. Organisations that make good use of information in decision making, and which use new technologies to ‘access, process and exchange information are likely to be best placed to survive in increasingly competitive world markets, Part A Information, technologies and systems for organisation performance | 1: Manaping Informatie2 Costs of information systems MESEWD itormaton systems costs can be signtcan, 2.1 Costs of information Information system costs include hardware and software costs, implementation costs associated with a ‘new systems development (especially labour costs and training costs) and day to day costs, such as. salaries and accommodation, Many organisations invest large amounts of money in information systems, but not always wisely. The ‘unmanaged proliferation of IT is likely to lead to expensive mistakes. Two key benefits of information systems, the ability to share information and the avoidance of duplication, are likely to be lost. AIL T expenditure should therefore require approval to ensure that it enhances rather than detracts from the overall information strategy. Effective budgeting may be required to keep costs under control, particularly purchase of new equipment. ‘An activity-based approach may be appropriate. In terms of your performance management exam, you may be required to consider an investment ‘opportunity such as a new information systern. Techniques such as return on investment (covered later in this Study Text) can be used to analyse the costs and benefits 3 Communication of information ST Communicating information is much easier when computers are connected together to form a network. Various forms of networks can be formed - global in the form of the internet and local in the form of the intranet. Wireless technology facilitates mobile networking, 3.1 Networks ‘There was a time when computers were stand-alone one-user machines that didn’t communicate with any other devices or the internet, Connecting machines together whereby information could be sent between individuals or selected devices, became popular in the mid-80s. Businesses found this to be a major boost to efficiency and productivity and the concept of networking became widespread. Some computers within the network could be dedicated to file storage, known as file servers, or other dedicated services such as printing, Others could be charged with performing major numer crunching tasks. These server computers are usually stored in a dedicated room in a secure location. 3.2 Intranets A cluster of computers can be networked together to form an organisation-wide network. This is known as an intranet and used to share information internally. Intranets are effectively private networks. Potential applications include company newspapers, induction material, online procedure and policy manuals, employee web pages where individuals post details of their activities and progress, and internal databases of the corporate information store. Intranets are used for many purposes: (a) Performance data: linked to sales, inventory, job progress and other database and reporting systems, enabling employees to process and analyse data to fulfil their work objectives, (b) Employment information: online policy and procedures manuals (health and safety, disciplinary and grievance), training and induction material, internal contacts for help and information, (c) Employee support/information: advice on first aid, healthy working at computer terminals, training courses offered and resources held in the corporate library and so on.(d) Notice boards for the posting of messages to and from employees: notice of meetings, events, trade union activities. (€) Departmental home pages: information and news about each department's personnel and activities, to aid identification and cross-functional understanding (A) Bulletins or newsletters: details of product launches and marketing campaigns, staff moves, changes in company policy, links to relevant databases or departmental home pages. (9) Email facilities for the exchange of messages between employees in diferent locations. (h) Upward communication: suggestion schemes, feedback, questionnaires. 3.3 Extranets An extranet is an intranet that is accessible to authorised outsiders, using a valid username and password. The username will have access rights attached, determining which parts of the extranet can be viewed. Extranets are becoming a popular means for business partners to exchange information, 3.4 Wireless technology At one stage, the networks as described above would have needed to be physically connected via cables (eg ethernet). However, the development of portable computers and radio technologies has led to wireless networks. Wireless technology allows communication using electromagnetic, radio and microwave signals. For ‘example, Wi-Fi converts an internet signal into radio waves which can then be picked up by devices (9 laptops and tablets) containing a wireless adaptor. The main benefits of wireless technology include: (a) Remote working and increased mobility (b) Increase productivity (because employees can work together wherever they need to) | (c) Reduced costs as the business expands (because itis easier to add new users toa wireless | network than to install new cabling) WiFi networks are created through an array of hundreds and even thousands of local ‘hotspots’ throughout metropolitan areas. Initially, hotspots were rare but can now be found in most major airports, hotels, bookstores, coffee houses, shopping centres and even car dealerships. Mobile devices also have certain drawbacks. Laptops, netbooks and smartphones have security issues ~ eq they are easy to steal or lose. When using mobile devices itis important to ensure that employees are wate of their responsibilities and the need to Keep both mobile devices and business information secure. IF using public Wi-Fi to access the internet, it may not always be possible to find a secure and available network. This may prevent access to business information when required, There are costs involved in setting up the equipment and training required to make use of mobile devices. Mobile IT devices can expose valuable data to unauthorised people if the proper precautions are not taken to ensure that the devices, and the data they can access, are Kept safe. 3.5 The internet The internet is a global network connecting millions of computers. ‘| J ‘The world wide web constitutes a global resource of knowledge and data. The internet represents a physical global network with access to this ‘web’. The terms 'world wide web’ and ‘internet’ are often used interchangeably although strictly speaking, this is not correct. The world wide web uses the internet for Global transmission between computers, The internet is essentially a public network and hence allows communication with external stakeholders such as other businesses. Computers across the world communicate via telecommunications links and information can be exchanged through email or through accessing and entering data viaa website, We will look at information and the internet again in Section 6 below.4 Controls over generating and distributing internal information Controls need to be in place over the generation of internal information in routine and ad-hoc reports, 4.1 Controls over generating internal information in routine reports a) ©) (9) (e) ® 4.2 Controls over generating internal (a) (b) () (a) (e) Carry out a cost-benefit analysis. How easy is the report to prepare compared with the usefulness ‘of the decisions that can be taken as a result of its production? The cost of preparing the report will in part be determined by who is preparing it. The cost can be reduced if its preparation can be delegated by a director to a junior member of statt Atrial preparation process should be carried out and a prototype prepared. Users should be asked to confirm that their requirements will be met. A consistent format and consistent definitions should be used to ensure that reporting is accurate and the chance of misinterpretation is minimised. Standard house styles will ensure that time is not wasted by managers, staff and report writers on designing alternative layouts. ‘The originator of the report should be clearly identified so that users’ queries can be dealt with quickly. ‘The report should clearly set out limits to the action that users can take as a result of the information in the report. This will ensure that the organisation's system of responsibilities is maintained. ‘The usefulness of the report should be assessed on a periodic basis to ensure that its production is necessary. formation in ad hoc reports Carty outa cost-benefit analysis as above, Ensure that the required information does not already exist in another format. Brief the report writer so that only the relevant information is provided Ensure that the originator is clearly identified Ensure that report writers have access to the most up-to-date information. 