For Examinations to August 2017

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ACCA
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Paper F2 | MANAGEMENT ACCOUNTING

Foundations in Accountancy
Paper FMA | MANAGEMENT ACCOUNTING
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 ACCA

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MANAGEMENT ACCOUNTING F2/FMA
STUDY TEXT
For Examinations to August 2017

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 Paper
F2/FMA
Contents

Page

Introduction ...............................................................................................v

About This Study System ............................................................................v

Syllabus.....................................................................................................vi

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ACCA Study Guide ......................................................................................ix

Formulae and Tables ................................................................................ xv

Sessions

1
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Examination Technique ..........................................................................xviii

Accounting for Management ................................................. 1-1

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2 Sources of Data .................................................................... 2-1

3 Cost Classication ................................................................ 3-1

4 Presenting Information ........................................................ 4-1

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5 Accounting for Materials ....................................................... 5-1

6 Accounting for Labour .......................................................... 6-1

7 Accounting for Overheads..................................................... 7-1

8 Absorption and Marginal Costing .......................................... 8-1

9 Job, Batch and Service Costing ............................................. 9-1

10 Process Costing ...................................................................10-1

11 Alternative Costing Principles ..............................................11-1

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 Contents

Sessions Page

12 BudgetingNature, Purpose and Behavioural Aspects .........12-1

13 Statistical Techniques ..........................................................13-1

14 Budget Preparation .............................................................14-1

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15 Flexible Budgets, Budgetary Control and Reporting .............15-1

16 Standard Costing and Variance Analysis ..............................16-1

17

18

19
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Capital Budgeting and Discounted Cash Flows .....................17-1

Performance Measurement ................................................. 18-1

Further Aspects of Performance Measurement ....................19-1

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20 Glossary ..............................................................................20-1

21 Index ..................................................................................21-1
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iv DeVry/Becker Educational Development Corp. All rights reserved.

 Introduction

ABOUT THIS STUDY SYSTEM

This Study System has been specifically written for the Association of Chartered Certified
Accountants Papers F2 Management Accounting in the ACCA Qualification and FMA
Foundations of Management Accounting of Foundations in Accounting.
It provides comprehensive coverage of the core syllabus areas and is designed to be used
both as a reference text and as an integral part of your studies to provide you with the
knowledge, skill and confidence to succeed in your ACCA studies.
About the current author: Nick Ryan is Becker's lead tutor in performance management and

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has 15 years' experience in delivering ACCA exam-based training.

How to Use This Study System

You should start by reading through the syllabus, study guide and approach to examining the
syllabus provided in this introduction to familiarise yourself with the content of this paper.

Focus

Session Guidance

Visual Overview
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The sessions which follow include the following features:

These are the learning outcomes relevant to the session, as published in

the ACCA Study Guide.

Tutor advice and strategies for approaching each session.

A diagram of the concepts and the relationships addressed in each session.

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Terms are defi ned as they are introduced and larger groupings of terms will
Definitions
be set forth in a Terminology section.

These are to be read as part of the text. Any solutions to numerical

Illustrations
Illustrations are provided.

These extracts of external content are presented to reinforce concepts and

Exhibits
should be read as part of the text.

These should be attempted using the pro forma solution provided

Examples
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(where applicable).

Key Points Attention is drawn to fundamental rules, underlying concepts and principles.

Exam Advice These tutor comments relate the content to relevance in the examination.

Commentaries These provide additional information to reinforce content.

Session Summary A summary of the main points of each session.

These quick questions are designed to test your knowledge of the technical
Session Quiz
content. A reference to the answer is provided.

A link to recommended practice questions contained in the Study Question

Study Question Bank. At a minimum, you should work through the priority questions
Bank after studying each session. For additional practice, you can attempt the
remaining questions (where provided).

Example Solutions Answers to the Examples are presented at the end of each session.

DeVry/Becker Educational Development Corp. All rights reserved. v

VISUAL OVERVIEW
Objective: To outline and contrast the purposes of cost and management accounting
and financial accounting and to understand the roles of the management accountant
and management information in planning, controlling, decision-making and performance
measurement.

ACCOUNTING

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FINANCIAL MANAGEMENT
COMPARISON
ACCOUNTING

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ACCOUNTING
Processes
Planning
Decision-Making
Control
Cost Accounting (see
Sessions 511, 16)
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Performance
Measurement

DATA AND
INFORMATION
Terminology
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Data Processing
Attributes
Limitations

Session 1 Guidance
Understand the difference between data and information and the attributes of useful
information (s.4).
Identify the main areas of difference between management accounting and financial accounting (s.5).

