Management Accounting

product: 4462 | course code: c370

 Management Accounting
Centre for Financial and Management Studies
SOAS, University of London
This edition: 2014

All rights reserved. No part of this course material may be reprinted or reproduced or utilised in any form or by any electronic,
mechanical, or other means, including photocopying and recording, or in information storage or retrieval systems, without written
permission from the Centre for Financial & Management Studies, SOAS, University of London.
Management Accounting
Course Introduction and Overview

Contents
1
Course Objectives 2

2
The Course Author 2

3
Course Structure 2

4
Overview of the Course 4

5
Learning Outcomes 4

6
Study Materials 5

7
Teaching and Learning Strategy 5

8
Assessment 6

 Management Accounting

1 Course Objectives
Welcome to the course Management Accounting. Accounting information is a
fundamental resource for enabling managers to make decisions. This course
emphasises a critical understanding of the accounting numbers, the underly-
ing assumptions behind those numbers, and the choice of accounting tools
and techniques that will best suit managers information needs. The aim of
the course is to equip line managers primarily in business (but also public-
sector agencies) with the ability to prepare budgets, develop business cases
for capital investment, calculate prices and exercise cost control.
The course uses a range of simulations, case studies and real-life problems in
addressing variations in practice between industry sectors and geographical
regions. A plain English style is used throughout the course that addresses the
needs of European, Asian, African and Arabic-speaking students.

2 The Course Author

Matthew Haigh PhD (Macquarie) has had careers in public-sector auditing,
chartered accountancy and internal auditing. He has researched and lectured
in eight European countries and currently holds a Senior Lectureship in
Accounting at the University of London. He holds qualifications in chartered
accountancy and certified information systems auditing. His roles in commer-
cial and public-sector organizations have focussed on the production, review
and audit of management and financial accounting information.

3 Course Structure
The course consists of eight units, each of which comprises a set of readings,
questions and exercises.

Unit 1 The Context of Management Accounting

1.1 Introduction to Management Accounting
1.2 Shareholder Value and Management Control Systems
1.3 Non-financial Accounting Information
1.4 Summary and Practice Tasks
1.5
Case Study

Unit 2 Pricing and Production-Volume Decisions

2.1
Pricing Strategy

2.2
Relevant Costs for Pricing Decisions

2.3
Finding the Break-Even Point Cost-Volume-Profit Analysis

2.4
Achieving a Target Profit Using Break-Even Analysis

2.5
Using Contribution to Make Decisions

2.6
Segmental Profitability Analysis for Closing-Continuation Decisions

2.7
Summary and Practice Tasks

2.8
Case Study

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 Course Introduction and Overview

Unit 3 Production Decisions, the Value Chain and Production Capacity

3.1
The Value Chain

3.2
Production Capacity

3.3
Theory of Constraints, Relevant Cost, Opportunity Cost

3.4
The Outsourcing Decision

3.5
Costing Orders

3.6
The Product-Mix Decision

3.7
Environmental Costs

3.8
Summary and Practice Tasks

3.9
Case Study

Unit 4 Volume-Based Cost Systems

4.1
The Problem of Allocating Production Costs

4.2
Variable Costing and Absorption Costing

4.3
Throughput Costing and Process Costing

4.4
Job Costing

4.5
Summary and Practice Tasks

4.6
Case Study

Unit 5 Activity-Based Cost Systems I

5.1
Classifying Costs Using Value-Chain Activities

5.2
Types of Activities: Facility-Level, Customer-Level, Product-Level, Batch-Level,
Unit-Level

5.3
Steps in Designing an Activity-Based Cost System

5.4
Summary

Unit 6 Activity-Based Cost Systems II

6.1
Using the Activity Model to Forecast Resource Capacity

6.2
Organisation-Level Factors Affecting Activity-Based Costing Systems

6.3
Summary and Practice Tasks

6.4
Case Studies

Unit 7 Capital Investment Decisions

7.1
Introduction To Capital Investment Decisions

7.2
Accounting Rate of Return

7.3
Payback

7.4
Discounted Cash Flow Techniques

7.5
Taxes and Price Inflation

7.6
Practice Tasks

7.7
Problems

Unit 8 Performance Measurement Systems and Strategic Budgeting

8.1
Business Units, Responsibility Centres, Cost Centres, Profit Centres, Investment
Centres

8.2
Divisional Performance and the Controllability Construct

8.3
Transfer Pricing

8.4
Profit and Cash Budgets

8.5
Summary and Problem Questions

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 Management Accounting

4 Overview of the Course

Unit 1 introduces management accounting by establishing its role in the
business organisation. The unit highlights the interaction between manage-
ment accounting and financial accounting, explains the importance of
shareholder value and its relationship to organisational strategy and man-
agement control, then frames accounting information in its broader context as
part of a management control system. Emphasis is placed on the managers
role in the design of accounting information systems.
Unit 2 considers the use of accounting information in making pricing
decisions, beginning with an introduction to cost behaviour and the
distinctions between fixed and variable costs, average and marginal costs.
This unit also covers break-even analysis, cost-plus pricing, target rate of
return, optimum and special pricing decisions, and segmental profitability
analysis.
Unit 3 focuses on how accounting information can be used in production-
volume decisions. It begins by considering operations that follow the
pricing function (already covered in Unit 2). The concept of the value chain
is considered when contrasting the different operating decisions faced by
manufacturing business and service industries. Particular issues covered
are production capacity under resource constraints, product mix and
relevant costs in relation to the make-versus-buy decision of the wholesal-
er. Quality management costs and environmental costs are also considered.
Unit 4 explains how accountants have used production volumes to classify
costs and determine the costs of products and services. Various concepts such
as direct/indirect costs, cost driver and cost object are introduced, and their
importance is explained in terms of the indirect cost allocation problem.
After learning about the basic volume-based production costing system, you
turn in Units 5 and 6 to examine a more complex, more accurate but more
costly production costing system known as activity-based costing. A compari-
son is made between activity costs and the Japanese approach to production
costing.
The topic of Unit 7 is capital investment decision-making, an important
element of long-term strategy implementation. This unit covers the use of
accounting rate of return, payback and discounted cash flow techniques in
capital investment decisions.
Unit 8 examines in detail the transfer-pricing problem that typically arises
within multi-product and multi-regional organisation studies. The remainder
of the unit examines the popular techniques used to evaluate the performance
of organisational divisions, branches and units, with a strong focus on budg-
etary control. The final section examines the uses of profit budgets and cash
forecasts, budget-setting processes and the way budgeting processes are used
for cost control.