4.3 Controls over distributing internal information (a) A procedures manual sets out controls over distributing internal information. Procedures manual (for standard reports) () Indicates what standard reports should be issued and when (eg budgetary control report for department X on a monthly basis) (ii) Sets out the format of standard reports (ii) Makes clear who should receive particular standard reports (iv) Indicates whether reports should be shredded (if confidential) or just binned (V) Makes clear what information should be regarded as highly confidential Other controls (i) Payroll and personnel information should be kept in a locked cabinet or be protected by password access on a computer system. (ii) Allemployees should be contractually required not to divulge confidential information (ii) The internal mail systern should make use of ‘private and confidential’ stamps, BPP LEARNING MEDIA[==> BPP LEARNING MEDIA (iv) An appropriate email policy should be set up. (1) Email is best suited to short messages rather than detailed operational problems. (2) Email provides a relatively permanent means of communication, which may be undesirable for confidential’'off-the-record’ exchanges. (3) Staff may suffer from information overload, (4) Itis uncomfortable to read more than a full soreen of information. Longer messages will either not be read properly or will be printed out (in which case they may just as Well have been circulated in hard-copy form). (v) Physical computer security Internal security. Management can regulate which staff members have access to different types of data, For instance, access to HR records may be restricted to members of the HR team by keeping these records on a separate server or database. In this way, only certain terminals may access servers with sensitive or confidential data stored on them. External security. The organisation can also protect its data from external access by using firewalls. firewall is designed to restrict access to a network by selectively allowing or blocking Inbound traffic to parts of an organisation's system. It examines messages entering and ‘exiting the system and blocks any that do not conform to specified criteria. In this way, firewalls can be used to protect data and databases from being accessed by unauthorised people or terminals. For example, access to Key servers could be restricted to a small number of terminals only. 4.4 If information is held on a server {t information is held on a server then the following are required: (2) Controls over viruses and hacking (b) Clearly understood policy on the use of emails and corporate IT (c) Password system to restrict access to particular files 5 Security and confidential information ‘A number of procedures can be used to ensure the security of highly confidential information thal is not {for external consumption. Passwords Logical access systems Database controls Firewalls Personnel security planning Anti-virus and anti-spyware software Disaffected employees have potential to do deliberate damage to valuable corporate data or systems, especially if the information system is networked, because they may have access to parts of the system that they are not really authorised to use. If the organisation is linked to an external network, people outside the company (hackers) may also be able to get into the company’s internal network, either to steal data or to damage the system. Various procedures are therefore necessary to ensure the security of highly confidential information that is not for external consumption. 5.1 Passwords Passwords are a set of characters allocated to a person, terminal or facility which have to be keyed into the system before further access is permittedIn order to access a system the user first needs to enter a string of characters. If what is entered matches a password issued to an authorised user or valid for that particular terminal, the system permits access. Otherwise the system shuts down and may record the attempted unauthorised access. Keeping track of these attempts can alert managers to repeated efforts to break into the system; in these cases the culprits might be caught, particulary if there is an apparent pattern to their efforts. The restriction of access to a system with passwords is effective and widely used but the widespread and growing use of PCs and networks is making physical isolation virtually impossible. The wider use of information systems requires that access to the system becomes equally widespread and easy. Requirements for system security must be balanced by the operational requirements for access: rigidly enforced isolation of the system may significantly reduce the value of the system. 5.2 Logical access systems While physical access control (doors, locks, and so on) is concerned with the prevention of unauthorised persons gaining access to the hardware, logical access control is concerned with preventing those who already have access to a terminal or a computer from gaining access to data or software. Ina logical access system, data and software or individual computer systems will be classified accoi to the sensitivity and confidentiality of data. (a) Payroll data or details of the draft corporate budget for the coming year may thus be perceived as highly sensitive and made available to identified individuals only, (b) Other financial information may be made available to certain groups of staff only, for example ‘members of the finance function or a certain grade of management. (c) Other data may be unrestricted. A logical access system performs three operations when access is requested (2) Identification of the user (b) Authentication of user identity (c) Check on user authority 5.3 Database controls Databases present a particular problem for computer security. In theory, the database can be accessed by large numbers of people, and so the possibility of alteration, unauthorised disclosure or fraud is so much greater than with applic Itis possible to construct complicated password systems, and the system can be programmed to give a limited view of its contents to particular users or restrict the disclosure of certain types of information to particular times of day. It is possible to build a set of privileges into the system, allowing authorised users with a particular password to access more information. ‘There are problems ensuring that individuals do not circumvent the database by means of inference, however. If you ask enough questions, you should be able to infer from the replies the information you are really seeking, For example, the database forbids you to ask if John is employee Category A. However, if you know there are only three employee categories, A, B, and C, and there is no prohibition on asking about categories B and C, you can work out the members of category A by process of elimination (ie neither B, nor C, therefore A). ‘These so-called Inference controls exist to make this difficult by limiting the number of queries, or by controlling the overlap between questions. 5.4 Firewalls ‘Systems can have firewalls to prevent unauthorised access into company systems. Firewalls can be implemented in both hardware and software, or a combination of both. Firewalls are frequently used to prevent unauthorised internet users from accessing private networks connected to the internet, iBPP LEARNING MEDIA especially intranets. All messages entering or leaving the intranet pass through the firewall, which examines each message and blocks those that do not meet specified security criteria, ‘As well as preventing unauthorised access onto company systems, firewalls can also be used to help protect a company’s data from corruption by viruses. 5.5 Encryption Information transmitted from one part of an organisation to another may be intercepted. Data can be encrypted (scrambled) in an attempt to make it unintelligible to eavesdroppers. 5.6 Other safety measures ‘Authentication is a technique for making sure that a message has come from an authorised sender. Dial back security operates by requiring the person wanting access to the network to dial into it and identity themselves first. The system then dials the person back on thelr authorised number before allowing them access. All attempted violations of security should be automatically logged and the log checked regularly. In a ‘multi-user system, the terminal attempting the violation may be automaticaly disconnected. 5.7 Personal data In ecent years there has been a growing popular fear that information about individuals which is stored ‘on computer files and processed by computer can be misused. {In particular, its felt that an individual could easily be harmed by the existence of computerised data about themselves which was inaccurate or misleading and which could be transferred to unauthorised ‘third parties at high speed and litle cost, ‘As a result, most countries have introduced legislation designed to protect the individual. In the UK, the current legislation is the Data Protection Act 2018. 