DeVry/Becker Educational Development Corp. All rights reserved. 1-1

Session 1 Accounting for Management F2 Management Accounting

1 Accounting
The primary functions of accounting are:
To classify and record actual transactions in monetary terms.
To present and interpret the results of transactions to assess:
performance over a period; and
financial position at a given date.
To project, in monetary terms, future activities arising from
alternative planned courses of action.

2 Financial Accounting

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Financial accounting involves the following:
Classifies and records actual transactions in monetary terms in
accordance with established concepts, principles, accounting
standards and legal requirements. For example, in accordance

Standards (IFRS).

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with the requirements of International Financial Reporting

Presents as accurate a view as possible of the effect of those

transactions over a period of time and at the end of that time.
That part of financial accounting which is concerned with
the preparation of the financial statements is referred to as
financial reporting.
A set of financial statements consists of:
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Statement of Statement of
Statement of
comprehensive nancial position
cash ows
income ("Balance sheet")

3
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Management Accounting

3.1 Processes
Management accounting is concerned with the provision of
information to enable management to:
formulate policies;
plan (set objectives, select strategies);
organise (establish sequence of tasks);
make decisions on alternative courses of action;
control activities (including safeguarding assets);
manage and measure performance (including motivation).

1-2 DeVry/Becker Educational Development Corp. All rights reserved.

F2 Management Accounting Session 1 Accounting for Management

Decision-
Data collection Planning Results
making

Feedback Forecast
and control or target

3.2 Planning

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Planning is the setting of goals and selecting the means
of achieving them.
As businesses become large, these will need to be formalised.
Short-term plans such as the annual budget show in detail
the intended results for the forthcoming year.

3.2.1
of the business.

Anthony's Model

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Long-term plans document the long-term objectives

Robert Anthony suggested that the planning process takes

place at three levels within an organisation:
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STRATEGIC

TACTICAL
OPERATIONAL
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3.2.2 Strategic Planning

Strategic planning means formulating, evaluating and selecting
strategies for the purpose of preparing a long-term plan of action.
Time period of planning is longtypically five or more years.
Decisions taken are "high level"how to compete, which
products and markets.
Targets used will be broadsuch as achieving a specific
market share, or growth in the market value of the company
or return on capital employed.
Information used in planning will be mainly external
(e.g. competitors, markets).

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Session 1 Accounting for Management F2 Management Accounting

3.2.3 Tactical Planning

Tactical planning means planning the utilisation of resources to
achieve specific objectives in the most effective and efficient way.
The time frame for planning is typically one year.
Tactical plans aim to contribute to the long-term strategy.
Plans may be very formalised and detailed.
Information used in planning will be a mix of internal
and external.

3.2.4 Operational Planning

Operational planning means the fully detailed specifications by
which individuals are expected to carry out the predetermined

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cycles of operations to meet sector objectives.
The time frame for planning is shortpossibly one week or
even one day.
Targets set will be "transaction-based" numeric targetssuch
as producing a given number of units per hour.

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The information used for planning will be mainly internal.

Illustration 1 Planning

In a large multinational company, the strategic planning is likely

to be performed by the chief executive officer and the senior
management team. This may involve decisions such as which
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markets to invest in and which product areas. Tactical planning
may be carried out by a local team of management within each
geographic area. The team will make plans, such as how many staff
to employ in the next financial year, how much to produce and so
onoften by means of a budget. Operational managers might be
shift managerstheir planning may involve items such as staff rotas,
or purchasing of raw materials.

3.3 Decision-Making
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Decision-making usually involves using the information

provided by the costing system to make decisions concerning:
long-term goals; and
day-to-day routine operations.

For decisions to be optimal, management must be provided

with information appropriate to its needs.

3.4 Control
Strategic control is externally focused comparing the
strengths, weaknesses and limitations of the organisation
with other businesses in the same industry.
"Management control systems" are mechanisms which
aim to ensure that organisational objectives are achieved.

1-4 DeVry/Becker Educational Development Corp. All rights reserved.

F2 Management Accounting Session 1 Accounting for Management

3.4.1 Results or Output Controls

Control often includes the assessment of performance
by comparing the budgeted results with actual results
(i.e. the outcomes of work effort).* *Output control
The output report usually takes the form of an "operating systems require that
statement" which breaks down the difference into its performance measures
component parts (detailed in Session 16). ("standards") be set
as targets and that
3.4.2 Different Types of Controls actual performance is
measured. Rewards
Although budgetary control (through variance analysis) is and punishments
widely used to influence the decisions of line managers, may be important
other categories of control include: motivational factors.
action (or behavioural) controls; and

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personnel and cultural controls
(also called "clan and social").
Behavioural control involves the actions of subordinates
being observed (e.g. by a factory foreman).
Behavioural constraints include physical preventive

and computer passwords).

