Chapter I: MANAGEMENT and the NATURE of MANAGEMENT ACCOUNTING

Management Accounting Defined Management accounting or managerial accounting is an area of accounting concerned with the application of appropriate techniques and concepts in processing historical and projected economic data of an entity to assist management in setting up reasonable economic objectives and in making rational decisions towards the attainment of these objectives. Management and Its Functions Management the effective motivation of men and the efficient utilization of resources for the attainment of predetermined objectives. the process of planning, organizing, and controlling a certain task to realize the objectives of the organization. BASIC FUNCTIONS OF MANAGEMENT PL PLANNING Planning involves: -setting up immediate and long term goals. -deciding which alternative means would be best suited to attain the set goals. Organizing involves: -deciding how to utilize available resources as plans are carried out -tackling activities necessary to achieve corporate objectives such as staffing, subordinating, directing, motivating. Directing involves: -guiding the activities within the enterprise -coordination of sub-units in an organization to work together

ORGANIZING

DIRECTING

CONTROLLING G

Controlling involves: -comparing actual performance with set plans or standards. -deciding what corrective actions to take should there be any deviation (variance) between actual and planned performance.

NOTE: decision-making is an inherent function of management; all management functions would require a certain amount of decision-making. MANAGEMENT BY OBJECTIVES vs. MANAGEMENT BY EXEPTION Management by objectives is a procedure in which a subordinate and a supervisor agree on goals and the methods of achieving them and develop a plan in accordance with that agreement. The subordinate is then evaluated with reference to the agreed plan at the end of the period.

Management by exception is a technique of highlighting those which vary significantly from plans and standards in line with the management principle that executive time should be spent on items that are non-routine and are identified as top priority. Role of Management Accounting in the Performance of Management Functions Management accounting assists in the planning function of management by providing quantitative data and projections. Performance of the organizing function is facilitated by making recommendations on division and assignment of functions. Management accounting provides progress reports to aid management in the performance of its directing function. It assists management in its controlling functions by providing the latter with analytical reports on variances. MANAGEMENT ACCOUNTING vs. FINANCIAL ACCOUNTING FINANCIAL ACCOUNTING Primarily for external users MANAGEMENT ACCOUNTING Exclusively for internal users (management) Management wants and needs Discretionary or optional Monetary and non-monetary Relevance (timeliness of data) Decision-making from internal and external Sources Extensive and detailed Focus on segments and business As a whole As frequent as need arises Future-oriented using current and past data No unifying model or equation

1. User of information

2. Guiding principles 3. Optional/Mandatory 4. Type of information 5. Emphasis of reports 6. purpose/End result 7. Source of data 8. Amount of detail 9. Focus of information

Generally Accepted Accounting Principle Mandatory (especially for public entities) Primarily monetary (financial) in nature Reliability (precision of data) Financial reporting and compliance From companys (internal) info system Compressed and simplified Focus mainly on business as a whole

10. Frequency 11. Time orientation

Periodic (annually, quarterly) Mainly historical (past) data

12. Unifying model

Assets = Liabilities + Equity

ACCOUNTING INFORMATION Relevant Accounting Information Accounting information may be considered relevant when it can affect the decision of an informed user. Thus, managements decision on a particular problem can be affected by relevant information provided management is knowledgeable on what is relevant and irrelevant. Objectives of Accounting Information The contents of accounting reports may vary depending upon the objectives of the report and this may be: 1. To enable the management to evaluate its performance and position. 2. To bring to the attention of the management certain deviations from financial plans or standards, and operating efficiencies. 3. To help management solve an existing problem. The nature of accounting information varies in different companies because of differences in size and nature of operations and other factors. Accounting information may ve presented to manegemnet orally or in writing. Principles in Internal Reporting To make internal reports mare useful to management, the following principles need to be observed in their preparation: 1. Timeliness. Reports should be prompt to facilitate the making of decision. 2. Relevance. Accounting information must be related to the purpose or objective of the users thereof. 3. Quantifiability. Information relayed to management must be quantified or expressed in terms of units of measure to facilitate the formulation of solutions to management problems. 4. Freedom from bias. Accounting information must be impartially determined and reported. 5. Verifiability. Accounting information is said to be verifiable if substantial identical results can be arrived at by two or more qualified persons working on the same data. 6. Understandability. Reports should be clear, concise and understandable so as not to mislead the users thereof. 7. Flexibility. The form and contents of reports must be adapted to changes in the needs of the user and the surrounding circumstances. Social Responsibility of the Management Accountant The social responsibility of the management accountant arises from his proximity to management and the fact that the latter relies on him for financial information before making decisions. He has the responsibility to make management aware of its responsibility to society by encouraging the latter to undertake socially desirable activities geared towards the social well-being of the community.