5 Learning Outcomes
When you have completed your study of this course, you will be able to:

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 Course Introduction and Overview

discuss the importance of an effective management control system,

including a well-designed accounting information system
identify the relevant costs to consider in marketing and pricing
decisions
plan production volumes and product-line combinations
make decisions that take account of quality management and
environmental costs
apportion overhead costs to products and services using a range of
methods
apply appropriate capital investment appraisal methods
explain the ways in which divisional performance might be measured
design an effective budget-setting process to help control a business.

6 Study Materials
This study guide is your main learning resource for the course as it directs
your study through the eight study units. Each unit includes recommended
reading from the nominated textbooks below and from the Course Reader.

Text Books
Paul Collier (2012) Accounting For Managers: Interpreting Accounting
Information for Decision-Making, Fourth Edition, Chichester UK: John Wiley &
Sons Ltd.
Anthony A Atkinson, Robert S Kaplan, Ella M Matsumara, S Mark Young
(2012) Management Accounting, Sixth Edition, Harlow UK: Pearson
Education.

Readings
You are provided with a range of academic journal articles, extracts from
supplementary texts, articles written by academics and taken from the finan-
cial press, and a number of simulation lessons. This material comprises the
Readings an essential part of this course.

7 Teaching and Learning Strategy

As mentioned above, the course uses a range of examples and case studies to
illustrate the theoretical principles and assist you to understand and use
management accounting information. Review questions and exercises are
included in the course to facilitate your learning.
The course is structured around eight units. It is expected that studying each
unit, including the recommended readings and activities, will take between 15
and 20 hours per week. However, these timings may vary according to your
familiarity with the subject matter and your own study experience. You will
receive feedback through comments on your assignments and there is a
specimen examination paper to help you prepare for the final examination.

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 Management Accounting

8 Assessment
Your performance on each course is assessed through two written assign-
ments and one examination. The assignments are written after week four and
eight of the course session and the examination is written at a local examina-
tion centre in October.

Preparing for Assignments and Exams

There is good advice on preparing for assignments and exams and writing
them in Sections 8.2 and 8.3 of Studying at a Distance by Talbot. We recom-
mend that you follow this advice.
The examinations you will sit are designed to evaluate your knowledge and
skills in the subjects you have studied: they are not designed to trick you. If
you have studied the course thoroughly, you will pass the exam.

Understanding assessment questions

Examination and assignment questions are set to test different knowledge and
skills. Sometimes a question will contain more than one part, each part testing
a different aspect of your skills and knowledge. You need to spot the key
words to know what is being asked of you. Here we categorise the types of
things that are asked for in assignments and exams, and the words used. All
the examples are from the Centre for Financial and management Studies
examination papers and assignment questions.

Definitions
Some questions mainly require you to show that you have learned some concepts, by
setting out their precise meaning. Such questions are likely to be preliminary and be
supplemented by more analytical questions. Generally Pass marks are awarded if the
answer only contains definitions. They will contain words such as:

Describe
Contrast

Define
Write notes on

Examine
Outline

Distinguish between
What is meant by

Compare
List

Reasoning
Other questions are designed to test your reasoning, by explaining cause and effect.
Convincing explanations generally carry additional marks to basic definitions. They will
include words such as:

Interpret

Explain

What conditions influence

What are the consequences of

What are the implications of

Judgment
Others ask you to make a judgment, perhaps of a policy or of a course of action. They will
include words like:

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 Course Introduction and Overview

Evaluate

Critically examine

Assess

Do you agree that

To what extent does

Calculation
Sometimes, you are asked to make a calculation, using a specified technique, where the
question begins:

Use indifference curve analysis to

Using any economic model you know

Calculate the standard deviation

Test whether
It is most likely that questions that ask you to make a calculation will also ask for an
application of the result, or an interpretation.

Advice
Other questions ask you to provide advice in a particular situation. This applies to law
questions and to policy papers where advice is asked in relation to a policy problem. Your
advice should be based on relevant law, principles, evidence of what actions are likely to
be effective.

Advise

Provide advice on

Explain how you would advise

Critique
In many cases the question will include the word critically. This means that you are
expected to look at the question from at least two points of view, offering a critique of
each view and your judgment. You are expected to be critical of what you have read.
The questions may begin

Critically analyse

Critically consider

Critically assess

Critically discuss the argument that

Examine by argument
Questions that begin with discuss are similar they ask you to examine by argument, to
debate and give reasons for and against a variety of options, for example

Discuss the advantages and disadvantages of

Discuss this statement

Discuss the view that

Discuss the arguments and debates concerning

The grading scheme: Assignments

The assignment questions contain fairly detailed guidance about what is
required. All assignment answers are limited to 2,500 words and are marked
using marking guidelines. When you receive your grade it is accompanied by

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 Management Accounting

comments on your paper, including advice about how you might improve,
and any clarifications about matters you may not have understood. These
comments are designed to help you master the subject and to improve your
skills as you progress through your programme.

Post graduate Assignment Marking Criteria

The marking criteria for your programme draws upon these minimum core
criteria, which are applicable to the assessment of all assignments:

understanding of the subject

utilisation of proper academic [or other] style (e.g. citation of references, or use of
proper legal style for court reports, etc.)

relevance of material selected and of the arguments proposed

planning and organisation

logical coherence

critical evaluation

comprehensiveness of research

evidence of synthesis

innovation / creativity / originality
The language used must be of a sufficient standard to permit assessment of
these.
The guidelines below reflect the standards of work expected at postgraduate
level. All assessed work is marked by your Tutor or a member of academic
staff, and a sample are then moderated by another member of academic staff.
Any assignment may be made available to the external examiner(s).

80+ (Distinction). A mark of 80+ will fulfil the following criteria:

very significant ability to plan, organise and execute independently a research project
or coursework assignment;

very significant ability to evaluate literature and theory critically and make informed
judgements;

very high levels of creativity, originality and independence of thought;

very significant ability to evaluate critically existing methodologies and suggest new
approaches to current research or professional practice;

very significant ability to analyse data critically;

outstanding levels of accuracy, technical competence, organisation, expression.

7079 (Distinction). A mark in the range 7079 will fulfil the following criteria:

significant ability to plan, organise and execute independently a research project or
coursework assignment;

clear evidence of wide and relevant reading, referencing and an engagement with the
conceptual issues;

capacity to develop a sophisticated and intelligent argument;

rigorous use and a sophisticated understanding of relevant source materials,
balancing appropriately between factual detail and key theoretical issues. Materials
are evaluated directly and their assumptions and arguments challenged and/or
appraised;

correct referencing;

significant ability to analyse data critically;

original thinking and a willingness to take risks.