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measures (e.g. bans on international telephone calls

Pre-action reviews give prior approval to an action plan

before it is implemented.
The main advantage of action/behavioural controls is that
they prevent deviations, whereas results/output controls
detect them.
Personnel, social and cultural controls rely on underlying
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discipline, shared values and codes of conduct.

3.5 Cost Accounting

Cost accounting is that part of management accounting which:
Establishes budgets, standard costs and actual costs of:
operations/processes;
departments/products; and
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Analyses differences between budgeted or standard

costs and actual costs.

3.6 Performance Measurement

Performance measurement is a vital function in organisations.
It provides feedback on what does and does not work, and helps
motivate people to sustain their efforts.
"Performance" concerns output (e.g. of products and services)
which permits evaluation and comparison with goals, standards,
etc. It can be expressed in non-financial and financial terms.
"Measurement" concerns numerical information which
quantifies input, output, etc. Performance measures might be
simple (i.e. derived from one measurement, such as unit cost)
or composite (e.g. a consumer or retail price index).
Organisations need to match and align suitable performance
measures with their business strategy, structures and corporate
culture. Suitable measures need to strike a balance between
their merits, costs and results.

DeVry/Becker Educational Development Corp. All rights reserved. 1-5

Session 1 Accounting for Management F2 Management Accounting

4 Data and Information

4.1 Data Processing Model

Data Process Information

Processing may include the following:

Summarising;
Analysing;

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Filtering;
Storing.

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Datafacts or pieces of information. These are not useful for
decision-making without being further processed.
Informationprocessed data. It is useful for supporting
management in the decision-making process.
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Illustration 2 Data Processing
Model
In a retail business, each sale is recorded, usually by the cash
register. The record of each sale is a piece of data. Without further
processing it does not help managers to make decisions. If members
of senior management were informed every time a sale was made,
they would soon lose focus.
At the end of each month a report might be produced, showing total
sales, analysed by product, with comparisons to the same period last
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year. This report is an example of useful information. The report is

prepared by summarising and analysing each individual sale. It tells
management which products are being successful, how the business
is performing compared with the previous year, and so forth.

1-6 DeVry/Becker Educational Development Corp. All rights reserved.

F2 Management Accounting Session 1 Accounting for Management

4.2 Attributes of Good Information

Good information assists management to make good decisions.
What constitutes good information can be summarised by the
acronym "ACCURATE", as follows:
Accuratethe degree of accuracy depends on the user. If an
investor is reviewing a set of financial statements, an error
of $100 in sales might not matter if total sales are $1 million.
However, a cashier in a shop has to count the cash in the cash
register at the end of each shift. A discrepancy of just $1 may
be a cause for concern.
Completeall relevant information for the decision should
be included.

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Cost effectivethe cost of providing information should be
less than the benefits it provides.
Understandablethe information should be free from
technical jargon.
Relevantif a manager is provided with a long report that
contains a lot of superfluous information, it is difficult for the

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manager to identity the important information.
Availableinformation should be available to the appropriate
managers when they need it.
Timelythe later information is received, the less likely it is

to be useful.
Easy to useinformation should be presented in a professional
way, with summaries and diagrams.
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To determine whether it is cost effective to provide additional
information, the marginal cost of further information can be
compared with the marginal benefit.
Marginal cost means the additional cost of providing new
information (e.g. hiring additional staff and investing in
additional information technology).
Marginal benefit refers to the additional benefit gained by
having additional information (e.g. cost savings or additional
sales revenue).
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Information should be provided up to the point where the

marginal cost equals the marginal benefit. Beyond this
point, the marginal cost of additional information exceeds the
marginal benefit.*
$
*The diagram
Marginal illustrates the principle
cost that information
should not be provided
if the cost of that
information exceeds
the benefit. However,
the marginal cost
of information may
increase in steps
Marginal rather than as a
benet straight line (see
Session 3). It will also
be very difficult to
Do not provide Amount of
predict the value of the
information beyond information
marginal benefits.
this point

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Session 1 Accounting for Management F2 Management Accounting

4.3 Limitations of Information

in Decision-Making
The quality of information (output) is dependent on the quality
of raw data (input). If historic financial data is not reliable,
then management accounting cannot make an appropriate
analysis of it for decisions about the future.
Managers involved in the decision-making process must
have relevant knowledge and a proper understanding of
the information and principles (e.g. statistics, economics)
which underlie it.
Managers may make intuitive decisions on a course of action
(e.g. to avoid a lengthy decision-making process) which limits

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the use of management accounting information.
Management accounting provides informationnot decisions.
Managers must take the part of decision-maker and ensure
their implementation.
Obtaining good-quality information for decision-making may
be too costly for smaller businesses.

