Management Information

1 Introduction

This chapter looks at management information: its purpose, sources, categories, desirable qualities and potential problems. It finishes by considering the role of a trainee accountant in a cost and management accounting system

2 The purpose of management information

Management information is used by managers to

• Plan the future of the business. For example, future cash flows and whether borrowing will need to be arranged or whether more employees need to be recruited.
  

• Control the progress of the business. For example whether budgets set in the planning stage will be met.
  

• Decision making. For example, what to produce or which branch to close.
  

Obviously, managers of different departments will usually require different information. However, managers at different levels within a department will also need different information. For example, senior managers will often require more summarised information to see ‘the whole picture’, whereas more junior managers often need more details.

3 Data and information

The following diagram is often used to represent a computerised accounting system:

In fact, the diagram can apply to the processing of any information whether manually or by computer. A person (or machine) receives data, processes it in some way (perhaps by using it to make a decision or to produce a report) and outputs or passes on that information to the next stage in the whole process. Often files (collections of data) have to be accessed.

For example, on receiving a customer order (input), the customer’s receivables record and the inventory price files would be accessed so that a decision could be made (process) about whether or not the order should be approved. The decision is then passed on within the organisation or sent to the customer (output).

Nothing in that description has said whether this is a computerised or a manual process.

Note that a distinction has been made between data and information. Data is ‘raw fact’; information is data with meaning. For example, a record of the height of everyone living in a certain city would be data (not much use). Once that data is processed and, for example summarised into average heights of men, women etc, then the data becomes more interesting and useful.

Similarly a list of all unpaid invoices is data which only become meaningful i.e. informative once sorted by customer to show what each owes and also, perhaps, then presented in descending order so that the customers owing most are shown at the top of any list.

However, computerised accounting systems will normally produce information:

• More cheaply   (because fewer people need to be employed)
  

• More accurate   (fewer arithmetic errors – though incorrect programs will repeatedly report incorrect information)
  

• Faster     (because the processing is automated and computers work very quickly)
  

• More specific   (because computers can scan through vast amounts of data and report on the note-worthy events).
  

• More complex   such as analysis of sales trends
  

• Wider access   because a terminal on everyone’s desk potentially gives all access to information needed.
  

The importance of the last two qualities cannot be over-emphasised: if you are going to exercise management control you must have your attention quickly drawn to events that need your attention. Control will be poor if you have to search through vast quantities of data that is provided a month late.

4 The features of useful management information

The features of good management information are often described and remembered using the word ‘ACCURATE’.

Accurate.   Certainly accurate enough for managers to use confidently. Some managers need information accurate to the last cent whilst others are happy with accuracy to the nearest $1,000.

Complete.   Missing information can be very serious. For example, omitting a cash outflow that will happen next month could be fatal for a business.

Cost-beneficial   There is little point having information which costs more to provide than any benefit that arises from it.

User-targeted   The information should be what users need. For example, senior managers often have to be planning for the future so need forward-looking information.

Relevant   Too much information causes information overload and might mean that important matters are overlooked.

Authoritative   What is the information’s source and reliability? Just because you find something by ‘Googling’ the internet does not mean the information is correct.

Timely   The information should be received quickly enough to be of use to the decision-maker. Real-time on-line systems can speed up the supply of information.

Easy-to-use   The information should be well-set out and described.

5 Sources and categories of information

The main sources of information are:

• Internal information
  

• External information
  

In addition to internal/external, information can be categorised as:

• Financial/non-financial
  

• Quantitative/non-quantitative
  

• Historical/future estimates
  

• Routine/ad hoc (as and when needed)
  

• Numerical/graphical
  

You are undertaking accountancy training and this is likely to affect your view of how important financial and non-financial information are. It is important to emphasise now the importance of non-financial information. For example, financial information can show you that sales have increased, but that might not explain why sales have increased. The cause of the improvement might be better customer service, more innovative products, or more reliable products, and none of these is a financial measure.

Indeed financial measures are often described as lagging indicators because the information they contain often lags behind non-financial indicators. For example, customer satisfaction will rise before sales rise.