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 Course Introduction and Overview

6069 (Merit). A mark in the 6069 range will fulfil the following criteria:

ability to plan, organise and execute independently a research project or coursework
assignment;

strong evidence of critical insight and thinking;

a detailed understanding of the major factual and/or theoretical issues and directly
engages with the relevant literature on the topic;

clear evidence of planning and appropriate choice of sources and methodology with
correct referencing;

ability to analyse data critically;

capacity to develop a focussed and clear argument and articulate clearly and
convincingly a sustained train of logical thought.

5059 (Pass). A mark in the range 5059 will fulfil the following criteria:

Ability to plan, organise and execute a research project or coursework assignment;

a reasonable understanding of the major factual and/or theoretical issues involved;

evidence of some knowledge of the literature with correct referencing;

ability to analyse data;

shows examples of a clear train of thought or argument;

the text is introduced and concludes appropriately.

4049 (Fail). A Fail will be awarded in cases in which there is:

limited ability to plan, organise and execute a research project or coursework
assignment;

some awareness and understanding of the literature and of factual or theoretical
issues, but with little development;

limited ability to analyse data;

incomplete referencing;

limited ability to present a clear and coherent argument.

2039 (Fail). A Fail will be awarded in cases in which there is:

very limited ability to plan, organise and execute a research project or coursework
assignment;

fails to develop a coherent argument that relates to the research project or
assignment;

does not engage with the relevant literature or demonstrate a knowledge of the key
issues;

incomplete referencing;

contains clear conceptual or factual errors or misunderstandings;

only fragmentary evidence of critical thought or data analysis.

019 (Fail). A Fail will be awarded in cases in which there is:

no demonstrable ability to plan, organise and execute a research project or
coursework assignment;

little or no knowledge or understanding related to the research project or assignment;

little or no knowledge of the relevant literature;

major errors in referencing;

no evidence of critical thought or data analysis;

incoherent argument.

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 Management Accounting

The grading scheme: Examinations

The written examinations are unseen (you will only see the paper in the
exam centre) and written by hand, over a three hour period. We advise that
you practice writing exams in these conditions as part of you examination
preparation, as it is not something you would normally do.
You are not allowed to take in books or notes to the exam room. This means
that you need to revise thoroughly in preparation for each exam. This is
especially important if you have completed the course in the early part of the
year, or in a previous year.
Details of the general definitions of what is expected in order to obtain a
particular grade are shown below. These guidelines take account of the fact
that examination conditions are less conducive to polished work than the
conditions in which you write your assignments. Note that as the criteria of
each grade rises, it accumulates the elements of the grade below. Assignments
awarded better marks will therefore have become comprehensive in both
their depth of core skills and advanced skills.

Post graduate unseen written examinations Marking Criteria

80+ (Distinction). A mark of 80+ will fulfil the following criteria:

very significant ability to evaluate literature and theory critically and make informed
judgements;

very high levels of creativity, originality and independence of thought;

outstanding levels of accuracy, technical competence, organisation, expression;

shows outstanding ability of synthesis under exam pressure.

7079 (Distinction). A mark in the 7079 range will fulfil the following criteria:

shows clear evidence of wide and relevant reading and an engagement with the
conceptual issues;

develops a sophisticated and intelligent argument;

shows a rigorous use and a sophisticated understanding of relevant source materials,
balancing appropriately between factual detail and key theoretical issues.

Materials are evaluated directly and their assumptions and arguments challenged
and/or appraised;

shows original thinking and a willingness to take risks;

shows significant ability of synthesis under exam pressure.

6069 (Merit). A mark in the 6069 range will fulfil the following criteria:

shows strong evidence of critical insight and critical thinking;

shows a detailed understanding of the major factual and/or theoretical issues and
directly engages with the relevant literature on the topic;

develops a focussed and clear argument and articulates clearly and convincingly a
sustained train of logical thought;

shows clear evidence of planning and appropriate choice of sources and methodology,
and ability of synthesis under exam pressure.

5059 (Pass). A mark in the 5059 range will fulfil the following criteria:

shows a reasonable understanding of the major factual and/or theoretical issues
involved:

shows evidence of planning and selection from appropriate sources;

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 Course Introduction and Overview

demonstrates some knowledge of the literature;

the text shows, in places, examples of a clear train of thought or argument;

the text is introduced and concludes appropriately.

4049 (Fail). A Fail will be awarded in cases in which:

there is some awareness and understanding of the factual or theoretical issues, but
with little development;

misunderstandings are evident;

there is some evidence of planning, although irrelevant/unrelated material or
arguments are included.

2039 (Fail). A Fail will be awarded in cases which:

fail to answer the question or to develop an argument that relates to the question set;

do not engage with the relevant literature or demonstrate a knowledge of the key
issues;

contain clear conceptual or factual errors or misunderstandings.

019 (Fail). A Fail will be awarded in cases which:

show no knowledge or understanding related to the question set;

show no evidence of critical thought or analysis;

contain short answers and incoherent argument.
[2015-16: Learning & Teaching Quality Committee]

Specimen exam papers

CeFiMS does not provide past papers or model answers to papers. Modules
are continuously updated, and past papers will not be a reliable guide to
current and future examinations. The specimen exam paper is designed to be
relevant and to reflect the exam that will be set on this module.
Your final examination will have the same structure and style and the range
of question will be comparable to those in the Specimen Exam. The number of
questions will be the same, but the wording and the requirements of each
question will be different.
Good luck on your final examination.

Further information
On line you will find documentation and information on each years
examination registration and administration process. If you still have ques-
tions, both academics and administrators are available to answer queries.
The Regulations are also available at www.cefims.ac.uk/regulations/, setting
out the rules by which exams are governed.

Centre for Financial and Management Studies 11

 Management Accounting

UNIVERSITY OF LONDON
CENTRE FOR FINANCIAL AND MANAGEMENT STUDIES
MSc Examination
for External Students 91DFM C370

INTERNATIONAL BUSINESS ADMINISTRATION

Management Accounting
Specimen Examination

This is a specimen examination paper designed to show you the type of examination
you will have at the end of this course. The number of questions and the structure of
the examination will be the same, but the wording and requirements of each question
will be different.

The examination must be completed in THREE hours.

Answer THREE questions, selecting at least ONE question from EACH

section. The examiners give equal weight to each question; therefore, you are
advised to distribute your time approximately equally between three ques-
tions.

DO NOT REMOVE THIS PAPER FROM THE EXAMINATION

ROOM. IT MUST BE ATTACHED TO YOUR ANSWER BOOK AT
THE END OF THE EXAMINATION.




University of London, 2014

12 University of London
 Course Introduction and Overview

SECTION A
Answer at least one question from this section.
QUESTION 1.
You are the financial manager of the Television division of a manufacturing
company that makes energy saving devices. Its principal customers are
retailers in the electrical goods market. You have been asked by the produc-
tion director to provide advice on the operations of the new Ecofriendly
Television production line.
The Television division produces only one line of Ecofriendly Television sets
but has a long-term contract with a major retailing chain to sell 10,000 Eco-
friendly Television sets each month.
The following data are available.