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Interpretation of information often will depend on the personal
judgement of the manager. This can be affected by bias
(e.g. aversion to risk) or other personal prejudices which will
affect the objectivity of decisions.
Decision-making on management information alone ignores such
personal factors as attitude (e.g. to risk), morale and motivation.
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Comparison of Management and Financial Accounting

Management Accounting Financial Accounting

Users of Management only Shareholders, banks, creditors,

information potential investors, customs and
excise, government, taxation
authorities
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Format of Can take any form Presentation regulated by law

information (e.g. Companies Acts) and
accounting standards (e.g. IFRS)

Content Includes future predictions A summary of mainly historic

(e.g. in budgets) information

Level of detail More detailed (e.g. costs and As prescribed by users,

revenues by department/ product) legislation, etc

Frequency of Quarterly, monthly (even weekly) Usually annually (more frequently

preparation for certain types of "public interest"
companies)

Purpose of Useful to plan, control and make Stewardship and investment

information decisions decisions

Basis of Relevant for decision-making Historical costs (as modified by

valuation (e.g. replacement cost) revaluation of certain fixed assets)

1-8 DeVry/Becker Educational Development Corp. All rights reserved.

 Session 1

Summary
Accounting aims to record, present and interpret the results of transactions to reflect the
financial performance of an organisation over a given period, and to present its financial
position at the end of the period.
Financial accounting is performed for the purpose of external users, and presents information
in accordance with a specified set of rules or standards (e.g. IFRS).
The purpose of management accounting is to provide internal information to managers for
planning, decision-making and control purposes.
Accounting involves data processing, which is the process of converting raw data into
information.

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The characteristics of good information can be remembered using the acronym "ACCURATE".

Session 1 Quiz
Estimated time: 10 minutes

1.

2.

3.
pl
List the SIX processes involved in management accounting. (3.1)

True or false? Tactical planning is typically for a period of several years. (3.2.3)

State THREE categories of management controls. (3.4.2)

m
4. Define "information". (4)

5. List EIGHT attributes of good information. (4.2)

6. List FIVE areas of difference between management accounting and financial accounting. (5)

Study Question Bank

Estimated time: 15 minutes
Sa

Priority Estimated Time Completed

Management
Q2 15 minutes
information functions
Additional
Q1 Sigma

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Session 2

Sources of Data

FOCUS

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This session covers the following content from the ACCA Study Guide.

A. The Nature, Source and Purpose of Management

Information
2. Sources of data

pl
a) Describe sources of information from within and outside the organisation
(including government statistics, financial press, professional or trade
associations, quotations and price list).
b) Explain the uses and limitations of published information/data (including
information from the Internet).
c) Describe the impact of general economic environment on costs/revenue.
d) Explain sampling techniques (random, systematic, stratified, multistage,
cluster and quota).
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e) Choose an appropriate sampling method in a specific situation.
Sa

Session 2 Guidance
Note that this is a theoretical session dealing with a concept of dataits nature, types, complexity
and source.
Familiarise yourself with the miscellaneous classifications of data (e.g. primary/secondary, discrete/
continuous, etc). Use Example 1 to check your understanding of section 1.

F2 Management Accounting Becker Professional Education | ACCA Study System

VISUAL OVERVIEW
Objective: To describe sources of information and explain sampling techniques.

TYPES OF DATA
Quantitative Data v Qualitative Data
Discrete Data v Continuous Data
Primary Data

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Secondary Data
Raw Data v Aggregated Data

INTERNAL SOURCES EXTERNAL SOURCES

Management Information
System (MIS)
Accounting Records
Company Records
pl







Government Statistics
Professional and Trade Associations
Commercial Services
National and International Institutions
Financial Press
General Economic Environment
Internet
Uses of Published Information/Data
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Limitations of Published Information/Data

SAMPLING
Terminology
Why Sample?
Stages in Sample Data Collection
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SELECTION METHODS
Random Selection
Systematic Selection
Stratified Sample
Multi-stage Selection
Non-random

Session 2 Guidance
Understand the different internal and external sources of data (s.2, s.3), including the type and
nature of data that an entity will be able to collect.
Know why sampling (s.4.1) is required and the steps involved in a sampling process (s.4.2). Use
the Illustrations and Example 2 in section 5 to test your understanding of choosing an appropriate
sampling method.

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Session 2 Sources of Data F2 Management Accounting

1 Types of Data
1.1 Quantitative Data v Qualitative Data
Quantitative Data Qualitative Data
Is capable of numerical Reflects distinguishing
measurement (e.g. time, characteristic (e.g. gender,
distance, cost, weight, age). colour, nationality).