5.8 Personnel security planning Certain employees will always be placed in a position of trust; for example, senior systems analysts, the database administrator and the computer security officer. With the growth of networks, almost all ‘employees may be in a position to do damage to a computer system. A recent report claims that 80% of hacking is done by employees, Although most employees are honest and well intentioned, it may be relatively easy for individuals to ‘compromise the security of an organisation if they wish to do so, The following types of measure are therefore necessary. (2) Careful recruitment (b) Job rotation (c) Supervision and observation by a superior (a) Review of computer usage (eg via systems logs) (@) Enforced vacations The key is that security should depend on the a weakness, itis also a strength imum possible number of personnel, Although this is 5.9 Anti-virus and anti-spyware software ‘The growth ofthe internet has led to increased exposure to security risks. Two particular risks derive from exposure to computer viruses and to spyware. Computer viruses typically ative by email and are triggered when the user opens the emall and an attachment. The virus is a self-replicating computer program that infiltrates and then damages a computer system.Spyware is a type of program that watches what users do with their computer and then sends that information over the internet to a third party. Customers of online bank accounts have experienced particular problems with spyware when their personal financial data has bean captured by Keylogging software Software has been developed to counteract these risks. Anti-virus software works to achieve this by. (a) Scanning files to look for known viruses {b) Identifying suspicious behaviour from any computer program that might indicate infection au Spyware software combats spyware in two ways. {a) Real-time protection which prevents the installation of spyware by blocking software and activities known to represent spyware {b) Detection and removal of spyware by scanning software and removing files and entries that match known spyware 6 Sources of management accounting information WESTIE pternat sources of ntrmation include the tnancial accounting records and other systems closely ted to the accounting system. Capturing data/information from inside the organisatior lves the following. (a) Asystem for collecting or measuring transactions data ~ eg sales, purchases, inventory and revenue — which sets out procedures for what data is collected, how frequently, by whom and by what methods, and how itis processed and filed or communicated (b) Informal communication of information between managers and staff (eg by word of mouth or at meetings) () Communication between managers 6.1 Sources of monetary and non-monetary information 6.1.1 The financial accounting records: ‘You are by now very familiar with the idea of a system of sales ledgers and purchase ledgers, general ledgers, cash books, and so on. These records provide a history of an organisation's monetary ‘transactions. ‘Some of this information is of great value outside the accounts department - most obviously, for example, sales information for the marketing function. Other information, like cheque numbers, is of purely ‘administrative value within the accounts department. You will also be aware that, to maintain the integrity ofits financial accounting records, an organisation of any size will have systems for and controls over transactions. These also give rise to valuable information ‘An inventory control system is the classic example: besides actually recording the monetary value of purchases and inventory in hand for external financial reporting purposes, the system will include purchase orders, goods received notes, goods returned notes, and so on, which can be analysed to provide management information about speed of delivery, say, or the quality of supplies. 6.1.2 Other internal sources Much information that is not strictly part of the financial accounting records nevertheless is closely tied to the accounting system. . See ea eee BPP MEDIA[n> BPP LEARNING MEDIA’ (2) Information about personnel willbe linked to the payroll system. Additional information may be obtained from this source if, say, a project is being costed and itis necessary to ascertain the availability and rate of pay of different levels of staf. (b) Much information will be produced by a production department about machine capacity, movement of materials and work in progress, set up times, maintenance requirements, and so on, (c) Many service businesses - notably accountants and solicitors need to keep detailed records of the time spent on various activities, both to justiy fees to clients and to assess the efficiency of operations. Staff themselves are one of the primary sources of internal information. Information may be obtained either informally in the course of day to day business or formally through meetings, Interviews or questionnaires. Sources of information ‘Think of at least one piece of non-monetary information that a management accountant might obtain from the following sources in order to make a decision about a new product. (2) Marketing manager (b) Vehicle fleet supervisor (c) Premises manager (a) Public retations officer (@) Head of research 6.2 External sources of information External information tends to be more relevant to strategic and tactical decisions than to operational decisions, (Benchmarking is an exception.) Capturing information from outside the organisation might be carried out formally and entrusted to particular individuals, or might be ‘informal 6.3 Formal collection of data from outside sources ‘There are many sources of external Information. (a) A company's tax specialists will be expected to gather information about changes in tax law and how this will affect the company. {b) Obtaining information about any new legislation on health and safety at work, or employment regulations, must be the responsibility ofa particular person ~ for example the company's legal ‘expert or company secretary — who must then pass on the information to other managers affected by it (c) Research and development work often relies on information about other R&D work being done by another company or by government institutions. An R&D official might be made responsible for finding out about R&D work outside the company. (@) Marketing managers need to know about the opinions and buying attitudes of potential customers. To obtain this information, they might carry out market research exercises. Informal gathering of information from the environment goes on all the time, consciously or unconsciously, because the employees of an organisation learn what is going on in the world around ‘them — perhaps from the media, meetings with business associates or the trade press.Organisations hold external information, such as invoices and advertisements, from customers and ‘suppliers. However, there are many occasions when an active search outside the organisation is necessary, 6.4 Spe MESEEIEWD seconsary date, such as government statis o data provided by online databases isnot collected by ‘r for the user. Primary data ~ more expensive than secondary data ~ is more tallored to the user's exact needs. Market research is an example. external sources 6.4.1 Directories Examples (of business directories) include the following (although there are many others). (2) Kompass Register (Kompass) (0) Who owns Whom (Dun & Bradstreet) (©) Key British Enterprises (Dun & Bradstreet) 6.4.2 Associations There are associations in almost every field of business and leisure activity, and ACCA itself is an organisation. Associations collect and publish data for thelr members that can be of great interest to other users. For example, although the services of the Road Haulage Association (RHA) are geared towards ‘transport businesses, their analysis of fuel prices rises could be useful to all motorists. 6.4.3 Government agencies ‘The Government is a major source of economic information and information about industry and population trends. Examples of UK Government publications are as follows. Most of these are available online and can be downloaded for free (a) National Statistics, divided into 12 separate themes such as economy, health and labour {b) The Digest of UK Energy Statistics (annual) {c) Housing and Construction Statistics (quarterly) (@) Financial Statistics (monthly) {e) Economic Trends now published with Labour Market Trends in the Economic Labour Market Review {f) Public Sector Employment Trends (annual) gives details of employment in the public sector in the UK (9) Avarlety of publications on the Department for Business, Innovation and Skills website give data on industrial and commercial trends at home and overseas (h) Social Trends (annual) Official statistics are also published by other government bodies, such as the European Union, the United Nations and local authorities, 6.4.4 Other published sources This group includes all other publications, including some digests and pocket books and periodicals (often available in public libraries). 6.4.5 Syndicated services ‘The sources of secondary data we have looked at so far have generally been free because they are in the public domain. Inexpensiveness is an advantage that can be offset by the fact that the information is MEDIAunspecific and needs considerable analysis before being useable. A middle step between adapting secondary data and commissioning primary research is the purchase of data collected by market research companies. The data tend to be expensive but less costly than primary research. 6.4.6 Consumer panels A form of continuous research which result in secondary data often bought in by marketers is that generated by consumer panels. These constitute a representative sample of individuals and households whose buying activity in a defined area is monitored either continuously (every day, with results aggregated) or at regular intervals, over a period of time, There are panels set up to monitor purchases of groceries, consumer durables, cars, baby products and many others. 