Sales price per unit 500.00
Variable costs per unit:
Direct material 100.00
Direct labour and on-costs 100.00
Variable support 100.00
Fixed costs per unit 100.00
Total unit costs 400.00

Production occurs in batches of 20 units.

Each batch takes 2 machine hours to manufacture.
Machine hour capacity is 1,000 hours.
Required:
a Determine the profitability of the Ecofriendly Television produc-
tion line and advise the production executive director as to the
production decision. (50 marks)

b The following information is available for the Television division

for the previous month.

Actual amounts

Materials: 5 000 pounds purchased at 12.00 per pound; used 6 000 pounds
Direct labour: 5 000 hours at 10.00 per hour
Units produced: 2,000
Standard amounts

Materials: 5 pounds per unit at a price of 10.00 per pound

Labour: 30 minutes per television set at a wage rate of 10.00 per hour
Determine the price and quantity variances of materials and
labour used in production. Comment on the relationships be-
tween the variances. (50 marks)

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 Management Accounting

QUESTION 2.

Fleeting Image Ltd is considering the option of replacing the

commercial carrier it currently uses for its customer deliveries
with an investment in a fleet of ten delivery vans.

It is expected that Fleeting Image Ltds existing carrier will

charge a total of 200,000 each year for the next three years to
undertake the deliveries.

The new vans would cost 30,000 each to buy, payable immedi-
ately. The annual running costs are expected to total 10,000 for
each van (including the drivers salary).

The new vans would be expected to operate successfully for

three years, at the end of which period they would have to be
scrapped, with zero expected disposal proceeds.

The average rate of taxation of corporate income for Fleeting Im-

age Ltd has been 10 percent. This rate also holds for any capital
gains. The depreciation rate allowable for taxation purposes is 40
percent reducing balance. The cost of capital for Fleeting Image
Ltd is estimated at 10 percent.

a What is the expected accounting rate of return if the fleet of

motor vehicles is purchased? (20 marks)

b What is the expected payback period if the fleet of motor vehicles

is purchased? (20 marks)

c Advise on the relative advantages and limitations of the account-

ing rate of return and payback period methods of project
evaluation. Discuss the mechanics, strengths and assumptions
used in discounted cashflows evaluation. Provide a calculation
based on a discounted cashflow method of your choice. (60 marks)

QUESTION 3.

A nursing home located inside a large district hospital has been

examining its budgetary control procedures with reference to its
support costs. 6,000 patients are expected from the budget period.

In the first six months of the year, costs were incurred evenly and
the same expectation is held for months 7 to 12.

During months 1 to 6, the total number of patients treated were

2,700 and actual support costs are as follows:

Expense
Staff 59 400
Utilities 27 000
Supplies 54 000
Other 8 100
Total 148 500

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 Course Introduction and Overview

Fixed costs are budgeted for the entire year as follows:

Expense
Supervision 120 000
Depreciation and financing 187 200
Other 64 800
Total 372 000
a Present a support costs budget for months 7 to 12 of the year.
You should show each expense but should not separate individ-
ual months. What is the total support cost for each patient? (60 marks)

b During months 7 to 12 the nursing home treated 3,800 patients,

support costs were 203,300 and fixed costs amounted to
190,000. Comment on the financial performance of the nursing
home in this period. Show all calculations and describe any as-
sumptions used in your analysis. (40 marks)

QUESTION 4.

a Explain why transfer prices are used between divisions of an

organization where each trading division is appraised using
profit performance. (40 marks)

b Identify the consideration in choosing a transfer pricing method

to be used under the following conditions:
i the product being transferred has an outside market and the
producing division is working at full capacity making sever-
al different products.
ii the product being transferred has an outside market and the
producing division has spare capacity.
iii a product is produced using parts from different production
centres none of which has an external market for their work
except the centre completing the final product. (60 marks)

SECTION B
Answer at least one question from this section.
QUESTION 5.
A group of operations executives has asked you to explain the
steps involved in determining activity cost driver rates in an
activity-based costing system. They have also asked you to de-
sign such a system for a particular production problem
involving its two main product lines. One line consists of rela-
tively low-cost, stackable, plastic furniture, designed for
outdoor use. The other product line is a number of models of
ergonomically designed office chairs, designed for executives
and directors offices.

Briefly outline to the group what you understand by a cost driver

and outline the steps involved in determining activity cost driver

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 Management Accounting

rates in an activity-based cost system. Your answer should out-

line how activity-based cost systems can overcome the
weaknesses of other types of cost allocation systems and at the
same time might lead to new strategic concerns.

QUESTION 6.

How can analysis of variances between budgeted and actual

production costs assist in the achievement of a companys strate-
gic objectives?

QUESTION 7.

In capital budgeting, what is Economic Value Added, what data

is needed when computing Economic Value Added, and what
useful information can Economic Value Added provide? Do you
consider Economic Value Added to be superior or inferior to
other methods of project evaluation? Explain why or why not.
Provide examples to support your argument.

QUESTION 8.

Your Finance Director has been reading about environmental

costs and the treatment of carbon emissions. You have been
asked to prepare a brief to the board on the relevance of envi-
ronmental costs, whether environmental costs should be
included in the management accounts, and any strategic consid-
erations that might be relevant for the board.

Prepare a brief as required. Use any of the theories covered in

the course in providing an evaluation of environmental costing
in terms of strategic cost management. Provide examples of
mandatory and voluntary costing standards, where appropriate.

16 University of London
Management Accounting
Unit 1 The Context of Management
Accounting

Contents
1.1
Introduction to Management Accounting 3

1.2
Shareholder Value and Management Control Systems 4

1.3
Non-financial Accounting Information 11

1.4
Summary and Practice Tasks 12

1.5
Case Study 14

References and Websites 15

 Management Accounting

Unit Overview
Unit 1 sets the scene for the course by defining and explaining key terms used
in management accounting and control. The unit first describes the need for
firms to produce management accounting information, then explains account-
ing information as part of a management control system designed to address
financial and operational risks faced by firms. Understanding management
accounting as a way to control risk is crucial for the rest of the course. In later
units you will look in more detail at specific elements of management ac-
counting techniques and information.
Key terms that you should be able to define and discuss are these: Manage-
ment control, Risk management, Accountability, Internal controls,
Shareholder value, Cybernetics, Entropy, Business cycles, Corporate govern-
ance, Balanced scorecard, Stakeholder reporting, Performance measures.