1.2 Discrete Data v Continuous Data

Discrete Data Continuous Data
This increases "in jumps", i.e. Increases continuously to

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takes specific (usually integer) any fraction of accuracy
values but none in-between (e.g. (e.g. distance, weight).
number of children in families).

1.3 Primary Data

Secondary Data
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This is data collected by an investigator to be used for a
specific purpose. Therefore, it is more difficult, costly and time
consuming to collect than secondary data.

1.4
This is not specifically collected for the purpose for which it is
being used but taken from the data of others. It may be entirely
appropriate and wholly adequate to draw conclusions so that the
collection of primary data is rendered unnecessary.
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However, it must be used with care because the background to
its original collection is often unknown.
Its main attraction is that it is far cheaper and quicker to
obtain than primary data. Internet data, for example, is
immediately available.
1.5 Raw Data v Aggregated Data
Raw Data Aggregated Data
Sa

In its original form, this is Collected and summarised in

recorded as received and some way (e.g. rearranged in
unprocessed. order of size, date, etc and/or
grouped in class intervals).

Example 1 Data Classification

Classify the following data:
Solution
(a) Data collected by the Department of Education of
your government which you use for your own survey.
(b) The manufacturer's make of mobile phones used by
your work colleagues.

(c) Data collected from a sample survey.

(d) The speed of a car passing a certain point in the road.

(e) The shoe sizes of your colleagues.

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F2 Management Accounting Session 2 Sources of Data

2 Internal Sources of Data

2.1 Management Information System

A management information system (MIS) is designed to provide
management with its information needs at every level (i.e.
operational, tactical, and strategic).
A good MIS provides suitably detailed reports in an accurate,
consistent and timely manner.
It continuously gathers relevant data (both internal and
external) which is processed, updated and made available to
all who have the authority to access it.

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It incorporates external data into internal data. For example,
the cost of a component purchased for the manufacture of
a product may be a published price (e.g. on a price list) but
the standard cost of the product (as determined by the cost
accountant) will be confidential internal information.

2.2 Accounting Records

pl
Accounting records are all the records of assets and liabilities and
monetary transactions. They include the "books" (e.g. ledgers
and asset registers) which will most likely be computerised and
the supporting documentation.
Supporting documentation will include all that is raised
internally (e.g. goods received notes, sales invoices, payslips,
tax returns) and documentation received from external parties
m
(e.g. invoices from suppliers, tax demands, bank statements).
Information from existing and potential suppliers of goods and
services will typically include:
technical specifications;
retail prices and discounts available;
terms of delivery;
payment terms;
after-sales services;
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product warranties.

2.3 Company Records

Although much of the information created within an organisation
will be confidential (and access to it will be restricted) many
organisations must make certain information public by filing it
with an authority.*
*Limited companies in
Many listed companies choose to provide much more the UK must file with
information and may publish in an annual report: Companies House an
key data (e.g. revenue, earnings, expenditure on research, annual return which
dividends per share); includes audited
financial statements.
mission statement (see Session 18);
chairman's report (essentially a letter to the shareholders);
board of management (the chairman and other key
executives);
investor information (e.g. explanation of stock market
movements, share price, etc);

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Session 2 Sources of Data F2 Management Accounting

information (e.g. development in

industry-related
technology);
"green" issues (e.g. measures to reduce carbon emissions);
highlights (e.g. new chairman, acquisitions, expansion into
new territories);
five-year financial summary (e.g. a summary income and
statement and statements of financial position with four
years of comparative information).
Such annual reports therefore provide information which may
be used to:
identify key executives (e.g. to "headhunt");
research companies (e.g. with a view to acquiring);
improve pre-meeting planning;

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gain competitive intelligence;
target new customers;
analyse financials;
view key industry trends.

3 External Sources of Data

pl
The main sources of external secondary sources are:
government (federal, state and local) statistics;
professional trade associations;
commercial services;
national and international institutions;
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financial press;
Internet.
3.1 Government Statistics
A large-scale survey undertaken by a government or international
agency may provide more accurate data than can be obtained
through customised surveys based on relatively small sample sizes.
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Information from governments may include:

population censuses;
social surveys, family expenditure surveys;
import/export statistics;
production statistics;
agricultural statistics.
3.2 Professional and Trade Associations
Professional and trade associations differ widely in the extent to
which they collect data and disseminate information.
Trade associations typically produce a trade (members)
directory and a yearbook along with perhaps periodic
newsletters.
Professional associations tend to publish information more
broadly to a range of stakeholders. For example, ACCA
provides resources for its students, members, learning
partners and employers.