6.5 Information from customers Customers can provide useful information. (a) Firms send out satisfaction questionnaires and market research. (0) Customer comments and complaints sent voluntarily can suggest improvernents, 6.6 Information from suppliers Supple information comes in several categories. (EE “ : 7 Bie intormation © | A supplier pitching fora product wil detail products, services and | | ptoes, This is before a deals done. | ‘Operational information Ifa firm has placed a particular job or contract with a supplier, the | | supplier may provide details of the stages in the manufacturing process, eq the delivery time Loe Pricing information __| Component prices vary from industry to industry; some are volatile. | Teshnolooy | Technological developments in the supplier’ industry can affect the [type of input components, their cost and their availabilty { 6.7 The internet ‘The internet increases the richness of external data and reduces the cost of searching for it ‘The internet offers efficient, fast and cost-effective email, and massive information search and retrieval facilities. There is a great deal of financial information available and users can also access publications and news releases issued by the Treasury and other government departments. Businesses are also using it to provide information (cheaply) about their own products and services and to conduct research into their competitors’ activities, The internet offers a speedy and impersonal way of getting to know the basics (or even the details) of the services that a company provides. ‘The internet is commonly used to access information about suppliers. (a) A firm can visit a supplier's website for details of products and services. (0) The user can search a number of websites through a browser. Note that the internet may not ‘contain every supplier; arguably it should not be relied on as the sole source. (c)_Anumber of business to business sites have been opened. Participating members offer their services, and can offer quotes. A lot of the communication search problem is avoided. BPP Deane eee rere ieee oeeee] REEEmm) 6.8 Database information ‘Amanagement information system or database should provide managers with a useful flow of relevant Information which is easy to use and easy to access. Information is an important corporate resource. Managed and used effectively it can provide considerable competitive advantage and so itis a worthwhile investment. Itis now possible to access large volumes of generally available information through databases held by public bodies and businesses. (@) Some companies, such as LexisNexis, charge users a subscription fee to access their electronic database. LexisNexis’ clients come primarily from within the legal and accountancy profession, iho use the service to access legal and public records related information. (b) Public databases are also available for inspection. Dun & Bradstreet provides general business information. AC Nielsen operates online information regarding products and market share. Developments in information technology allow businesses to have access to the databases of external organisations. Reuters, for example, provides an online information system about money market interest rates and foreign exchange rates to firms involved in money market and foreign exchange dealings, and to the treasury departments of a large number of companies. The growing adoption of technology at point of sale provides a potentially invaluable source of data to both retailer and manufacturer. 6.8.1 Online databases Most external databases are online databases, which are very large computer files of information supplied by database providers and managed by ‘host’ companies whose business revenue is generated through charges made to users. Access to such databases is open to anyone prepared to pay and who is equipped with a PC plus internet aocess and communication software, These days there are an increasing number of, Companies offering free internet access. Most databases can be accessed around the clock. 6.9 Data warehouses A data warehouse contains data from a range of internal (for instance sales order processing systern, ‘nominal ledger) and external sources. One reason for including individual transaction data in a data warehouse is that the user can drill down to access transaction-level detail it necessary. Data is. increasingly obtained from newer channels, such as customer care systems, outside agencies or websites, ‘The warehouse provides a coherent set of information to be used across the organisation for management analysis and decision-making. The reporting and query tools available within the warehouse should facilitate management reporting and analysis. This analysis can be enhanced through using data mining software to identity trends and patterns in the data. 7 Information for control purposes Much control is achieved through the feedback of internal information. Control is dependent on the receipt and processing of information, both to plan in the first place and to ‘compare actual results against the plan, so as to judge what control measures are needed. Plans will be based on an awareness of the environment (from externally sourced information) and on the current performance of the organisation (based on internal information such as, for example, sales. volumes and costs). Control is achieved through feedback — information about actual results produced from within the organisation (that i, internal information) such as variance control reports for the purpose of helping management with control decisions. BPP LEARNING MEDIA mation | Part Information, technologies and systems for organisation performanceBPP LEARNING HeDIA The sources of information outlined earlier in the chapter are used to supply management with data for control For instance, payroll records give information on the total cost of staff and a breakdown into cost by function, role, bonuses, taxes, and so on which can show management how different cost areas are Performing. As payroll is often a large cost and to some extent discretionary or variable, itis important to monitor and control Equally, information on wage payments will also be relevant to an organisation's cash flow planning. AS far as possible, organisations like to keep their cash balances within certain limits. So, by knowing the amount and timing of wages and salary payments, the organisation can make any adjustments to ensure cash balances remain within the desired limits. Information about inventory levels can also be instructive, For example, some lines of inventory may be slow moving, but management will need to establish why this is. Has a competitor introduced a rival product, or reduced its prices? Have there been any quality issues with the product which have damaged its reputation in the marketplace? Is the product in a long-term decline and should production of it be discontinued? In this respect, information about quantities of a product sold compared with quantities produced could also be very useful. For example, if a product is selling very well, production may need to be increased so that demand can be satisfied and any stock-outs avoided. Customer data is vital in any business that strives to focus on customers. Thus data on buying habits, where customers shop, what they buy and who the main customers are all give feedback for control urposes. Equally, data from customer sales accounts can provide useful information on how customer debts are aged. A report on the ageing of debt can provide management with information on how successful its receivables control policy is. Management's response will be different if half the customer debt has been ‘outstanding for more than say, 60 days, compared with only 5% of the debt being outstanding for more than 60 days. External data is useful for benchmarking provided the correct or appropriate benchmarks are selected. 8 Costs of information Be aware of the cost of inefficient use of information. The costs to an organisation of the collection, processing and production of internal information can be divided into three types. These are direct data capture costs, process costs, and indirect costs of producing internal information. Direct data Use of bar coding and scanners (eg in retail capture ‘© Employee time spent filling in timesheets Secretary time spent taking minutes at a meeting Processing | «Payroll department time spent processing and analysing personnel costs Time for personnel to input data (2g in relation to production) on to the MIS. Inefficient use Information collected but not needed of information | » Information stored long after itis needed ‘© Information disseminated more widely than necessary ‘© Collection of the same information by more than one method ‘© Duplication of information 19 and manufact ‘The syllabus states that you need to be able to identity the indirect costs of producing information. You need to remember that a direct cost can be completely attributed to obtaining the information, An indirect cost cannot be completely attributed to itPHC) ‘© Organisations require information systems for a range of purposes. ‘Supporting operations = Processing and recording transactions Supporting managerial activities = Decision making Planning Performance measurement Control ' ‘* Information systems costs can be significant, ‘* Communicating information is much easier when computers are connected together to form a network ‘Various forms of networks can be formed - global in the form of the internet and local in the form of the Intranet. Wireless technology facilitates mobile networking. ‘+ Controls need to be in place over the generation of internal information in routine and ad-hoc reports. © procedures manual sets out controls over distributing internal information. © _Anumber of procedures can be used to ensure the security of highly confidential information that is not for external consumption: = Passwords: me Logical access systems = Database controls = Firewalls Personnel security planning Be Anti-virus and anti-spyware software ‘© Internal sources of information include the financial accounting records and other systems closely tied to the accounting system. ‘© External information tends to be more relevant to strategic and tactical decisions than to operational decisions. (Benchmarking is an exception.) ‘© There are many sources of extemal information. ‘© Secondary data, such as government statistics or data provided by online databases, is not collected by or for the user. Primary data ~ more expensive than secondary data — is more tailored to the user's exact. needs. Market research is an example. ‘© The internet increases the richness of external data and reduces the cost of searching for it ‘© Much control is achieved through the feedback of internal ‘© Be aware of the cost of inefficient use of information.1 What s an information system? What are the benefits of wireless technology? 