Learning Objectives
When you have completed your study of this unit, including the recom-
mended readings and activities, you will be able to
discuss the key qualities that management accounting information
should possess
compare and contrast financial accounting and management accounting
assess management information from a corporate governance
perspective, a shareholder value perspective and a stakeholder
perspective
evaluate the design of an internal control system over a companys
business cycles
describe, using flowcharting terminology and in words, the various
processes in revenue and expenditure business cycles, and use that
work to evaluate how a company controls its accounting information
describe how companies can combine non-financial and financial
performance measures using metrics such as the balanced scorecard.

Reading for Unit 1

Textbooks
Paul Collier (2012) Accounting For Managers: Interpreting Accounting
Information for Decision-Making, Chapter 1 Introduction to Accounting,
Chapter 2 Accounting and its Relationship to Shareholder Value and
Corporate Governance, and extracts from Chapters 4, 5 and 9.
Anthony Atkinson, Robert Kaplan, Ella Matsumara and Mark Young (2012)
Management Accounting, sections from Chapter 1 How Management
Accounting Information Supports Decision Making, and Chapter 2 The
Balanced Scorecard and Strategy Map.

Course Reader
Ruth Hines (1988) Financial Accounting: In Communicating Reality, We
Construct Reality.

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 Unit 1 The Context of Management Accounting

1.1 Introduction to Management Accounting

In this course you will study management accounting in a variety of in-
dustries, contexts and countries. Before this, though, it is essential that you
understand what management accounting actually is and what the manage-
ment accounting function means to an organisation.
Putting management accounting information in organisational context, firms
are required to produce financial reports, which are regulated by gov-
ernmental agencies. Management accounting information, however, is not
mandated by law (although there is a legal requirement for businesses to keep
proper accounting records). Even though there is no direct legal mandate for
management accounting reports, corporate governance requirements im-
posed on large businesses compel businesses to report how they conduct their
operations and manage a wide variety of operational and strategic risks.
These aspects of risk management are called internal controls; in some count-
ries such as the United States, businesses report on their internal controls to
regulators and shareholders.
How are internal controls over management accounting information related
to corporate governance? Unmonitored controls tend to deteriorate over time.
Monitoring by managers is implemented to help ensure that internal control
continues to operate effectively. When monitoring is designed and imple-
mented appropriately, organisations benefit because they are more likely to:
identify and correct internal control problems on a timely basis
produce more accurate and reliable information for use in decision-
making
be in a position to provide periodic certifications or assertions on the
effectiveness of internal control.
Paul Collier (2012)
Accounting For

Readings Managers: Interpreting
Accounting Information
Please turn to your textbook by Paul Collier, and study Chapter 1 the sections Account- for Decision-Making,
Chapter 1 Introduction
ing, accountability and the account and Introducing the functions of accounting. Also to Accounting; and
read from Atkinson and his colleagues Chapter 1, pages 25 to 28, ending with the section Anthony Atkinson,
IN PRACTICE: Definition of Management Accounting. Robert Kaplan, Ella
Matsumara and Mark
These two readings provide an overview of what accountancy is and introduces manage- Young (2012)
Management
ment accounting information for internal users such as company directors, managers and Accounting, Chapter 1
employees. It is the use of management accounting for people inside an organization that How Management
is the focus of this course. Accounting Information
Supports Decision
Making: sections cited.
 Exercise
As you work through the two readings above, try to suggest reasons why management
accounting information is needed. Also, note the similarities and differences in the various
definitions of accounting in Collier and Atkinson et al.
Financial reporting is based on third-party accountability that is, on representations made
by managers to external claimants on the firm such as shareholders, tax authorities and
creditors. Furthermore, corporate law requires financial reports to be prepared by manag-
ers which, on behalf of a firms external claimants, are reviewed by external auditors.

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 Management Accounting

Look at the section in Colliers Chapter 1 called Accounting, accountability and the account,
compare and contrast external financial reports to the types of human resources information,
production information and financial information needed within an organisation.

In the exercise above, you may have come up with a range of suggestions on
why management accounting information is needed, such as to support
decision-making and to provide performance benchmarks of divisions within
companies. Although there are strong arguments for producing management
accounting information for internal performance, there are also arguments
against producing management accounting information. We will come across
some of these arguments later in Unit 8 when we study budgeting.
Now that you have an understanding of management accounting informa-
tion, its time to consider the two broad types of accounting activities. The key
difference between management accounting and financial accounting is one
of focus.
Management accounting is focused on internal uses, such as producing
information for use in cost budgets, labour hiring plans, and sales
forecasts.
Financial accounting is focused on external uses, such as producing
information that meets the demands of tax authorities, stock exchanges,
lenders and shareholders for information on the assets and liabilities of
a business.

Reading
Paul Collier (2012)
Accounting For
Managers: Interpreting
Please turn to Colliers Chapter 1 and read the following three sections: The role of Accounting Information
for Decision-Making,
financial accounting; The role of management accounting; and The relationship between Chapter 1 Introduction
financial accounting and management accounting. to Accounting: sections
cited.
 As you study these sections, make notes of the key differences between financial
accounting and management accounting, paying attention to their objectives, organisa-
tional functions, and actual information items produced.

1.2 Shareholder Value and Management Control Systems

Before we move on to study management accounting information, it is useful
to study its organisational context. Management control in profit-oriented
businesses adopts the perspective that shareholder value is the most import-
ant objective of the management of a business. Management is held to account
by shareholders. In the case of profit-oriented businesses, the single organiza-
tional objective to which managers are held to account is usually held to be
wealth maximisation. In the case of non-profit organisations, organisational
objectives are the execution of specific operational programs and the
achievement of specific outcomes, which may differ from organisation to
organisation, and may or may not include financial objectives.
We understand accounting information systems as a subset of management
control systems. Managers need to understand accounting information

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 Unit 1 The Context of Management Accounting

systems (hereafter, AIS) if they are to control the variety of risks associated
with running an organisation. The operational benefits of an effective AIS are:
1 effective decision-making, and
2 acceptable standards of customer service, product and service quality,
productivity, and cost of production.
Other benefits of an effective AIS, and relevant to a shareholder value per-
spective on the firm, are:
3 quality information in external financial statements, such as balance
sheets, and internal financial statements, such as divisional operational
budgets, and
4 good corporate governance, meaning that a company is well-controlled,
being aware of and having taken measures to counter risks arising in its
ordinary course of business.
The Chartered Institute of Management Accountants does not define an
internal control of itself but defines an internal control system. A system of
internal controls is the whole system of controls, financial and non-financial,
established in an effort to provide managers reasonable assurance that busi-
ness operations are effective and efficient, that the firm is well-controlled
financially and that the firm complies with relevant laws and regulations.