6 Cost centres, profit centres and investment centres

A manager who is in charge of a cost centre is responsible for costs only and therefore the information that will be useful will be solely related to costs. For example, cost budgets compared to actual costs.

A cost centre could be:

• A subsidiary company
  

• A division
  

• A department
  

• A team
  

• A person
  

• A production line
  

• A project
  

• A machine
  

Examples of cost centres can include: the IT department, quality control department, the accounting department, the manufacturing facility.

A manager who is in charge of a profit centre is responsible for costs and revenues, so will be interested in information about both costs and sales.

As above, a profit centre could be:

• A subsidiary company
  

• A division
  

• A department
  

• A team
  

• A person
  

• A production line
  

• A project
  

• A machine
  

The difference is that here, besides being responsible for costs, the head of a profit centre will also be responsible for revenues.

The revenues could be sales to outside organisations or they could be internal sales to elsewhere in the organisation. For example, an IT department could be turned from a cost centre into a profit centre if it were to be allowed to charge IT users for the services supplied.

Being head of a profit centre is usually more interesting and demanding than being just the head of a cost centre. Many people don’t get great satisfaction from ensuring that costs do not exceed budget (a cost centre managers’ responsibility), but would get much satisfaction from beating a profit budget (a profit centre manager’s responsibility).

A manager who is in charge of an investment centre is responsible for costs, revenues and the use made of the funds invested in that subsidiary or division. In addition to keeping a close eye on costs and revenues, the manager will also have to have information available about, for example, the rate of return or net present value (see a later chapter) that that division is generating.

Because costs, revenue and capital expenditure all have to be identified separately an investment centre would normally be:

• A subsidiary company
  

• A division
  

Whether dealing with a cost, profit or investment centre, it is important that the information that is provided to managers is tailored to their needs.

7 The limitations of cost and management accounting information

The limitations of cost and management accounting information are:

• Potentially all the matters covered by ACCURATE (Accurate, Complete, Cost-beneficial, User-targeted, Relevant, Authoritative, Timely, Easy-to-use.)  
  

• Difficulty making future estimates.
  

• Often quantitative and financial only, but undoubtedly matters such as quality and customer service levels will be important.
  

• Can be difficult for manager with no financial training to understand.
  

• Often too inward-looking. For example, perhaps it does not give information about competitors’ selling prices.
  

8 The role of a trainee accountant in a cost and management accounting system.

A trainee accountant is likely to have the following roles in a cost and management system:

• Recording transactions. For example, making posting to the ledgers.
  

• Extracting information and presenting it for management use. For example, a comparison of budget and actual figures for a period.
  

• Investigating financial matters. For example, looking into an overrun in a cost.
  

• Helping with budget preparation.
  

• Helping and supervising more junior staff.
  

Note that a trainee accountant will generally not be closely involved in decision-making and planning as these functions will normally be carried out by more senior staff.

9 Methods of analysing, presenting and communicating information

10 Suitable formats for communicating management information

For all the variety of methods suggested in Example 4, communication tends to be of three possible types:

• Oral/spoken
  

• Written
  

• Graphical
  

They have their own strengths and weaknesses:

Oral/spoken

Written

Graphical

Typical formats of written communication are as follows

• Letters
  

  ‘Dear Sir’: pairs with ‘Yours faithfully’. ‘Dear Mr Smith’ pairs with ‘Yours sincerely’

• Email
  

Note that emails are:

- Less formal than letters.

- Can easily be sent to the wrong person (with potentially embarrassing results).

- Can be composed and sent quickly without sufficient thought or care.

• Reports
  

The appendices contain detailed information that is referred to elsewhere in the report.

• Memoranda
  

Memoranda do not have Dear Sir/Yours faithfully

Short memoranda might not have numbered, titled paragraphs.

11 Distribution of reports

There is little point in producing information and reports if these are not reliably distributed to the people who need them. Similarly, it is not satisfactory for information and reports to be distributed to the wrong people. Not only will this probably waste their time, but many reports contain confidential information which needs to be restricted. Examples of confidential information would include employees’ salary details and company performance data.