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F2 Management Accounting Session 2 Sources of Data

Exhibit 1 ACCA

The following are ACCA publications for members including a range of magazines,
factsheets and booklets. Source: http://www2.accaglobal.com/members/publications/

Accounting and Business

ACCA's monthly global magazine for members, which addresses critical issues affecting
the business and finance world and contains the latest in news analysis and features.
Sector specific magazines and booklets
A range of publications tailored to your specific sector of business in the UK and Ireland.
Titles include In Practice, In Practice Ireland, Corporate Sector Review, Public Eye,
Financial Services Review and Health Service Review.
Technical factsheets

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A range of factsheets on key technical matters.

3.3 Commercial Services

Published market research reports and other publications

pl
(e.g. results of clinical trials) are available from a wide range
of organisations which charge for their information.
Typically, marketing people are interested in media statistics
and consumer information which has been obtained from
large-scale consumer panels.
The publishing organisation:
funds the collection of the data (which is wide-ranging in
its content);
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makes money by selling this data to interested parties.

3.4 National and International Institutions

International agencies (e.g. World Bank, International
Monetary Fund (IMF), Organisation for Economic Co-operation
and Development (OECD), etc) produce secondary data in
abundance.
National sources include:
Sa

bank economic reviews;

university research reports;
medical journals.

3.5 Financial Press

The financial press reports daily, for example, on market prices
of securities of publicly traded corporations and is an important
and influential source of information in many sectors of the
community:
Investors rely on it for information about how their shares are
performing;
Stockbrokers are interested in what is happening in the share
market;
Politicians should see how their policies are affecting the
market (and, in turn, the economy); and
People in business are interested in how their companies are
perceived and how other companies are performing.

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Session 2 Sources of Data F2 Management Accounting

Although the financial press is a quick and relatively cheap way of

obtaining information, it must be remembered that it is a source
of both:
facts (as derived from official announcements, etc); and
opinions (usually expressed in columns written by financial
journalists, politicians, stockbrokers, advisers or other
prominent industry figures).

3.6 General Economic Environment

One of the main reasons for "following the financial news" is to
understand the current economic environment:
The level of growth in gross domestic product influences

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demand for products and services. Management needs
to consider the effect of government actions on economic
growth. For example, an increase in rates of profits tax or
cuts in government spending is likely to lead to a reduction of
aggregate demand in the economy.
If inflation is high or rising, governments may increase interest

pl
rates in an attempt to control it. This will have the effect of:
aggregate demand in the economy (consumers will
reducing
spend less because they have to pay higher interest on loans);
increasing the cost of finance for companies.
If the domestic currency strengthens as a result of higher
interest rates, exporters may be forced to reduce their prices
and imports will be cheaper.

3.7 Internet
m
The Internet links the computers of organisations, governments and
even individuals to transmit, exchange and/or receive information
quickly and inexpensively. Much of the information which can be
obtained, however, is not approved before it is made public.
Users of information from the Internet should consider, before
using it, whether it is:
accurate (i.e. current, comprehensive and with a stated
Sa

purpose);
credible (e.g. authored by a known organisation);
reasonable (i.e. balanced, objective, moderated, internally
consistent); or
supported (e.g. corroborated by other sources).
3.8 Uses of Published Information/Data
Published data is widely used in the exploratory phase of
research. For example, a preliminary analysis of available
data may help:
in understanding market conditions; and
identifying lines of inquiry and/or alternative courses of
action that might be pursued.
Published sources are particularly helpful in defining
populations and in structuring samples to be taken from them.
Information obtained from published sources is used in decision-
making (e.g. setting prices, deciding whether to make or buy a
product or lease or buy an asset), comparing performance (e.g.
with competitors), negotiating pay settlements, etc.

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F2 Management Accounting Session 2 Sources of Data

3.9 Limitations of Published Information/Data

Particular attention must be paid to definitions of terms in the
original information. For example, "ownership" of assets may
mean legal ownership and/or physical control (e.g. of a leased Limitations concern
asset). A "billion" may be a thousand million or a million the quality of both
million! the data and its
source and how the
Users of secondary data may require a different level of
data is used.
accuracy than that which was required in its original collection.
Those involved in the original research may have had vested
interests in their findings, resulting in source bias (e.g.
inflating estimates of market shares).
The system of data collection may change over time (e.g.

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geographical boundaries may be changed by government
or the basis for stratifying a sample may be altered). Other
factors that may affect the reliability of secondary data
include sample size, response rate, questionnaire design, etc.
Most censuses take place at 10-year intervals, so data from
this and similar published sources may be out-of-date by the

4 pl
time it is published. Also, the period for which data was first
compiled may have a substantial effect on the nature of the
data (e.g. whether it is a census "snapshot" or collected over
a period).

Sampling
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4.1 Terminology
Population: the group of people/items about which information
is to be collected. This must be clearly defined (e.g. meaning of
"student").
Sample: a group of items drawn from a population for
examination.
Descriptive Statistics: methods of describing large masses of
data. For example, measures of centrality (e.g. arithmetic mean)
Sa

and spread (e.g. standard deviation).

