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Report
ACCA F2 FIA FMA
Management Accounting
For exams from February 2014
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Key to icons
Syllabus
Real world example
Technical content
Local example
Question to consider
Diagram
Answer
Key model
Past exam question
Tackling the exam
Answer to past exam
question
Summary
Case study
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Syllabus
A
The nature, source and purpose of management information
B
Cost accounting techniques
C
Budgeting
D
Standard costing
E
Performance measurement
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Exam format
This paper is assessed by a two hour computer-based or paper-based
examination.
Section A: Thirty five two mark objective test questions:
70 marks
Section B: Three ten mark multi-task questions:
30 marks
Total:
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100 marks
Chapter 1
Accounting for
management
• Information
• Planning, control and decisionmaking
• Financial accounting and
management accounting
• Cost accounting
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Syllabus learning outcomes
• Distinguish between data and information
• Identify and explain the attributes of good information.
• Outline the managerial processes of planning, decision making
and control.
• Explain the difference between strategic, tactical and operational
planning.
• Describe the purpose and role of cost and management
accounting within an organisation.
• Compare and contrast financial accounting with cost and
management accounting
• Explain the limitations of management information in providing
guidance for managerial decision-making
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Overview
Accounting for
management
Role of management
accounting function
Data and
information
Comparison with
financial accounting
Qualities
Information for
planning
Information for
control
Information for
decision making
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Tackling the exam
Example
Question
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Information
The successful management of any organisation depends on
information.
For example management need information for:
• Setting prices
• Deciding on whether to purchase or lease machinery
• Deciding how many units to produce
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Information
Information is used in any type of organisation:
• Non-profit seeking organisations such as charities, clubs and local
authorities need information for reporting on their activities and
determining prices or subscriptions
• Multinational businesses need information for reporting on their
activities
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Information
Information is sometimes referred to as processed data.
The syllabus requires you to know the difference between information
and data.
Data is the raw material for processing.
For example, data may relate to facts, events and transactions.
Researchers conducting questionnaire surveys obtain data which are
processed and analysed to produce a report.
The resulting report is information.
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Information
Qualities of good information
• Relevance.
Information must be relevant to the purpose for which a manager
wants to use it.
• Completeness.
An information user should have all of the information that they
need to do their job properly.
• Accuracy.
Information should obviously be accurate because using incorrect
information could have serious consequences.
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Information
• Clarity.
Information must be clear to the user.
• Confidence.
Information must be trusted by the managers who are expected to
use it.
• Communication.
Individuals given authority to do certain tasks must be given the
information they need to do them.
• Volume.
There are physical and mental limitations to what a person can
read, absorb and understand properly.
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Information
• Timing.
Information should be available when it is needed.
• Channel of communication.
Some information is best communicated informally by telephone or
word-of-mouth and some is better in a formal method, in writing.
• Cost.
Benefits of information must outweigh the cost of collecting it.
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Question to consider
What information may the managers of a business need?
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Answer
External information
Internal information
Competitors – Service offered
Management accounts
– Prices charged
Customers – Other services they
might use
– Satisfaction
– Jobs to tender for
Suppliers
– Continuation of trade
Possibility of opening new
office/dept
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– Performance against budget
– Debtor reports
Budgets (eg Cash, production, sales)
Staff availability
Information
Most organisations need:
• Financial information
• Non-financial information
• A combination of financial and non-financial information
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Information
Non-financial information is becoming more important to managers.
For example, suppose a business decides to provide a staff canteen.
Non-financial information examples:
• Managers need to know how staff morale is affected by the
canteen
• Whether the bread from a supplier is fresh
• Why canteen staff are requesting a new dishwasher
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Planning, control and decision-making
Management require information to help them to plan and control
operations and to make informed decisions.
• Planning
• Control
• Decision-making
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Planning
Organisations should never be surprised by developments which
occur gradually because they should have implemented a planning
process.
Planning involves:
• Establishing objectives
• Selecting appropriate strategies to achieve those objectives
Planning forces management to think ahead systematically in both
the short term and the long term.
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Planning – establishing objectives
An objective is an aim or a goal of an organisation.
A strategy is a possible course of action that might enable an
organisation to achieve its objectives.