2 3 ‘Published data is always reliable’ True or false? 4 Organisations have many sources they can use for external data, List six of these. 5 Choose the correct words from those highlighted. Logical/physical access control is concerned with preventing those who do not have access/already hhave access to a terminal or computer from gaining access to hardware/data or software. 6 Five measures to control the ability of individuals to compromise the security of an organisation were listed in the chapter. What are they? 1 2 3 ; : 7 A number of procedures can be used to make sure confidential data is kept secure. List five of these. MEDIAPSR OR ite 4 1 An information system is a combination of hardware, software and communications capability, where information is collected, processed and stored, 2 (a) Remote working and increased mobility {b) Increase productivity (because employees can work together wherever they need to) {c) Reduced costs as the business expands (because itis easier to add new users to a wireless network than to install new cabling 3 False. 'Reliability’ of data for a decision is determined by its age, the sample and data definitions. By ‘published’ data, include the internet ~ a source of falsehoods as well as inforrnation 4 Directories, Trade associations, government agencies, periodicals/journals, market research data and ‘consumer panels 5 Logical already have access data or software Careful recruitment Job rotation Supervision and observation by a superior Review of computer usage (for example via systems logs) Enforced vacations 7 Passwords, logical access systems, database controls, firewalls, encryption, personnel security planning, and anti-virus and anti-spyware software (We list more than five to cover all of the possibilities mentioned in the chapter.) Section AQ1 Examination Section A 02 Examination "Section A 05 Section A Q6 Examination Examination BPP LEARNING MEDIAEa) cus cu (Ec) analytics : 1 Introduction to planning, control and decision-making ‘A3(a) 2 Management accounting information for strategic -A3(a) planning, contro and decision-making 3 Management accounting information for management control A3(@) 4 Management accounting information for operational Bla) contol 5 Types of information systems A3(b) 6 Big data AS(C), (@) Introduction This chapter covers issues relating to performance management information systems and thelr design. ‘We begin witha look atthe accounting information needs at al levels of the ‘consider the characteristics ofa range of management including transaction processing systems and executive Information systems. ‘The last section ofthis chapter looks atthe concept of Big Data.Study guide [as | Information systoms and data analytics | | Identify the accounting information requirements and describe the different 2 | types of information systems used for strategic planning, management | control and operational contol and decision-making, _| (b) | Define and discuss the main characteristics of transaction processing 2 systems; management information systems; executive information systems; enterprise resource planning systems and customer relationship | management systems, (©)__| Describe the characteristics (volume, velocity, variety) of big data. (4) _| Explain the uses of big data for enhancing decision-making. Exam guide Management accounting and information systems are an important part of the Performance Management syllabus because they play an integral part in producing the information that managers use for performance measurement and performance management. Performance management information systems provide the information which enables performance measurement to take place. ‘You could face questions specifically on the topics in this chapter, particularly in a Section A, or you may ‘need to use them as a framework for a wider question. One of the competencies you require to fulfil performance objective 12 of the PER is the ability to contribute to development and improvements of management accounting systems and internal reporting ‘You can apply the knowledge you obtain from this section of the text to help to demonstrate this | competence | ay | | 1 Introduction to planning, control and decision-making ‘Strategic planning is the process of deciding on objectives for the organisation, changes in these objectives, the resources to attain these objectives, and the policies that are to govern the acquisition, use and disposition of these resources. Management control is the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organisation's objectives. It is sometimes called tactics or tactical planning. Operational control (or operational planning) is the process of assuring that specific tasks are carried out effectively and efficiently Within and at all levels of the organisation, information is continually flowing back and forth, being used by people to formulate plans and take decisions, and to draw attention to the need for control action, when the plans and decisions don’t work as intended. Planning means formulating ways of proceeding. Decision-making means choosing between various alternatives. These two terms are virtually inseparable: you decide to plan in the first place and the plan you make is a collection of decisions. Strategie decisions are long-term decisions and are characterised by their wide scope, wide impact, relative uncertainty and complexity | BPP LEARNING MEDIA.Control is used in the sense of monitoring something so as to keep It on course, like the ‘controls’ of a car, not (or not merely) in the sense of imposing restraints or exercising tyrannical power over something We have more to say about control later in this Study Text. | 1.1 Information for planning, control and decision-making Robert Anthony, a leading writer on organisational control, suggested what has become a widely used hierarchy, classifying the information used at different management levels for planning, control and decision-making into three tiers: strategic planning, management control and operational control (Anthony, 1965). We consider each tier in turn in Sections 24. ‘Managerial level = Long-term To P planning decisions Middle | Melum-term planning and | management coil decisions | | Operational/shor'-term decisions a routine processing of transactions Bottom OPERATIONAL y terms, ‘Strategie planning. The process of deciding on objectives of the organisation, changes in these objectives, the resources used to atiain these objectives, and the policies that are to govern the ‘acquisition, use and disposition of these resources. Management (or tactical) control. The process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organisation's objectives. itis sometimes called tactics or tactical planning Operational control (or operational planning). The process of assuring that specific tasks are carried out effectively and efficiently. 2 Management accounting information for strategic planning, control and decision-making MESEEIEWD | pranagement accountng information can be used to support strategic planning, control and decision- making. Strategic management accounting differs from traditional management accounting because It has an external orientation and a future orientation, ‘This section identifies the accounting information requirements for strategic planning, control and decision-making, 2.1 Future uncertainty Much strategic planning is uncertain (a) Strategic plans may cover a long period into the future, perhaps five to ten years ahead or even longer. Divine Pitortinnintonmistntewneainam | tates EL MEDIA(b) Many strategic plans involve big changes and new ventures, such as capacity expansion decisions, decisions to develop into new product areas and new markets, and so on, Inevitably, management accounting information for strategic planning will be based on incomplete data, and will use forecasts and estimates, (a) It follows that management accounting information is unlikely to give clear guidelines for management decisions and should incorporate some risk and uncertainty analysis (eg sensitivity analysis) (b) For longer-term plans, discounted cash flow techniques ought to be used in financial evaluation. (c) The management accountant will be involved in the following. (i) Project evaluation Managing cash and operational matters Reviewing the outcome of the project (post implementation review) 2.2 External and competitor orientation Much management accounting information has been devised for internal consumption. However, it is important to balance this with a consideration of external factors. (a) Strategic planning and control decisions involve environmental considerations. {b) strategy is pursued in relation to competitors. 