Reading Paul Collier (2012)

Accounting For
Managers: Interpreting
Please turn to Colliers Chapter 2 and read the section Shareholder value-based manage- Accounting Information
ment. for Decision-Making,
Chapter 2 Accounting

 Make notes of the types of data used in operational performance measures, and and its Relationship to
Shareholder Value and
compare that with the types of data used in financial performance measures. Corporate Governance:
section cited.
You do not need to study all the various types of financial ratios instead, note the type of
data that are being used in these ratios. All this data is produced by accounting informa-
tion systems, and it is to those that we now turn.

1.2.1 The internal control system

The section in Colliers Chapter 4 Planning and control in organizations
(which you will be studying in the next sub-section) introduces a cybernetic
approach to business systems. A cybernetic approach takes a view that
business operations will collapse over time unless systemic faults are diag-
nosed and corrected.
The first-order cybernetic approach views business operations as subject to
entropy, or the tendency of a system to disintegrate over time. Management
controls are seen as part of a feedback loop that generates negative entropy
that is, that identifies noise in the operational system or information system,
and deals with that noise by neutralising its effects, a reaction which allows
systems to remain functioning as designed. (So-called second-order cyber-
netic systems, by contrast, identify noise in the system but do not eradicate it.
Instead, second-order systems incorporate unintended noise in the system.)
An internal control system can be thought of as comprising two parts:

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 Management Accounting

a) a control environment which exists at the whole-of-firm level

b) internal controls that are introduced and maintained over a companys
operational and informational processes.
A control environment describes senior managements and the board of direc-
tors attitude towards controls. Establishing a foundation for monitoring
controls means to institute a proper tone at the top. A strong control envi-
ronment will institute an organisational structure that assigns monitoring
roles to people with appropriate capabilities, objectivity and authority. On the
other hand, if the control environment in an organisation is weak, then
internal controls in that organisation are also likely to be ineffective.
No matter how well the internal controls are designed, they can only provide
a reasonable assurance that objectives will be achieved. Some limitations are
inherent in all internal control systems. These limitations include:
Judgment the effectiveness of controls will be limited by decisions
made with human judgment under pressures to conduct business based
on the information available at hand.
Breakdowns even well designed internal controls can break down.
Employees sometimes misunderstand instructions or simply make
mistakes. Errors may also result from new technology and the
complexity of computerised information systems.
Management Override high-level personnel may be able to override
prescribed policies or procedures for personal gains or advantages. This
should not be confused with management intervention, which represents
management actions to depart from prescribed policies and procedures
for legitimate purposes.
Collusion control system can be circumvented by employee collusion.
Individuals acting collectively can alter financial data or other
management information in a manner that cannot be identified by
control systems.
In the presence on a weak control environment, any or all of the limitations
can be expected to exist in an organization.
Internal controls are specific to business processes and operate on various
levels. Effective internal controls enable the proper functioning of business
processes e.g. sales-ordering, warehouse management, shipping goods to
customers, ordering goods from suppliers and so on.
The objectives of internal controls over a specific business process are:
1 Authorisation
2 Completeness
3 Accuracy
4 Validity
5 Physical safeguards and security
6 Error handling
7 Segregation of duties.

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According to the Committee of Sponsoring Organizations, internal controls

can be categorised according to whether internal controls are detective,
corrective or preventive 1.
1 Detective controls are designed to detect errors or irregularities that may
have occurred in operational processes and/or in information flows.
2 Corrective controls are designed to correct identified errors or irregularities
in operational processes and/or information flows.
3 Preventive controls are designed to keep errors or irregularities in
operational processes and/or information flows from occurring in the
first place.
There are many controls available, some of which are indispensable and
necessary, and others that are less necessary. A key control is one that in its
absence would lead to the system breaking down. A key control can be
detective, corrective or preventive.
The systems-based approach to controlling business cycles relies on the ability
of a business to control its strategy-setting, operational and reporting systems.
Managing a firm means to
a) the control environment that exists at the whole-of-firm level and
b) the internal controls maintained over a companys operational and
informational processes.

Example
Risk: Sales staff are responsible for creating sales orders from business customers, for
approving sales orders, and for receiving cheque payments from customers. The lack of
segregation of the execution function (sales), the authority function (approval) and the
custody function (handling cheques) may mean that it is now possible for sales staff to
create a fictitious vendor or change existing vendor master data and approve purchases to
that fictitious or altered vendor name.
Appropriate control to mitigate this risk: Segregate the execution, authority and custody
functions in the sales ordering process. This means a different person should perform each
function. If the company is so small that three people are not available for these functions,
then the company can institute a mitigating control such as financial controller review or
internal auditor review of sales orders (on a frequent basis but without prior notification to
the sales staff).

1.2.2 Business cycles

An effective understanding of internal controls and an appreciation of their
relationship to management accounting information depend on an under-
standing of the inter-relationships of business cycles. The two basic business
cycles are revenue (or sales) and expenditure.

1
Source:
http://www.coso.org/documents/COSO_Guidance_On_Monitoring_Intro_online1_002.pdf

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 Management Accounting

The four basic business operations within the revenue cycle are Sales,
Accounts receivable, Cash receipts, and General ledger processing. Each of
these operations is made up of a number of processes.
The expenditure cycle consists of the following basic business operations:
Purchases, Accounts Payable, Cash Disbursements, and General Ledger
Processing. Similarly, each of those four operations comprises several
processes.
Each operation is managed by implementing system controls.
For example, in the Sales operation in the revenue cycle, you may notice that a
key control is separating the sales force from the accounts receivable function.
A business does not want its sales people to be responsible for chasing its
customers to pay their accounts. Why not? If a sales person were to be made
responsible for collecting debts owed by customers, it would be possible for
the sales person to cancel the record of sales, so the companys financial
controller is never made aware that the sales took place. If the sales person
were then to keep the cash receipts collected from customers, using it for
her/his own purposes, no one would be able to detect the theft. Putting
different people in the accounts receivable and sales functions ensures that
this cannot occur at least, not easily. We can call a functional separation of
duties a segregation of duties.
While segregation of duties is a preventive control, it is also important to
design appropriate detective controls. For example, in the revenue cycle,
monthly sales records should be reconciled to debtors records. The monthly
sales ledger/debtors ledger reconciliation is an example of a detective control
because it will detect any anomalies between credit sales and cash receipts
from credit sales.
Managing these sorts of risks is crucial to any organisation, which is why it
becomes important to understand the basic business cycles and the key
control that a business will rely on to manage its operations.
Paul Collier (2012)

Readings on Business Cycles Accounting For
Managers: Interpreting
First, study the sections in Colliers Chapter 9 Business processes and Internal controls for Accounting Information
for Decision-Making,
information systems. These two sections explain internal controls in terms of two basic Chapter 9 Accounting
business processes: the revenue business cycle (or cash in), and the expenditure business and Information
Systems, and Chapter
cycle (or cash out). 4 Management
When you have read that section, please turn to this textbooks Chapter 4 and read the Control, Accounting
and its Rational-
sections Management control systems and Planning and control in organizations. Economic

 As you read these sections, make notes on the importance of internal controls for
Assumptions: sections
cited.

management decisions concerning manufacturing decisions and marketing decisions.