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Local example
Apple’s Strategy in China
With an early release of the new iPhone 5s and iPhone 5c in
September, Apple (NASDAQ:AAPL) included China in the iPhone’s
global debut for the first time. Now, that strategy might be paying off,
a new report says, noting that the company has managed to surpass
ZTE Corp. (SHE:000063) and Xiaomi Corp., to capture fifth position
in the world's largest smartphone market in the third quarter.
http://www.ibtimes.com/apples-china-strategy-paying-report-sayscompany-beat-zte-enter-top-5-chinese-smartphone-market
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Question to consider
The objectives of a firm may be:
Profit making firm
Non profit making firm
•
•
•
•
•
•
•
•
•
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Answer
Profit making firm
Non profit making firm
• Maximise profits/shareholder
wealth
• Provide goods/services
• Minimise costs
• Minimise costs
• Maximise revenue
• Use resources efficiently
• Increase market share
• Satisfaction of donor
• Providing best quality
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Planning
Long-term strategic planning (also known as corporate planning),
involves selecting appropriate strategies to prepare a long-term plan
to attain the objectives.
Time span – depends on organisation but could be 2, 5, 7 or 10 years
Formulating the plan is a detailed and lengthy process.
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Planning
Long-term plans are broken down into a series of short-term plans
usually covering 1 year.
They usually relate to sections, functions or departments.
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The planning process 1
The planning process
THE
ASSESSMENT
STAGE
Assess the
external
environment
Assess the
organisation
Assess the
future
THE
OBJECTIVE
STAGE
Evaluate corporate
objectives
THE
EVALUATION
STAGE
Consider alternative
ways of achieving
objectives
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Assess
expectation
s
LONGTERM
STRATEGY
PLANNING
The planning process 2
THE
EVALUATION
STAGE
Consider alternative
ways of achieving
objectives
THE
CORPORATE
PLAN
Agree a corporate
plan
Production
planning
Resource
planning
Product
planning
STRATEGY
PLANNING
Research and
development
planning
Detailed operational plans which implement the corporate plan
on a monthly, quarterly or annual basis. Operational plans
include short-term budgets, standards and objectives.
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SHORTTERM
PLANNING
Control
There are two stages in the control process.
1
The performance of the organisation is regularly compared with
the actual performance. Any deviations from plan can be
identified and corrective action taken.
2
The corporate plan is reviewed in light of any changes in factors
on which the plan was based. Plan is modified if necessary to
prevent damage to future success of the business.
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Decision-making
Decision-making involves making a choice between alternatives.
The management accountant must provide information so that
management can reach an informed decision.
It is therefore vital the management accountant understands the
decision-making process so that appropriate information can be
supplied.
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Decision-making process
Step 1
Identify goals, objectives or problems.
Step 2
Identify alternative solutions/opportunities which
might contribute towards achieving them.
Step 3
Collect and analyse relevant data about each
alternative.
Step 4
Make the choice/decision. State the expected
outcome and check that the expected outcome
is in keeping with the overall goals or
objectives.
Step 5
Implement the decision.
Step 6
Obtain data about actual results.
Step 7
Compare actual results with the expected
outcome. Evaluate achievements.
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PLANNING
CONTROL
Anthony’s view of management activity
Anthony divides management activities into :
• Strategic planning,
• Management control, and
• Operational control.
Strategic planning: ‘the process of deciding on objectives of the
organisation, on changes in these objectives, and on the policies that
are to govern the acquisition, use and disposition of these resources’.
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Anthony’s view of management activity
Strategic plans are those which set or change the objectives or
strategic targets of an organisation.
Examples include:
• Selection of products and markets
• Required levels of company profitability
• Purchase and disposal of subsidiary companies
• Purchase and disposal of major non-current assets
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Anthony’s view of management activity
Tactical (or management) control: ‘the process by which managers
assure that resources are obtained and used effectively and
efficiently in the accomplishment of the organisation’s objectives’.
Resources refers to people, materials, machines, money.
Efficiency means optimum output is achieved from the input
resources used.
Effectiveness in the use of resources means that outputs obtained
are in line with the intended objectives.
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Anthony’s view of management activity
Strategy feeds into tactical and operational plans. Eg
Increase sales by 5% per annum for at least 5 years
─ Strategic plan
Planning direct sales resources, advertising, sales promotion (to help
increase sales by 5%)
─ Tactical plan
Sales territory specifies the weekly sales targets for each sales
representative
─ Operational planning
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Management control systems
A management control system is a system which measures and
corrects the performance of activities of subordinates in order to
make sure that the objectives of an organisation are being met and
the plans devised to attain them are being carried out.