2.3 The challenge for management accountants Traditional accounting systems have had a number of per failings, (2) _ Direction towards financial reporting. It is necessary to report historical costs to shareholders, but the classifications of transactions for reporting purposes are not necessarily relevant to decision-making (b) Misleading information. This is particularly with regard to overhead absorption. (c) _ Neatness rather than usefulness. Importance is placed on financial reporting templates, rather than providing solutions for management accountants. (@) Internal focus. Management accounting information has been too inward looking (for example, focusing on achieving internal performance targets, like budgets). However, organisations also ‘need to focus on customers and competition. (e) Inflexibitity. Traditional accounting systems have displayed an inability to cope with change, and the modern business environment. The challenge lies in providing more relevant information for strategic planning, control and decision- ‘making. Traditional management accounting systems may not always provide this. (a) Historical costs are not necessarily the best guide to decision-making. One of the criticisms of management accounting is that management accounting information is biased towards the past rather than the future. (b) Strategic issues are not easily detected by management accounting systems. (c)__ Financial models of some sophistication are needed to enable management accountants to provide useful information 2.4 What is strategic management accounting? ‘The aim of strategic management accounting is to provide information that is relevant to the process of strategic planning and control BPP LEARNING MEDIA TERE enter re ten nats | Pht en soi tranKey term Strategic management accounting is a form of management accounting in which emphasis is placed on are external tothe organisation, as well as non- | generated information. BPP LEARNING MEDIA information about factors wl iancial and internally L___} 2.4.1 External orientation ‘The important fact which distinguishes strategic management accounting from other management accounting activities is its external orientation, towards customers and competitors, suppliers and perhaps other stakeholders. For example, while a traditional management accountant would report on an organisation's own revenues, the strategic management would report on market share or trends in market size and growth. (2) Competitive advantage is relative. Understanding competitors is therefore of prime importance. For example, knowledge of competitors’ costs, as well as a firm's own costs, could help inform strategic choices: a firm would be unwise to pursue a cost leadership strategy without first analysing its costs in relation to the cost structures of other firms in the industry. (b) Customers determine if a firm has competitive advantage, 2.4.2 Future orientation criticism of traditional management accounts is that they are backward looking, (a) Decision-making isa forward- and outward-looking process. {b) Accounts are based on costs, whereas decision-making is concerned with values. Strategic management accountants will use relevant costs (ie incremental costs and opportunity costs) for decision-making, We look at this topic in Chapter 6. 2.4.3 Goal congruence Business strategy involves the activities of many different functions, including marketing, production and human resource management. The strategic management accounting system will require Inputs from ‘many areas of the business. (a) Strategic management accounting translates the consequences of different strategies into a common accounting language for comparison, {b) Itrelates business operations to financial performance, and therefore helps ensure that business activities are focused on shareholders’ needs for profit In not for profit organisations this will not apply, as they do not focus on shareholder profitability. (We look at not for profit organisations in more detail later in this Study Text.) Ithelps to ensure goal congruence, again by translating business activities into the common language of finance, Goal congruence is achieved when individuals or groups in an organisation take actions which are in their selt-interest and also in the best interest of the organisation as a whole. 2.5 What information could strategic management accounting provide? Bearing in mind the need for goal congruence, external orientation and future orientation, some examples of strategic management accounting ae provided below. = Competitors’ costs Wat are they? How do they compare with ours? Can we beat | them? Are competitors vulnerable because oftheir cost structure? | Financial effect of competitor How might competitors respond to our strategy? How could their | respon: | responses affect our sales or margins? Pat mao, oem n tore |: oman ptt toms EESProduct profitability A firm should want to know not just the profits or losses that are being made by each of its products but also why one product | should be making good profits whereas another equally good | product might be making a loss. Customer profitabllily Somme customers or groups of customers are worth more than others. Pricing decisions | Accounting information can hep to analyse how profit and cash | | flows will vary according to price and prospective demand. | ‘The value of market share ‘Aim ought to be aware of what itis worth to increase the market share of one of its products. Capacity expansion Should the firm expand its capacity and, if so, by how much? Should the firm diversity into a new area of operations, or a new i market? | Brand values How much is t worth investing in a brand which customers will | | choose over competitors’ brands? | Shareholder wealth | Future profitability determines the value of a business. Cash flow " Riloss-making company can survive if it has adequate cash | resources, but a profitable company cannot survive unless it has ‘sufficient liquidity. | Effet of acquisitions and How will the merger affect levels of competition in the industry? | mergers Decisions to enter or leave a What are the barriers to entry or exit? How much investment is | business area required to enter the market? 3 Management accounting information for management control HESEIEDD granagement control isa he level boiow strategio planing in Anthony's decision-making hierarchy and is concerned with decisions about the efficient and effective use of resources to achieve objectives (Anthony, 1965). ‘Management control, witich we briefly touched on in Section 1, is at the level below strategic planning in Anthony's decision-making hierarchy. While strategic planning is concerned with setting objectives and strategic targets, management control is concerned with decisions about the efficient and effective use of an organisation's resources to achieve these objectives or targets. (a) Resources (which can be categorised as a series of 'M's): money, manpower, machinery, methods, markets, management, and management information, (b) Efficiency in the use of resources means that optimum output is achieved from the input resources used. It relates to the combinations of men, land and capital (eg how much production work should be automated) and to the productivity of labour, or material usage. (0) Effectiveness in the use of resources means that the outputs obtained are in line with the intended objectives or targets. The time horizon involved in management control will be shorter than at the strategic decisions level, there will be much greater precision and the focus of information will be narrower. ‘Management control activities are short-term non-strategic activities. 3.1 Examples of management control (or tactical) planning activities (a) Preparing budgets for the next year for sales, production, inventory levels, and so on (0) Establishing measures of performance by which profit centres can be gauged BPP | data an Part Information, technologi tems for organisational performance ia 2: Information systoms and data analytics | tion, technologies and ystems for og performan eee MEDIA(6) Developing a product for launching in the market (4) Planning advertising and marketing campaigns (@) Establishing a line of authority structure for the organisation 3.2 Examples of management control activities (a) Ensuring that budget targets are reached, or improved on (b) Ensuring that other measures of performance are satisfactory, or even better than planned (c) Where appropriate, changing the budget because circumstances have altered Management control is an essentially routine affair in that it tends to be carried out in a series of regular planning and comparison procedures; that is, annually, monthly or weekly, so that all aspects of an ‘organisation's activity are systematically reviewed. For example, a budget is usually prepared annually, and control reports issued every month or four weeks. Strategic planning, in contrast, might be irregular ‘and ocour when opportunities arise or are identified. 3.3 Information requirements Features of management control information (2) Primarily generated internally (but may have a limited external component) (0) Embraces the entire organisation (c) Summarised at a relatively low level (a) Routinely collected and disseminated (e) Relevant to the short and medium terms (Often quantitative (labour hours, volumes of sales and production) (a) Collected ina standard manner (h) Commonly expressed in money terms ‘Types of information (2) Productivity measurements (b) Budgetary control or variance analysis reports, (6) Cash flow forecasts (a) Manning levels (e) Profit results within a particular department of the organisation (f) Labour revenue statistics within a department (a) Short-term purchasing requirements 3.4 Source of information A large proportion of this information will be generated from within the organisation (it has an endogenous source) and it will often have an accounting emphasis. Tactical information is usually prepared regularly; perhaps weekly or monthly. 