Data sources and information costs - Internal and external s...

Learning Outcomes

After reading this article, you should be able to distinguish between internal and external sources of data, explain the differences between machine, transactional, and human/social data, and evaluate the costs associated with acquiring and processing information for management accounting purposes. You will also be able to identify direct and indirect data capture costs and the uses and limitations of published data for decision making.

ACCA Management Accounting (MA) Syllabus

For ACCA Management Accounting (MA), you are required to understand both where management accounting data originates and the implications of using various information sources. Your revision should focus on:

• Explaining the distinction between internal and external data sources
• Describing the three main data source types: machine/sensor, transactional, and human/social
• Identifying examples of internal and external information used for planning and control
• Explaining uses and limitations of published (secondary) information, including data from the internet
• Identifying direct and indirect costs of data capture for management accounting purposes

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of these is an example of transactional data?
   1. Temperature from a warehouse sensor
   2. Number of purchase orders processed
   3. Customer feedback on social media
   4. Government-published GDP statistics

2. State one direct and one indirect cost in producing management information.

3. True or false? All data from external sources can be relied upon without verification.

4. Briefly differentiate between machine/sensor data and human/social data.

Introduction

Accurate management information relies on the effective capture and use of data from a range of sources. As a management accountant, you must know where data originates, how it's collected and classified, and what costs are involved in transforming data into usable information.

Data can originate from inside or outside the organisation, and arrive in different forms—such as readings from equipment, transaction records, or human input. Understanding these categories—and their respective strengths, weaknesses, and cost implications—enables organisations to choose appropriate data for planning, decision making, and control, while managing the value and risks associated with information.

TYPES OF DATA SOURCES

Data for management purposes falls into two broad categories: internal (from within the organisation) and external (from outside).

Internal Data Sources

Internal sources generate data through the organisation's activities and operations.

• Financial records and accounting systems (e.g., sales ledgers)
• Payroll and HR systems (employee information, attendance)
• Production records (machine output, inventory levels)
• Internal reports and documentation

Internal data is usually more accessible, directly relevant, and timely for management purposes.

Key Term: internal data
Data that is generated within the organisation during its day-to-day operations and processes, such as transaction records and system outputs.

External Data Sources

External sources provide information from outside the organisation.

• Market research
• Government statistics and databases
• Professional bodies and trade associations
• Financial and business press
• Information from suppliers, competitors, and customers
• The internet

External data broadens the context for decision making but may lack consistency or reliability compared to internal data.

Key Term: external data
Data obtained from outside the organisation, such as market surveys, official statistics, or online resources that inform management decisions.

CATEGORIES OF DATA: MACHINE, TRANSACTIONAL, HUMAN/SOCIAL

Management information uses three main data categories:

Machine/Sensor Data

This data is generated automatically from equipment, sensors, or computer systems.

• Production line sensors measuring temperature, pressure, or speed
• Barcode scanners recording inventory movement
• GPS data from vehicles

Advantages:

• Automatically generated; reduces manual input errors
• Often real-time and highly detailed

Limitations:

• Restricted to what is measured by the device
• Can be affected by equipment faults or calibration issues

Key Term: machine/sensor data
Data produced automatically by devices or equipment without human intervention, used for monitoring and controlling processes.

Transactional Data

Transactional data is produced by business activities and records the details of each business interaction.

• Sales invoices and receipts
• Purchase orders
• Bank transactions
• Inventory movements

Advantages:

• Provides a direct record of business events
• Forms the backbone of accounting and control systems

Limitations:

• Volume can be very high; requires robust processing systems
• May require further analysis to become meaningful

Key Term: transactional data
Data that records the details of individual business transactions, forming the basis for accounting and operational systems.

Human/Social Data

This data arises from human behaviour, opinion, or interaction.