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Management control systems
Basic elements of a management control system:
• Planning: deciding what to do and identifying the desired results
• Recording the plan which should incorporate standards of
efficiency or targets
• Carrying out the plan and measuring actual results achieved
• Evaluating the comparison and deciding whether further action is
necessary
• Where corrective action is necessary, this should be
implemented
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Strategic information
• Derived from internal and external sources
• Summarised at a high level
• Relevant to the long term
• Deals with the whole organisation
• Often prepared on an ‘ad hoc’ basis
• Is both quantitative and qualitative
• Cannot provide complete certainty, given future cannot be
predicted
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Tactical information
• Primarily generated internally
• Summarised at a lower level
• Relevant to short and medium term
• Describes or analyses activities or departments
• Prepared routinely and regularly
• Based on quantitative measures
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Operational information
• Derived almost entirely from internal sources
• Highly detailed, being the processing of raw data
• Relates to the immediate term
• Prepared constantly or very frequently
• Task specific and largely quantitative
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Financial and management accounts
Management information provides a common source from which
information is drawn for two groups of people.
Financial accounts are prepared for individuals external to an
organisation.
Management accounts are prepared for internal managers of an
organisation.
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Financial and management accounts
The data used to prepare financial accounts and management
accounts are the same.
The differences between the financial accounts and the management
accounts arise because the data is analysed differently.
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Financial accounting
Financial accounting systems ensure that the assets and liabilities
of a business are properly accounted for.
Financial accounts provide information about profits etc to external
parties.
These external parties include shareholders, customers,
suppliers, tax authorities and employees.
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Financial accounting
The financial accounts show performance of a defined period.
There are legal and accounting requirements for limited
companies in preparing financial accounts.
Financial accounts are largely monetary and show a historic picture
of past operations.
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Management accounting
Management accounting systems provide information specifically
for the use of managers within an organisation.
Management accounts assist in planning and controlling an
organisation’s activities and help the decision-making process.
There are no legal requirements to prepare management accounts
or any set format.
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Management accounting
Management accounts can focus on specific areas of an
organisation’s activities.
Management accounts incorporate non-monetary measures and
can be used as a future planning tool.
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Question to consider
Complete the following table to compare financial and management
accounting:
Financial accounting
Legal requirement
Users
Level of precision
Rules
Reporting
Scope
Frequency
Format
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Management accounting
Answer
Financial accounting
Management accounting
Legal requirement

X
Users
External and internal
Internal
Precision
True and fair
As accurate as possible for the
users needs
Rules
Generally accepted accounting
principles
No rules govern them but some
established techniques used
Reporting
Past data
Past and present data to make
decisions about future
Scope
Whole organisation
Segments/divisions or whatever
is needed by the business
Frequency
Annual
As required
Format
Governed by Companies Act
No set format
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Cost accounts
Cost accounting is part of management accounting.
Cost accounting provides a bank of data for the management
accountant to use.
Concerned with:
• Preparing statements (eg budgets, costing)
• Cost data collection
• Applying costs to inventory, products and services
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Cost accounting information and decisions
All decision making is concerned with the future and so there will
always be some degree of uncertainty.
Information for decision making should therefore incorporate
uncertainty in some way.
The methods used to do this are outside the scope of this syllabus
but it is important to note that cost accounting information is
unsuitable for decision making as it does not take into account
uncertainty.
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Summary
1. Introduction to management accounting
 Purpose is to assist management in running their business to
achieve an overall objective.
2. Data and information
 Information is data that has been processed to be meaningful to
the person who receives it.
3. Planning, control and decision-making
 Information is used in a business for planning, control and decision
making.
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Summary
4. Role of management accountant
 Includes costing, decision-making, planning, control and
performance evaluation.
5. Management accounting and financial accounting
 Financial accounting systems ensure that the assets and liabilities
of a business are properly accounted for. Management accounting
systems provide information specifically for managers.
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Chapter 2
• Types of data
Sources of data
• Sources of data
• Secondary data
• Sampling
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Syllabus learning outcomes
• Describe sources of information from within and outside the
organisation.
• Explain the uses and limitations of published information/data.
• Describe the impact of general economic environment on costs/
revenues.
• Explain sampling techniques.
• Choose an appropriate sampling method in a specific situation.
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Overview
Effect of general
economic environment on
costs / revenues
Sources of Data
Data
Sampling
Primary vs Secondary
Random
Internal vs External
Systematic
Stratified
Random
Multistage
Quota
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Non Random
Cluster
Tackling the exam
Example
Question
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Types of data
Data may be classified as follows:
• Primary and secondary data
• Discrete and continuous data
• Sample and population data
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Types of data
• Primary data are data collected especially for a specific purpose. Raw
data are primary data which have not been processed at all.
• Secondary data are data which have already been collected
elsewhere, for some other purpose.