3.5 Management control and strategic planning compared The dividing line between strategic planning and management control is not a clear one. Many decisions include issues ranging from strategic to tactical. Nevertheless, there is a basic distinction between the two levels of decision. (a) The decision to launch anew brand of calorie-controlled frozen foods isa strategic plan (business strategy), but the choice of ingredients for the frozen meals involves a management control Aecision. (b) _Adecision that the market share for a product should be 25% is a strategic plan (competitive strategy), but the selection of a sales price of $2 per unit, supported by other marketing decisions about sales promotion and direct sales effort to achieve the required market share, would be a series of management control decisions. Management control tends to be carried out in a series of regular planning and comparison procedures (annually, monthly, weekly). For example, a budget is usually prepared annually and control reports issued ‘every month or four weeks. Strategic planning, in contrast, might be irregular and occur when opportunities arise or are identified. BPP EARNING MEDIA ransom novos onsen eoman | 2 temo msec srs4 Management accounting information for operational control Operational control, the lowest tier in Anthony's hierarchy, is concerned with assuring that specific tasks are carried out effectively and efficiently. ‘The third and lowest tier in Anthony's hierarchy of decision-making consists of operational control decisions. Just as ‘management control’ plans are set within the guidelines of strategic plans, so too are ‘operational contro!’ plans set within the guidelines of both strategic planning and management control. 4.1 Example: Link between strategic plans and operational/management control decisions (2) Senior management may decide that the company should increase sales by 5% per annum for at least five years ~ a strategic plan. (0) The sales director and senior sales managers will make plans to increase sales by 5% in the next year, with some provisional planning for future years. This involves planning direct sales resources, advertising, sales promotion, and so on, Sales quotas are assigned to each sales territory - a tactical management control decision. (c) The manager of a sales territory specifies the weekly sales targets for each sales representative This is an operational control decision: individuals are given tasks which they are expected to achieve Operational control decisions are therefore much more narrowly focused and have a shorter time frame than tactical or strategic decisions. 4.2 Operational control activities Although we have used an example of selling tasks to describe operational control, itis important to remember that this level of decision-making occurs in all aspects of an organisation's activities, even when the activities cannot be scheduled nor properly estimated because they are non-standard activities (such as repair work and answering customer complaints). ‘The scheduling of unexpected or ‘ad hoc’ work must be done at short notice, which is a feature of much operational decision-making. In the repairs department, for example, routine preventive maintenance can be scheduled, but breakdowns occur unexpectedly and repair work must be scheduled and controlled ‘on the spot’ by a repairs department supervisor. Operational control activities can also be described as short-term non-strategic activities. 4.3 information requirements (@) Operational information is information which is implementation of plans. jeded for the conduct of day to day {b) twill include much ‘transaction data’, such as data about customer orders, purchase orders, cash receipts and payments and is likely to have an endogenous (internal) source. (c) Operating information must usually be consolidated into totals in management reports before it can be used to prepare management control information. (a) The amount of detail provided in information is likely to vary with the purpose for which it is ‘needed, and operational information is likely to go into much more detail than tactical information, which in turn will be more detailed than strategic information. (e) Whereas tactical information for management control is often expressed in money terms, operational information, although quantitative, is more often expressed in terms of units, hours, ‘quantities of material, and so on. TERED sects assis | reso nts oamivtomnn PYBPP5 Types of information systems You should be aware of the main characterstios of transaction processing systems, management information systems, executive information systems and enterprise resource planning systems. 5.1 Transaction processing systems ‘Transaction processing systems (TPS) collect, store, modify and retrieve the transactions of an organisation. ‘ 7 |e isan event that generates or modifies data which is eventually stored on an information | system, | ‘Transaction processing systems (TPS) collect, store, modify and retrieve the transactions of an | organisation. | The four important characteristics of a TPS are as follows. (2) Controlled processing. The processing must support an organisation's operations. (b) _ Inflexibility. A TPS wants every transaction to be processed in the same way regardless of user or time. if it were flexible there would be too many opportunities for non-standard operations, (c) Rapid response. Fast performance is critical. Input must become output in seconds so customers don't wait. (a) Reliability. Organisations rely heavily on transaction processing systems, with failure potentially stopping business. Back-up and recovery procedures rust be quick and accurate. 5.1.1 Properties of a TPS ‘The components of a TPS include hardware, software and people. People in a TPS can be divided into three categories — users, participants and people from the environment. ‘The users are employees of the company who own the TPS. The users will nt alter data themselves, but will use the TPS to provide inputs for other information systems such as inventory control. Participants are direct users of the system. They are the people who enter the data, Participants include data entry operators, customer service staff and people working at checkouts, People from the environment are people who sometimes require the services of a TPS as they enter transactions and validate data, such as customers withdrawing money from an ATM. 5.1.2 Types of TPS Baich transaction processing (BTP) collects transaction data as a group and processes it later, after a time delay, as batches of identical data, ‘An example of BTP is cheque clearance. A cheque is a written order asking the bank to pay an amount of money to the payee. The payee cannot withdraw the money until the cheque is cleared. This involves checking that the payer has enough money in their account to cover the cheque. It usually takes three ‘working days ~ cheques are cleared in a group during a quiet period of the day. Real time transaction processing (RTP) is the immediate processing of data. It involves using a terminal or workstation to enter data and display results and provides instant confirmation. A large number of Users can perform transactions simultaneously but access to a central online database is required. ‘An example of an RTTP system is @ reservation system involved in setting aside a service or product for the customer to use at a future time, Such systems are commonly used for fight or train bookings and hotel reservations and require an acceptable response time, as transactions are made in the presence of customers. BPP LEARNING MEDIA5.2 Management information systems HESEENEEWD spanagementintormation systems (Mis) convert data rom mainly internal sources nt information (eg ‘summary reports, exception reports). This information enables managers to make timely and effective decisions for planning, directing and controlling the activities for which they are responsible. —— a Management information systems (MIS) generat information for monitoring performance (eg productivity information) and maintaining co-ordination (eg between purchasing and accounts payable). | Key term MIS extract, process and summarise data from the TPS and provide periodic (weekly, monthly, quarterly) reports to managers, Today MIS are becoming more flexible by providing access to information whenever needed, rather than pre-specified reports on a periodic basis. Users can often generate more customised reports by selecting subsets of data (Such as listing the products with a 2% increase in sales over the past month), using diferent sorting options (by sales region, salesperson, highest volume of sales) and different display choices (graphical, tabular). MIS have the following characteristics. Support structured decisions at operational and management contol levels, Designed to report on existing operations Little analytical capabil Relatively inflexible An intemal focus 5.3 Executive information systems Executive informati sources of information. systems (EIS) draw data from the MIS and allow communication with external Key term Executive information systems (EIS) provide a generalised computing and