Inferential (analytical) Statistics (covered in Session 13):
methods enabling a conclusion to be drawn from data (e.g.
correlation and regression).

4.2 Why Sample?

Populations are generally too big and/or individual items
too inaccessible to be examined entirely. Examining whole
populations can be too time consuming and costly.
The full extent of a population may not be known (e.g. people
with unsuspected diabetes, victims of crime).
Examination may result in the destruction of items (e.g.
testing flammability).

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Session 2 Sources of Data F2 Management Accounting

4.3 Stages in Sample Data Collection

The stages in a statistical enquiry are illustrated as follows:

Define Problem
Define population

Design Sample
Draft Questionnaire

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Sample size
Conduct pilot survey
Selection method

Collect and Check Data

pl Code responses for tabulation

Organise, Analyse and

Interpret Data
Tabulate/graph, etc
m
Report Findings
Recommend a course of action
Sa

5 Selection Methods*

5.1 Random Selection If conclusions

relating to the whole
A random sample is selected in such a way that all items have an population are to be
equal chance of being included in the sample (e.g. using random drawn, samples must
number tables or random number generator). be free of bias.

*The syllabus refers to the selection methods described in this

section as "sampling techniques". Remember, "sampling" is an
entire process which starts with defining a population and ends
with drawing a conclusion about the population. The ways in which The derivation of
a sample may be drawn are just one stage in the processthe random samples is
selection method. not examinable.

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F2 Management Accounting Session 2 Sources of Data

To use this method:

the number of items in the population must be known;
itmust be possible to match each item in the population
uniquely against each random number generated;
random numbers should not be duplicated.

Illustration 1 Random Sample

A sample of 100 invoices is to be selected from the 5,000 invoices

referenced A1611 to A6610. A random integer generator is used to
select 100 numbers between 1611 and 6610 for sample selection:

e
6162 6082 4860 5465 5971
3308 5326 4259 4656 3379
5319 1920 3407 4494 4351
2794 4609 2722 3143 1867 Simple random
2343 5067 5155 5928 5938 sampling is most
appropriate when the
5912 5686 4042 3321 5901
6340
6230
2384
3701
3025
3752
3263
1757
2660
2508
2184
5469
6480
4213
pl 2684
3115
5584
3399
5889
5299
4036
3266
2886
3697
2880
1898
5852
6296
1728
6596
3615
5503
4528
6553
4573
entire population from
which the sample is
taken is homogeneous.
m
4262 6292 2079 5047 4413
5536 5139 5628 4646 1862
5905 3223 4841 2317 4333
3996 1957 5970 3682 2457
6493 4892 3695 4890 4191
5317 1913 4902 6363 4849
3362 1837 6515 3934 2430
Sa

Because of the time it takes to sort the random numbers and

match each to an item "quasi-random" methods are often
used in practice. For practical purposes they are considered
random.

5.2 Systematic Selection

This quasi-random method uses a constant interval between items
selected from a random start. It is also called "interval" sampling.
The interval may be:
a number of items (see Illustration 2); or
a monetary value (see Illustration 3).

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Session 2 Sources of Data F2 Management Accounting

Illustration 2 Systematic Selection

a Number of Items
A sample of 100 invoices is to be selected from the 5,000 invoices in Illustration 1.
5,000
Select every = 50th invoice
100
Start at a random point between 1 and 50, e.g. 22.
So, select the 22nd invoice followed by the 72nd, 122nd, etc until 100 have been
selected. Because the first invoice in the population is numbered A1611, this will
correspond to selecting invoice numbers: A1632, A1682, A1732 and so forth.

Illustration 3 Systematic Selection

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a Monetary Value*
A sample of 100 invoices is to be selected from the 5,000 invoices in Illustration 1.
Invoices range in value from $10 to $1,200. A higher proportion of the monetary
value of the invoices will be examined if a value-weighted selection is made from
the monetary value of the population which is $2.15m.

pl
Interval is therefore
$2,150,000
100
= $21,500

Start at a random point between 1 and $21,500, e.g. $1,900.

The invoices will be summed in order. The first invoice selected will be the one
which takes the cumulative amount to $1,900 (i.e. contains the 1,900th $). The
next one selected will contain the 23,400th $ and so on.
m
Systematic selection is widely used in audit sampling (i.e. the
application of audit procedures to less than 100% of items in
order to form a conclusion on the population).

5.3 Stratified Sample *Systematic selection

based on monetary
If there are factors which divide up the population into identifiable value is also called
sub-populations ("strata") with different characteristics, a more cumulative monetary
representative sample of the population may be obtained by amount or "CMA"
selecting items within each sub-population ("stratum"). selection.
Sa

The proportion of each stratum in the sample should be the same

as in the population.