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Local example
China Primary
China Primary is an organisation dedicated to delivering an
information advantage for the investment process. It provides access
to previously unavailable data on companies operating performance
in Asia - data that allows for more accurate analysis and ultimately,
increased returns.
http://chinaprimary.com/why_overview.html
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Types of data
Quantitative (measurable) data may be classified as being discrete or
continuous:
• Discrete data are data which can only take on a finite or countable
number of values within a given range.
• Eg the number of goals scored by Manchester United against Chelsea
in a league final: Manchester United could score 0, 1, 2, 3 or even 4
goals (discrete variables = 0, 1, 2, 3, 4), but they cannot score 1½ or
2½ goals.
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Types of data
• Continuous data are data which can take on any value. They are
measured rather than counted.
• Continuous data include the heights of all the members of your
family, as these can take on any value.
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Types of data
• Sample data are data arising as a result of investigating a sample. A
sample is a selection from the population.
• Population data are data arising as a result of investigating the
population. A population is the group of people or objects of interest to
the data collector.
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Types of data
DATA
QUANTITATIVE
(variables that can
be measured)
DISCRETE
CONTINUOUS
(countable number)
(any value)
PRIMARY OR SECONDARY
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QUALITATIVE
(attributes that
cannot be
measured)
PRIMARY
SECONDARY
Sources of data
• Data may be obtained from an internal source or an external source.
Internal sources examples:
• Sales ledger
• Purchase ledger
• General ledger
To maintain the integrity of the accounting records, an organisation will
have systems and controls over transactions.
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Sources of data
Other internal sources examples:
• Data relating to personnel will be linked to the payroll system.
• Additional data may be obtained from this source if, say, a project is
being costed and it is necessary to ascertain the availability and rate
of pay of different levels of staff, or the need for and cost of
recruiting staff from outside the organisation.
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Sources of data
Other internal sources examples:
• Much data will be produced by a production department about
machine capacity, fuel consumption, movement of people, materials,
and work in progress, set up times, maintenance requirements and so
on.
• A large part of the traditional work of cost accounting involves
ascribing costs to the physical information produced by this source.
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Sources of data
External data examples:
• Invoices
• Letters
• Advertisements
• Other items received from from customers and suppliers
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Secondary data
You will remember that primary data are data collected especially for a
specific purpose.
The advantage of such data is that the investigator knows where the
data came from and is aware of any inadequacies or limitations in the
data.
Its disadvantage is that it can be very expensive to collect primary data.
Management accountants often collect primary data when they carry out
investigations. Eg analysing invoices to establish the direct cost of a
product.
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Secondary data
Secondary data sources may be satisfactory in certain situations but is
essential that there is good reason to believe that the secondary data
used is accurate and reliable.
Main sources of secondary data are:
• Governments
• Banks
• Newspapers
• Trade journals
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Secondary data
Government statistics
• Official statistics are supplied by many Governments.
• Population data is published by many Governments around the world,
and includes population numbers, births, deaths, marriages and so on.
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Secondary data
Banks
• The Bank of England issues a quarterly magazine which includes data
on banks in the UK, the money supply and Government borrowing and
financial transactions.
Financial newspapers
• Financial newspapers contain detailed business data and information.
• Financial newspapers include the Financial Times, the Wall Street
Journal, the Singapore Business Times and the Nikkei Weekly. Such
newspapers provide data on foreign exchange rates, interest rates,
gilts and other share prices.
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Secondary data
Trade journals
• Most industries are served by one or more trade journals. Journals
contain data on new developments in the industry, articles about
competitors' products, details of industry costs and prices and so on.
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Secondary data
Internet
• The Internet is a global network connecting millions of computers.
• The Internet allows any computer with a telecommunications link to
send and receive information to and from any other suitably
equipped computer.
• A website is a collection of images and text that provide information
which may be viewed on the World Wide Web.
• Most organisations now have a website and many are able to process
transactions (known as electronic commerce or e-commerce).
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Secondary data
Internet (continued)
• Remember, when you are looking at information on the Internet it is
not necessarily good information, just because it is 'published'.
• Anybody can put information on the Internet. The reliability and
reputation of the provider is important.
• For example, The Financial Times site, FT.com, is a respected source
of financial information. On the other hand, a site such as 'Fred's
Financial Advice' may contain unreliable information.
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Local example
The National Bureau of Statistics of China collates and publishes
statistics such as:
• Producer price indices for manufactured goods
• Consumer price indices
• Gross domestic product
• Employment rates
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Economic environment
General economic environment will affect the costs and revenues of a
business.