It is also important that information is produced at the right time and at the right frequency. For example, management accounts every month and by the 6th of the following month, sales analyses every Monday for the previous week.

Methods to ensure the proper distribution of information include:

• Circulation lists. A list of people who should each receive a copy or a list that is marked off as a copy is passed round.
  

• Calendars/spreadsheets/timetables to show employees in advance the dates by which information has to be provided and by when it should be available.
  

• Email groups. Many reports are nowadays distributed by email. It is extremely easy when addressing an email to leave off a person who should be included or to pick the wrong email address. Email systems allow groups to be set up so that instead of listing the addresses each time you simply pick a distribution list, such as “Accounts team” and this will then ensure that the document will be sent to the email addresses of all on the team.
  

• Encryption. Very sensitive data can be encrypted before transmission. The information can only be read by recipients who know the password.
  

• Access rights. When you sign into a corporate network, your sign-in details can be used to restrict your ability to see or change information. You are given access only to information which you have been granted access rights.
  

• Envelopes. Old fashioned, but sealed envelopes are a way in which information can be kept from prying eyes. For example, in the UK several government ministers have been photographed going into government meetings carrying official papers. Unfortunately, after the photographs were enlarged, the top copies of the papers could be easily read along with hand written comments made by the ministers. A simple envelope or folder would have prevented this embarrassment.
  

12 Charts and graphs

Charts and graphs can make information much more memorable and easier to understand

Choosing the right chart matters as much as drawing it. Use a bar or column chart to compare amounts between things (sales by branch, costs by department). Use a line chart to show how one thing moves over time. Use a pie chart to show how a single total splits up. Use a scattergraph to see whether two things are related, for example cost against output. If the reader needs the exact figures rather than the shape of them, use a table instead of a chart.

Bar chart

The graph below is a column chart:

The chart below is a bar chart of the same data:

Line chart

A line chart plots values against time and joins them up. Use it when the movement or trend matters more than the individual amounts — monthly sales, weekly cash balances, the cost per unit over a year. Time always goes on the horizontal axis. Several lines can be shown on the same chart to compare, say, budget against actual, but more than three or four lines becomes unreadable.

Scattergraph

A scattergraph plots one quantity against another, one dot per observation, and does not join the dots. Use it to see whether two things move together — for example total cost against units produced. If the dots lie roughly along a straight line there is a relationship, and a line of best fit drawn through them gives you the fixed cost (where it cuts the vertical axis) and the variable cost per unit (its slope). If the dots are scattered all over the chart, there is no useful relationship.

Pie chart

A pie chart shows how one total divides into its parts, with each slice sized in proportion to its share. Use it for something like total cost split between material, labour and overheads. It works only when the slices add up to a meaningful whole, and only when there are a few of them — six or seven slices is about the limit before the chart stops telling the reader anything. A pie chart cannot show a trend, so never use one for figures over time.

Area graph

Often like a line chart, but with filled in areas:

13 Interpreting management reports

Producing a report is only half the job. You will also be asked to read one and say what it means. Work through it in the same order every time: read the headings so you know what the figures are and what period they cover; find the biggest differences rather than looking at every line; express them as a percentage as well as an amount, because $10,000 means nothing until you know whether it is 1% or 50%; then look for lines that should have moved together and did not.

Answer. Profit is $15,000 below budget, a fall of 30%, which is far larger in percentage terms than the 5% shortfall in revenue. The reason is material: revenue fell 5% but material cost rose 10%, and those two should normally move in the same direction. So the problem is not simply that less was sold — something has gone wrong with material price or material usage, and that is the line the manager should investigate first. Labour and fixed overheads are close enough to budget to leave alone.

The same discipline works on a chart. Read the axes and the scale first, state what the shape is telling you (rising, falling, flattening, seasonal), then quote a figure off the chart to support what you have said. Be careful with a vertical axis that does not start at zero — it makes a small change look dramatic.