Illustration 4 Stratified Sample

A quality controller wishes to check, for defects, the output of a product which
is manufactured on three machines. Machines A, B and C have outputs of
100, 60 and 40 units an hour, respectively. To obtain a total sample of 60
items, the quality controller takes 30, 18 and 12 items from machines A, B and
C, respectively. This will provide a more accurate estimate of defects in the
population than if 60 items were randomly selected.

5.4 Multi-stage Selection

A multi-stage random sample can be constructed by taking a
series of simple random samples in stages.
This often is more practical for "on location" analysis (e.g. door-
to-door surveys).

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F2 Management Accounting Session 2 Sources of Data

For example, the steps might be:

1. A large geographic area (e.g. UK) is first divided into smaller
regions (e.g. counties) and a random sample of these is collected.
2. A random sample of smaller areas (e.g. boroughs) is taken
from within each of the regions chosen in the first stage.
3. A random sample of even smaller areas (e.g. wards) is taken
from within each of the areas chosen in the second stage.*

5.5 Non-random
*The number of steps
Alternative sample selection methods may be used when random in multi-stage selection
or quasi-random methods are not feasible (e.g. due to constraints will depend on how
of cost or time or the whole population not being known). small the areas are

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needed for the purpose
5.5.1 Quota Sampling of the study.
The method of selecting a quota of subjects is widely used in opinion
polling and market research. Interviewers or canvassers are each
given a quota of subjects of specified type (e.g. to select 20 adult
men, 20 adult women, 10 teenage girls and 10 teenage boys).

Illustration 5 Quota Sampling

correct might select, for example:

5 invoices < $100
15 invoices in the $100$2,000 range
30 invoices > $2,000
pl
An internal auditor checking sales invoices to ensure that they are
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5.5.2 Cluster Sampling
The entire population is divided into small areas ("clusters")
from which a random sample is selected.
All items in the selected clusters are included in the sample.
It is typically used when:
a researcher cannot get a complete list of the members of
Sa

a population but can get a complete list of "clusters" within

the population;
when a random sample would produce a list of subjects so
widely scattered that the cost of surveying them would be
prohibitive.

Example 2 Selection Methods

Suggest the most appropriate selection method in each of the following situations:

Solution

(a) Population groups are spread across distant cities.

(b) Whole population is available.

(c) Demographic groups are to be investigated.

(d) A stream of representative people is available

(e.g. in the street).

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 Summary
Data may be quantitative or qualitative; discrete or continuous; primary or secondary; raw or
aggregated; or internal or external.
Internal sources of data and information include the management information system (MIS),
accounting records and company records.
A good MIS provides reports which are suitably detailed, accurate, consistent and timely.
There are many external sources of data (e.g. government, publications, the Internet, etc)
which are widely used in research, decision-making and performance evaluation.
Limitations of published information concern the quality of both the data and its source and
how the data is used.

e
Sample selection is only one stage in the sampling process. Samples must be free of bias if
conclusions are to be made about the population.
Simple random sampling is most appropriate when the entire population from which the
sample is taken is homogeneous.
Quasi-random selection methods include systematic, stratified and multi-stage.

Session 2 Quiz
Estimated time: 15 minutes
pl
Quota sampling and cluster sampling are non-random sampling methods.
m
1. State the major difference between primary and secondary data. (1.3, 1.4)

2. State THREE characteristics of a strong management information system. (2.1)

3. List SIX items of information that may be published in an annual report. (2.3)

4. List SIX external sources of data. (3)

5. Describe the limitations of published information and data. (3.9)

6. Explain why it is important to sample. (4.2)

Sa

7. Identify and describe FOUR sampling methods. (5)

Study Question Bank

Estimated time: 30 minutes

Priority Estimated Time Completed

Q3 Sample Selection 30 minutes

Additional
Q4 Public Opinion

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 Session 2

EXAMPLE SOLUTIONS

Solution 1Data Classification

(a) Data collected by the Department of Education of Secondary

your government which you use for your own survey.
(b) The manufacturer's make of mobile phones used by Qualitative
your work colleagues.
(c) Data collected from a sample survey. Primary

(d) The speed of a car passing a certain point in the road. Quantitative and continuous

e
(e) The shoe sizes of your colleagues. Discrete

Solution 2Selection Methods

(b) Whole population is available.

pl
(a) Population groups are spread across distant cities.

(c) Demographic groups are to be investigated.

Cluster

Simple random

Stratified
m
(d) A stream of representative people is available Systematic
(e.g. in the street).

Although other methods might be used, these are the most suitable in the absence of further information.
Sa

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