communication environment for senior managers to support strategic decisions. Executive information systems draw data from the MIS and allow communication with external sources of information. EIS are designed to facilitate senior managers’ access to information quickly and effectively They have: . Menu-driven user friendly interfaces + Interactive graphics to help visualisation of the situation . Communication capabilities linking the executive to external databases An EIS summarises and tracks strategically critical information from the MS and includes data from external sources, eg competitors, legislation and databases such as Reuters. ‘A good way to think about an EIS is to imagine the senior management team in an aircraft cockpit, with the instrument panel showing them the status of all the key business activities. EIS typically involve lots of data analysis and modelling tools, such as what-if analysis to help strategic decision-making. BPP LEARNING MEDIA. ee nalyties |_ Part A Information, technologies and systems far organisational performanceio) BPP LEARNING MEDIA ‘A model of a typical EIS is shown below. els ‘workstation CC] Menus Graphies Communications Local processing els workstation FIs workstation Menus Financial daca, Market research Menus Graphics Office systems Legislation Communications |{ Modellinglanalysis_} | Competitors Graphies Local processing ‘Communications Local processing 5.4 Enterprise resource planning systems Enterprise resource planning systems (ERP systems) are modular software packages designed to integrate the key processes in an organisation so that a single system can serve the information needs of all functional areas. Most organisations around the world have realised that, in a rapidly changing environment, itis impossible to create and maintain a custom-designed software package that will cater to all their requirements and also be completely up to date, Realising the requirement of user organisations, some of the leading software companies have designed enterprise resource planning software which will offer an integrated software solution to all the functions of an organisation. ERP systems are large-scale information systems that impact an organisation's accounting information systems, These systems permeate all aspects of the organisation. A key element necessary for the ERP to provide business analysis is the data warehouse. This is a database designed for quick search, retrieval, ‘query, and so on. Enterprise resource planning systems (ERP systems) are modular software packages d integrate the key processes in an organisation so that a single system can serve the information needs of all functional areas. ERP systems primarily support business operations ~ those activities in an organisation that support the selling process, including order processing, manufacturing, distribution, planning, customer service, human resources, finance and purchasing. ERP systems are function-rich, and typically cover all these activities ~ the principal benefit being that the same data can easily be shared between different departments,Operations. | Controls inventory throughout he supply chal, from procurement to distribution Finance ERP software | “Accounting | Reports customer's Manages information flow Records sales and 1 credit rating and | smeeed crus ppenone payments and tracks | } _-—— business performance | Marketing Human resources Co-ordinates sale activities and Recrui, trains, evaluates and handles customer relationship | | compensates employees This integration is accomplished through a database shared by all the application programs. For example, when a customer service representative takes a sales order, itis entered in the common database and it automatically updates the manufacturing backlog, the price, the credit system and the shipping schedule. ERP systems work in real time, meaning that the exact status of everything is always available. Further, ‘many of these systems are global. Since they can be deployed at sites around the world, they can workin ‘multiple languages and currencies. When they are, you can immediately see, for example, exactly how ‘much of a particular partis on hand at the warehouse in Japan and what its value is in yen or dollar. 5.4.1 Example: ERP Say you are running a bioycle shop. Once you make a sale, you enter the order on the ERP system. The system then updates the inventory of bicycles in the shop, incorporates the sale into the financial ledgers, prints out an invoice, and can prompt you to purchase more bikes to replace the ones that you have sold. The ERP system can also handle repair orders and manage the spare parts inventory. It can also provide ‘automated tools to help you forecast future sales and to plan activities over the next few weeks. There may also be data query tools present to enable sophisticated management reports and graphs to be generated. In addition, the system may handle the return of defective items from unhappy customers, the sending out of regular account statements to customers and the management of payments to suppliers ERP systems can assist with the scheduling and deployment of all sorts of resources, physical, monetary ‘and human, A water company might use thelr ERP system to schedule a customer repair job, deploy staff to the job, verity that it got done, and subsequently bill the customer. An oll company might use it to ensure that their tankers are loaded, that a shipping itinerary is prepared and completed on schedule, and that all the equipment and people required for loading and unloading the cargo in each port are present at the right times. A bus company might use its system to manage customer bookings, record receipts and plan preventive maintenance activities for ther fleet 5.4.2 Benefits of ERP ‘The benefits that may be realised from a successfully implemented ERP project include: (a) Allowing access to the system to any individual with a terminal linked to the system's central server (b) Decision support features, to assist management with decision-making (c) In many cases, extranet links to the major suppliers and customers, with electronic data interchange facilities for the automated transmission of documentation, such as purchase orders and invoices (d) Alot of inefficiencies in the way things are done can be removed; the company can adopt so-called “pest practices’ — a cookbook of how similar activities are performed in world-class companies (c) Acompany can restructure its processes, so that different functions (such as accounting, shipping and manufacturing) work more closely together to get products produced THEE) toms tsantazonis | rath insioneomsosonssensromntaaieomaee (PEEP MEDIA(An organisation can align itself to a single plan, so that all activities, all around the world, are smoothly co-ordinated (q) _Standardising Information and work practices so that the terminology used is similar, no matter ‘where you workin the company (h) — Acompany could do a lot more work for a lot more customers without needing to employ so many people 5.5 Customer relationship management systems Customer relationship management systems (CRM systems) are software applications which specialise in providing information concerning an organisation's products, services and customers. Most CRM systems are based on a database which stores data about customers such as their order history and personal information such as address, age and any marketing feedback they have provided. These systems allow a personalised service to be provided to the customer as well as a swift reply to their queries. They can be a cost-effective solution because, although they can be made bespoke, there are plenty of off the shelf packages that can be used instead. CRM systems are often used by customer-facing staff who handle customer enquiries, orders or complaints and who need to understand the customer's immediate needs and provide an appropriate response. By providing a CRM, motivation can be increased in customer-facing staff who feel they are properly equipped to do their job. ‘The benefits of CRM systems are in regards to customer retention and targeted marketing. Better understanding of the customer, and being able to deal with them as an individual, should help generate customer loyalty. Since the needs of the customer are appreciated, marketing material can be better targeted. For example, products aimed at, say, female customers between the ages of 18 and 29 can be sent only to those customers, rather than male customers, or female customers in other age groups that would not welcome the marketing material. This has two main benefits: customers only receive appropriate marketing material, and the business makes more effective use of its marketing budget. Such increased control and management of organisational resources can be a source of competitive advantage cover competitors who do not have a CRM system. There are a number of criticisms of CRM systems, although most can be applied to any new system (not just CRMs), ‘© Cost of purchasing the system (can be expensive if bespoke) © Additional costs (such as purchasing new hardware or other systems in order to use the CRM) © Opportunity costs (money used on the CRM system could be spent on other projects) © Staff costs (training costs, getting staff support and costs to the business of the disruption of introducing a CRM) ‘© Effect on business processes (which may have to be changed to fit the system) Effect on customer relationship strategy (software takes over, rather than supports, the strategy) BPP LEARNING MEDIA