ICAEW MI cheat sheet

Management information is data processed into a form that supports planning, control and decision-making; data alone is unprocessed fact.

Information qualities: relevance, accuracy, completeness, timeliness, cost-effectiveness, understandability, comparability and reliability - a report failing any of these loses decision value.

Hierarchy of information: strategic (long-term, external, aggregated, ad hoc), tactical (medium-term, internal/external, exception-based), operational (short-term, internal, detailed, frequent).

Decision phases (Simon): intelligence (identify problem), design (generate options), choice (select option), implementation and review - information needs differ at each phase.

Cost of information includes capture, processing, storage and distribution; marginal benefit of extra information should exceed its marginal cost.

Data capture errors: transcription, transposition, omission, duplication and coding errors; validation checks (range, format, existence, check digit) catch some but not all.

A management information system converts transaction data (payroll, sales, inventory) into summary reports; the accounting information system is a subset focused on financial transactions.

Information overload reduces decision quality; exception reporting and summarisation are controls against it.

Big data characteristics (volume, velocity, variety, veracity) affect the design of reporting and analytics systems.

Cost object is anything for which costs are separately measured; direct costs are traceable to it, indirect costs (overheads) are not and must be apportioned.

Cost behaviour: fixed cost constant in total within the relevant range; variable cost constant per unit; semi-variable cost has both elements, split using high-low or least squares.

High-low method: variable cost per unit = (cost at high activity − cost at low activity) ÷ (high activity − low activity); fixed cost = total cost − variable rate × activity.

Prime cost = direct materials + direct labour + direct expenses; production cost adds production overhead; total cost adds non-production overhead.

Absorption costing: predetermined overhead rate = budgeted overhead ÷ budgeted absorption base (labour hours, machine hours, units); applied overhead = rate × actual activity.

Over/under absorption = overhead absorbed − overhead incurred; over-absorption occurs when actual activity exceeds budget or actual overhead is below budget.

Activity-based costing pools overheads by activity driver (set-ups, orders, inspections) and charges cost objects by driver consumption, improving accuracy where products differ in complexity.

Marginal costing values inventory at variable production cost only; fixed production overhead is a period cost, so profit differs from absorption costing by the fixed overhead in inventory movement.

Relevant cost for decisions: future, incremental and cash-based; sunk costs, committed costs and non-cash book values are excluded; opportunity cost is included.

Budget purposes: planning, coordination, communication, motivation, control and performance evaluation; these can conflict (e.g. tight budgets motivate but may demotivate).

Incremental budgeting adjusts last year's figures; zero-based budgeting builds each activity from a decision package and requires justification of all spend.

Rolling (continuous) budgets are revised each period and always look a fixed number of periods ahead, improving accuracy in volatile environments.

Flexed budget restates the fixed budget for actual activity using standard variable cost per unit, isolating volume effects from price and efficiency effects.

Variance: total = flexed budget − actual. Adverse (A) where profit is lower or cost higher than budget; favourable (F) where profit is higher or cost lower.

Sales volume profit variance = (actual units − budget units) × standard profit per unit; sales price variance = (actual price − standard price) × actual units.

Material price variance = (standard price − actual price) × actual quantity purchased; material usage variance = (standard quantity for actual output − actual quantity) × standard price.

Labour rate variance = (standard rate − actual rate) × actual hours paid; labour efficiency variance = (standard hours for actual output − actual hours worked) × standard rate.

Learning curve: cumulative average time per unit falls by a constant percentage each time cumulative output doubles; y = ax^b where b = log(learning rate) ÷ log 2.

Standard costing sets predetermined costs for materials, labour and overhead; standards may be ideal, attainable or current, and the choice affects motivation and variance interpretation.

Fixed overhead variances: expenditure = budgeted fixed overhead − actual fixed overhead; volume = (actual units − budget units) × standard fixed overhead per unit.

Fixed overhead capacity variance = (actual hours − budget hours) × standard rate; efficiency variance = (standard hours for actual output − actual hours) × standard rate.

Operating statement reconciles budgeted profit to actual profit by adding favourable and deducting adverse variances, separating planning and operating variances where relevant.

Variance investigation: consider size, trend, controllability, cost of investigation and likely benefit; random fluctuations should not trigger investigation.

Return on investment (ROI) = controllable profit ÷ divisional investment; residual income (RI) = controllable profit − imputed interest on investment.

RI encourages investment above the cost of capital; ROI can cause managers to reject projects that dilute a high existing ROI.

Balanced scorecard perspectives: financial, customer, internal process, learning and growth; measures should link to strategy, not just lagging financial results.

Transfer price at market price suits autonomy; at variable cost plus opportunity cost it gives goal congruence when capacity is scarce; at full cost it can distort decisions.

Break-even units = fixed costs ÷ contribution per unit; contribution per unit = selling price − variable cost per unit; contribution/sales ratio = contribution ÷ sales.

Margin of safety = (budgeted sales − break-even sales) ÷ budgeted sales, expressed as a percentage or in units.

Target profit volume = (fixed costs + target profit) ÷ contribution per unit; CVP analysis assumes constant price, cost and product mix within the relevant range.

Payback period = time for cumulative cash inflows to equal the initial outlay; ignores cash flows after payback and the time value of money.

Net present value discounts all relevant cash flows at the cost of capital; accept if NPV positive; NPV is preferred because it is absolute and uses all cash flows.

IRR is the discount rate giving zero NPV; accept if IRR exceeds cost of capital; it can mislead with non-conventional cash flows or when comparing project scale.

Relevant cash flows for appraisal exclude sunk costs, allocated overhead and non-cash items; include opportunity costs, incremental working capital and tax effects.

Accounting rate of return = average annual accounting profit ÷ average investment; ignores timing of cash flows.

Sensitivity analysis and scenario analysis test how far an assumption can change before the decision reverses; probability analysis weights outcomes by likelihood.

Spreadsheet controls: input validation, protected cells, locked formulas, version control, audit trail and independent review of key models.

Common spreadsheet risks: hard-coded values inside formulas, broken links, range errors, circular references and undetected manual overrides.

Absolute referencing ($A$1) fixes row and column when copied; mixed referencing fixes one; relative referencing shifts both - errors arise from wrong choice.

Lookup functions (VLOOKUP, INDEX/MATCH) require sorted or exact-match logic; approximate match on unsorted data returns wrong results.

A report should state purpose, period, source, basis of preparation and any assumptions; comparatives and ratios aid interpretation.

Key ratios: gross margin = gross profit ÷ revenue; operating margin = operating profit ÷ revenue; inventory days = inventory ÷ cost of sales × 365.

Data integrity controls: reconciliation between systems, exception reports, segregation of duties and review of master data changes.

Presenting information: chart type must suit the data (line for trends, bar for comparison, pie for composition); misleading scales and truncated axes distort interpretation.