The forecast state of the economy will influence the planning process
for organisations which operate within it. In times of boom and increased
demand and consumption, the overall planning problem will be to
identify the demand. Conversely, in times of recession, the emphasis will
be on cost-effectiveness, continuing profitability, survival and competition.
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Question to consider
Consider an accountancy training business and state how it might be
affected by a recession (ie the general economic environment.)
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Answer
Change
Impact
Decline in GDP
Less money in the economy meaning less
disposable income may create fall in
demand for courses
The firm operate in a city which has a
high promotion of financial service firms
which seem to be bucking the overall
recession well. (eg of a Local economic
trend)
A higher proportion of students coming
from an area less affected by the
recession may stave off the expected fall
in demand due to the national recession.
Increased inflation
High inflation in prices of utilities and food
costs mean that students will have less
disposable income and therefore may not
be able to afford fees.
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Answer – continued
Low Interest rates
Will make it easier for the business to raise debt
finance to finance it’s business.
From the point of view of the students low interest
rates should keep down mortgage repayments and
thus combat the high price inflation to help maintain
disposable income levels.
Increases in tax rates
Will reduce the profits made by the business which
could cause a reduction in either the dividends paid
to investors or a reduction in re investment within the
business
Reductions in government
spending
Any contracts with government agencies could be at
risk due to local cutbacks.
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Sampling
If all members of a population are examined, the survey is called a
census.
If it is not possible to survey the entire population, a sample is selected
The results from the sample are used to estimate the results of the
whole
Once a certain sample size has been reached very little accuracy is
gained by examining more items
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Sampling
Disadvantages of a census
• The high cost of a census may exceed the value of the results
obtained.
• It might be out of date by the time you complete it.
Advantages of a sample
• It can be shown mathematically that once a certain sample size has
been reached, very little accuracy is gained by examining more items.
The larger the size of the sample, however, the more accurate the
results.
• It is possible to ask more questions with a sample.
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Sampling
A random sample is selected so that every item in the population has an
equal chance of being included.
This will require a sampling frame.
A sampling frame is a numbered list of all items in a population.
From this list a random sample can be selected using random number
tables.
Random sampling may be expensive, can produce an unrepresentative
sample or a sampling frame may not exist.
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Sampling
As random sampling can be expensive or impossible then there are
various methods of quasi-random sampling.
Stratified random sampling is where the population is divided into
categories from which random samples are taken.
• This method means that a representative sample is selected which
reflects the population.
• Inferences can be made about each category.
• However the method requires prior knowledge of each population
item.
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Sampling
Systematic sampling is another method of quasi-random sampling.
• This involves selecting every nth item after a random start
• Systematic sampling is easy to use and reasonably random
• However a biased sample might be chosen if the population has a
regular pattern coinciding with the sampling interval
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Sampling
Multistage sampling is where the population is divided into
subpopulations from which a small random sample is selected.
• Each sub-population is then divided further and then a small sample is
again selected at random.
• This process can take place as many times as necessary.
• This method does not require a sampling frame of the entire
population and is relatively cheap.
• However it is not truly random and there is a possibility of bias.
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Sampling
When a sampling frame cannot be established then non-random
sampling methods must be used.
Quota sampling involves stratifying the population and restricting the
sample to a fixed number in each stratum.
• This method is cheap and administratively easy and often used by
market researchers.
• Much larger samples can be studied and no sampling frame is
required.
• However it could result in a certain bias.
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Sampling
Another form of non-random sampling is cluster sampling.
• This involves selecting one definable subsection of the population as
the sample that is taken to be representative.
• It is inexpensive to operate.
• It is a good alternative to multistage sampling if a sampling frame does
not exist.
• However there is potential for considerable bias.
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Chapter Summary
1. Data
 Data is term for facts, figures, information and measurements. If
collected for a specific purpose it is known as primary data and if
collected for another purpose it is known as secondary.
2. Sources of data
 Data can be internal (accounting records, payroll information, product
information, published accounts or historic records) or external (market
research, interviews, questionnaires, data from government, banks,
newspapers or the internet).
3. Impact of general economic environment on costs/revenues
 The economic environment will impact the costs and revenues of a
business.
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Chapter Summary
4. Sampling
 A sample is where data is only collected from a sample of the
population whereas a census collects information from the whole
population.
5. Random sampling
 The sample is selected in such a way that each item has an equal
chance of being selected. Often done using random numbers. Quasi
random sampling can also be used.
6. Non-random sampling
 Where a random sample cannot be used non random sampling can be
a solution. Both quota and cluster sampling can be used.
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