 Exercises on business cycles

You have already learned from above that a key control is one that in its absence would
lead to the business process breaking down.
 Exercise 1 Nominate at least one key control in the following sub-cycles: Sales,
Accounts Receivable, Cash Receipts, and General Ledger Processing.

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 Unit 1 The Context of Management Accounting

Exercise 2 Re-read Colliers Chapter 9 Business processes and Internal controls

for information systems, noting the key internal controls over the expenditure busi-
ness cycle. Nominate at least one key control in the sub-cycles of Purchases, Accounts
Payable, Cash Disbursements, and General Ledger Processing.

Figure 1.1 Identifying Key Controls Some useful symbols to start with.

Customer
purchase order
or sales order

Packing slip /
pick ticket

Back order
Bill of lading information

Sales invoice

Monthly
statement

Turnaround document
(or remittance advice)

Figure 9.1 in Colliers Chapter 9 (also below) presents a differently formatted

flowchart of the customer ordering process. Note the different format to that
used in the first data flow diagram above. Figure 9.1 is organised according to
the five sub-cycles in the sales cycle.
Despite their differences, both diagrams can be used to identify how a firm
controls its key business processes. In Practice Task 1 at the end of this unit,
you will need to refer to these two diagrams to match business processes with
appropriate internal controls.

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 Management Accounting

Figure 9.1 (Colliers Chapter 9, p.175) Customer Order Processing

Customer order
SALES

received
TRANSPORT WAREHOUSE PROCESSING
ORDER

Data entry Check stock Packing slip

of order levels

Goods taken Goods assembled Picking slip Inventory record

from shelf for order updated updated

Signed delivery Transport Goods delivered Signed delivery

note schedule to customer note
ACCOUNTING

Sales analysis accounts recievable Invoicing Invoice to

updated updated customer

Source: Collier (2012)

1.2.3 Alternative perspectives: stakeholder analysis

One criticism of the dominant concern with shareholder value is that it directs
attention away from the accountability obligations that profit-oriented firms
may owe to the wider society. We can say that those parties and groups that
are affected by or who have influence in organisations are stakeholders.
Stakeholder groups have stakes, even if they are non-financial stakes, in
organisations.
For example, if a recreation area for a neighbourhoods common use is pur-
chased by a business which plans to develop it commercially, the
neighbourhood becomes a stakeholder of that business, even though none of
the residents may be shareholders. The neighbourhood might want the
business to report how it will manage the desires of the neighbourhood for a
common-use recreation area.

Readings
Paul Collier (2012)
Accounting For Managers:
Interpreting Accounting
First, please turn to Colliers Chapter 2 and read the section A critical perspective. Information for Decision-
Making, Chapter 2
 As you study this section, make notes on how corporate governance requirements Accounting and its
Relationship to Shareholder
refer to the shareholder value concept. Value and Corporate
Governance: section A
Now turn to Colliers Chapter 5 and read the introduction and the sections Research and critical perspective and
theory in management control and accounting and Culture, control and accounting. Chapter 5 Interpretive and
Critical Perspectives on
 As you work through these readings, make notes on: Accounting and Decision
Making.
a) the normative view of accounting research
b) the interpretive view of accounting research
c) the critical view of accounting research.

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 Unit 1 The Context of Management Accounting

You will find the notes you make here a useful reference for the rest of the unit (especially
the case studies at the ends of the units). Paul Colliers textbook examines management
accounting using these three perspectives, and the remaining units in this course also ask
you to evaluate management accounting techniques and management accounting informa-
tion according to each of these perspectives.

Readings
Your course reader contains a short article Financial Accounting: In Communicating Ruth Hines (1988)
Financial Accounting:
Reality, We Construct Reality, by Ruth Hines. Read this article, adding to the notes you In Communicating
have already started in this unit on shareholder value. Although this article is about Reality, We Construct
financial accounting, its insights are also relevant for management accounting information. Reality, reprinted in
the Course Reader from
The article argues that the provision of accounting information itself can influence the Accounting,
behaviours of individuals and companies. This insight allows us to consider and asses the Organizations and
Society.
types of behaviour promoted by shareholder value, and compare that to the type of
behaviour promoted by stakeholder theory.

1.3 Non-financial Accounting Information

Financial measures of performance are often the easiest to measure; at their
simplest, profit (or economic surplus) equals income minus expenses. Finan-
cial measures tend to be the ones that are focused on most by managers.
However, purely financial measures do not always reflect other factors that
are critical to the success of a business.
One of the methods used by organisations to combine financial and non-
financial measures is the balanced scorecard, developed by Robert Kaplan, one
of the authors of your textbook, Management Accounting.
The four areas that balanced scorecards often measure are represented in a
2 x 2 grid, as shown below. The idea of the grid arrangement is that the four
corners are balanced in terms of importance:

Financial measures Customer/client measures

Internal business process measures Learning and growth measures

Also refer to Colliers Figure 4.5, and Exhibit 2-4 in Atkinson et al. Note the
variations in the titles used in the boxes above.
In many organisations that use balanced scorecards, the performance rubrics
chosen reflect the organisations profile, mission and specific objectives.
For example, Arup, a leading international engineering group and very
dependent on their professional staff and the organisations design skills, has
modified Internal business process measures in the box above as Design
process measures, and Learning and growth measures has been modified to
Staff measures.

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 Management Accounting

Readings Paul Collier (2012)

Accounting For
Managers: Interpreting
Please read the following three sections from your textbooks: Accounting Information
 Colliers Chapter 4 Non-financial performance measurement; for Decision-Making,
Chapter 4
 Atkinson et al. Chapter 2, The Balanced Scorecard pp. 4347; and Management Control,
Accounting and its
 Atkinson et al. Chapter 2 Strategy Map and balance Scorecard at Pioneer Petroleum Rational-Economic
pp. 6066. Assumptions; and
Anthony Atkinson,

 Exercise
Robert Kaplan, Ella
Matsumara and Mark
Young (2012)
Describe the strengths and weaknesses of using non-financial performance measurement Management
Accounting Chapter 2
systems at Pioneer Petroleum. The Balanced
Consider the firms stakeholders, e.g. different employee groups; different locations of Scorecard and Strategy
Map: sections cited.
customer groups; multi-party suppliers; international logistics operations; and operating in
multiple legal jurisdictions e.g. Asia and Europe.
Note the areas of operations that Pioneer Petroleum declares are important. Clue: identify
the areas that the company declares are risky.
 Are there any operational areas that Pioneer Petroleum has not mentioned?
 Where that is the case, why do you think this has occurred?
Note the performance measures that Pioneer Petroleum uses for each operational area.