• Employee timesheets and manual input
• Customer feedback surveys
• Online reviews and social media posts

Advantages:

• Can provide qualitative context and additional understanding
• Captures information not measurable by machines or systems

Limitations:

• Subject to bias, inaccuracy, and inconsistency
• May require careful interpretation or validation

Key Term: human/social data
Data obtained from people, such as opinions, observations, or behaviour, including survey responses and social media activity.

USES AND LIMITATIONS OF INFORMATION SOURCES

Internal Information

Uses:

• Budgeting, forecasting, and variance analysis
• Performance measurement and control

Limitations:

• May not reflect external threats or opportunities
• Can be outdated or incomplete if data management is poor

External Information

Uses:

• Competitor benchmarking
• Market demand estimation
• Economic environment assessment

Limitations:

• Relevance: Data may be too general or aggregated
• Reliability: Source may be biased or outdated
• Completeness: Not all needed details are available
• Cost: Some external sources require subscriptions or payment

COSTS OF INFORMATION

Collecting and producing information always incurs a cost, which must be balanced against its benefit to the organisation.

Direct Costs

Direct costs are traceable to the act of capturing or processing specific data.

• Purchase of scanning equipment or sensors
• Subscription fees for databases or journals
• Payment for external reports

Indirect Costs

Indirect costs arise as a consequence of information activities but are harder to trace to a single source.

• Staff training to use new systems
• Time spent searching or cleaning data
• Redundant or duplicate data storage
• System downtime during upgrades

Key Term: direct data capture cost
Expenses directly incurred to gather specific data or implement an information system, such as buying hardware or paying for a survey.

Key Term: indirect data capture cost
Overhead expenses associated with providing management information, including labour, training, or productivity losses.

Information Value vs Cost

The value of information should exceed its cost. If processing a particular source of data is more expensive than its benefit to decision making, its use should be questioned.

Worked Example 1.1

A retailer records all sales using barcode scanners (machine/sensor data), collects customer feedback via online forms (human/social data), and processes all purchases through its accounting system (transactional data). The company is considering subscribing to a paid market research database (external data) costing £5,000 per year.

Question: Should the company incur the extra external information cost?

Answer:
If the external database provides reliable, relevant data that supports improved pricing or marketing decisions—and these lead to increased profits beyond the £5,000 outlay—then it is worthwhile. If it provides little actionable value, the cost may outweigh the benefit.

Worked Example 1.2

A manufacturing business automates its production reporting with sensor-equipped machines (direct cost: £20,000 installation). In the first year, it saves £8,000 of labour and improves accuracy, reducing material waste by £4,000.

Question: What types of information costs are involved, and how should management assess the investment?

Answer:
The upfront cost is a direct data capture cost. Ongoing labour savings and reduced waste are indirect benefits. Management should calculate the payback period and compare total annual savings to the investment cost to assess the return.

Exam Warning

Exam Warning Do not assume that external data is always reliable or up-to-date. In the exam, you should question the validity of sources and the potential for bias or error.

Revision Tip

Revision Tip
Be prepared to give examples of each data source type and explain their strengths and weaknesses, especially in costing or budgeting scenarios.

Summary

Data for management accounting can come from internal sources (systems, documents, staff input) and external sources (market research, government statistics, the internet). Main types include machine/sensor, transactional, and human/social data, each with unique benefits and limitations. All data collection and processing has a cost—direct costs (equipment, subscriptions) and indirect costs (labour, overhead, redundancy) must be compared to the value of the information provided. Reliable, timely, and relevant data support better decisions, but using poor-quality or overly expensive sources can reduce effectiveness.

Key Point Checklist

This article has covered the following key knowledge points:

• Distinguish between internal and external data sources with examples
• Identify and define machine/sensor, transactional, and human/social data
• Explain uses and limitations of both internal and external information
• Recognise and describe direct and indirect data capture costs
• Assess whether the value of information justifies its cost

Key Terms and Concepts

• internal data
• external data
• machine/sensor data
• transactional data
• human/social data
• direct data capture cost
• indirect data capture cost