1.4 Summary and Practice Tasks

This unit has been about setting the scene before you go on to study the
specifics of management accounting in more detail in the rest of this course. In
Section 1.1, you studied how accountability has produced demands for both
financial and management accounting information. The accountability de-
mands for management accounting information come from various levels of
managers in a firm.
The table below may help you understand the difference between the two
main strands of accounting:
Management accounting Financial accounting
Also known as Management information Statutory accounts, financial
statements, annual accounts,
annual returns
Main users Internal users such as External users such as investors,
managers lenders, suppliers, tax
authorities
Information provided Decided by management to Set down by legislation and
and format of this best suit the businesss regulations
information requirements
Detail provided Considerable detail Broad overview
Reporting frequency As frequently as required: Annual, and quarterly or half-
daily, weekly, monthly yearly for large businesses
Time horizon Past and future periods Past periods (backwards-
(forecasts) looking)

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 Unit 1 The Context of Management Accounting

Audit and tax Not used for external audit Often audited and used for tax
or taxation authorities. May calculations
be used for internal audit
purposes
In Section 1.2, you learned how accountability demands for management
accounting information also come from governance requirements imposed by
regulators and stock exchanges. You also studied how shareholders interests
dominate reporting requirements imposed on businesses. You have seen
arguments for and against managing a business according to the shareholder-
value concept.
Stakeholder theory is an attempt to consider management accounting infor-
mation in terms of its social implications. Stakeholder reporting attempts to
redress the information needs of parties outside the narrow remit of creditors
and shareholders.
Organisational control is achieved primarily through the design of internal
control systems. Accounting information is important because it helps a
business control its strategies and operational risks, as well as meeting the
demands of shareholders. In Section 1.3, you studied non-financial perform-
ance measurement. The Balanced Scorecard provides a way that a business
can ensure it balances its financial performance measures with other types of
performance measures. Putting the distinction between financial and non-
financial accountability to one side, the perspective found most often in
management control, and reflected in professional bodies such as The Com-
mittee of Sponsoring Organizations, is a rational, goal orientation. Reflecting
that, the effectiveness of management control systems is often gauged using a
systems-based approach which detects weakness in system controls.

 Practice Tasks
Attempt any two (2) of the following four practice tasks as a way to refresh your
understanding of this unit before you move on to the case study below.

Practice Task 1
i) Using the two data-flow diagrams above in Section 1.2, identify which of the vari-
ous processes in the sales process are most important to a company.
ii) How will managers control the principal processes in sales?
iii) Whats the next business process after the remittance advice is sent to the cus-
tomer?
iv) Match each business process (there are eleven listed, i-xi) to the appropriate con-
trol (there are eight listed, A-H). Please note that a single control may be applied
to more than one business process.

Business processes
i. Customer Sale.
ii. Send goods to shop.
iii. Inquire inventory.
iv. Need more goods.
v. Raise a purchase requisition.

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 Management Accounting

vi. Raise a purchase order.

vii. Pay suppliers in cheque run.
viii. Goods arrive to warehouse.
ix. Supplier sends invoice.
x. Send ordered goods to shop or to customer directly.
xi. Receive cash from retail customer else send account.

Controls
A. Check customer exists and credit limit.
B. Check goods in stock.
C. Obtain approval.
D. Produce despatch note, copy of invoice, and receiving report.
E. Put ordered goods aside.
F. Match invoice to receiving report.
G. Review, chase and receive cash from debtors.
H. Obtain approval and post to general ledger.
Practice Task 2. Atkinson et al. Chapter 2, Exercise 2-34 p. 75: Balanced scorecard
measures, environmental and safety dimensions.
Practice Task 3. Atkinson et al. Chapter 2, Problem 2-44 p. 76: University balanced
scorecard.
Practice Task 4. Find out if your own organisation or an organisation you are interested
in uses the balanced scorecard. Makes notes on the following:
a. the areas of operations that are being assessed
b. the measures the organisation uses to asses operational areas
c. the target groups of readers for this information
d. match readers presumed informational needs with the actual information that is
disclosed. How well do you think that readers informational needs are being met?

Paul Collier (2012)

1.5 Case Study Accounting For
Managers: Interpreting

The case study for this unit is Colliers Chapter 5 Case study 5.1: easyJet, pages 71 Accounting Information
for Decision-Making,
to 73. Chapter 5 Interpretive
and Critical

 Once you have read this case, write a management memorandum of approximately Perspectives on
Accounting and
500 words that, first, describes easyJets financial and operational strategies; then evalu- Decision Making, Case
study 5.1.
ates easyJets management control system.
- Use Figure 9.1 in Colliers Chapter 9 as a guide to draw and explain a data flow
diagram (also called a flowchart) of easyJets customer order processes, cash re-
ceipting and related accounting processes.
- Your evaluation should identify the key controls in easyJets revenue cycle. (Key
controls are those that if they were absent, the operation would break down.) In-
clude at least one key preventive control and one key detective control in
customer ordering, cash receipting, and related accounting processes.
When writing up this case, you may wish to refer to the website
http://corporate.easyjet.com/investors.aspx.

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References and Websites

Atkinson Anthony, Robert Kaplan, Ella Matsumara and Mark Young
(2012) Management Accounting, Harlow Essex UK: Pearson Education
Limited.

Collier Paul (2012) Accounting For Managers: Interpreting Accounting

Information for Decision-Making, Fourth Edition, Chichester UK: John Wiley
& Sons.

Hines Ruth (1988) Financial Accounting: In Communicating Reality, We

Construct Reality, Accounting, Organizations and Society 13(3): 25161.

Business Cycles
easyJet, http://corporate.easyjet.com/investors.aspx.

OBA, IOCM and their impact on supplier relationship satisfaction,

http://www.fm-magazine.com/feature/depth/oba-iocm-and-their-
impact-supplier-relationship-satisfaction.

Internal Controls
Chartered Institute of Management Accountants, www.cimaglobal.com.

The Committee of Sponsoring Organizations of the Treadway Commission

(COSO)
http://www.coso.org/documents/COSO_Guidance_On_Monitoring_Intr
o_online1_002.pdf.
The Institute of Risk Management,
http://www.theirm.org/aboutheirm/ABaboutus.htm.
Risky Business, http://www.fm-magazine.com/feature/depth/risky-
business.

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 Management Accounting

16 University of London