STANDARDS OF ETHICAL CONDUCT FOR MANAGEMENT ACCOUNTANTS According to the Standards of Ethical Conduct set by the Institute of Management Accountants (IMA), management accountants have a responsibility to 1 2 3 4 maintain an appropriate level of professional competence by ongoing development of their knowledge and skills refrain from disclosing confidential information acquired in the course of their work, except when authorized and/or unless legally obligated to do so refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically Communicate information fairly and objectively and disclose fully all relevant information relative to users need. COMPETENCE CONFIDENTIALITY INTEGRITY OBJECTIVITY

THE CONTROLLER: CHIEF MANAGEMENT ACCOUNTANT CONTROLLERSHIP the practice of the established science of control, which is the process by which Management assures itself that company resources are obtained and utilized according to plans that are in line with the companys set objectives.

CONTROLLER - an officer of an organization who has responsibility for the accounting aspect of management control. It is a little given to a person holding the position of a chief management accounting executive of a business enterprise. In many accounting texts and business literatures, the controller is often referred to as the chief accountant.

CONTROLLER
FINANCIAL ACCOUNTING COST & MANAGEMENT ACCOUNTING ACCOUNTING SYSTEM & PROCEDURES FINANCIAL ANALYSIS & SPECIAL STUDIES GOVERNMENT & TAX REPORTING LINE FUNCTION VS. STAFF FUNCTION Line function- the authority to give command or orders to subordinates. It exercises direct downward authority over line departments (e.g., VP for operations manager).

Staff function- the authority to advise but not to command others; the function of providing line and staff managers with specialized service and technical advice for support. It is exercised laterally or upward. The controller primarily exercises a staff function as the controllers office gives advice and service to other departments and to entire organization as a whole; however, in an accounting department that is headed by the controller, the controller has a line authority over subordinates. CONTROLLER vs. TREASURER To avoid incompatible duties being assigned to a single officer, a controller, who is primarily concerned with accounting, must not hold at the same time the position of a treasurer, who is primarily concerned with the custody of funds. Consider the following: CONTROLLER Planning and control Reporting and interpreting Evaluating and consulting Tax administration Government reporting Protection and assets Economic appraisal TREASURER 1. Provision of capital 2. Investor relations 3. Short-term financing 4. Banking and custody 5. Credit and collections 6. Investments 7. Insurance

1. 2. 3. 4. 5. 6. 7. QUESTIONS:

1. Who are the different parties interested in the results of operations of a business concern and for what reason(s) are they interested therein? 2. Why is it imperative for an organization, be it political, civic or business, to have financial statements? 3. How would you define the following a. Accounting b. Management accounting c. Controllership d. Finance function in business e. Internal control 4. How does management accounting facilities the carrying out of management functions? 5. Differentiate management accounting from financial accounting. 6. Who is the chief financial officer in an organization? Is he always called Controller? Explain. 7. Enumerate the functions of the controller and the treasure. What should be the functions (s) of the Vice President for Finance?

8. The controller exercises staff authority with regards to the entire organization and line authority, in a limited way. How would you explain this?

EXERCISE 1: RECALL True or False. If your answer is false, explain a. Cost of goods sold is equal to the difference between cost of goods manufactured and ending inventory of finish goods. b. Prime cost consists of materials and labor costs while conversion cost refers to labor and factory overhead. c. A balance sheet shows the result of operations for a period while an income statement shows the financial condition of a business as of a certain date. d. The proceeds from issuance of stock previously issued by a corporation and subsequently reacquired but not cancelled. e. Treasury shares are shared of stock previously issued by a corporation and subsequently required but not cancelled. f. Accounting is the language of business.

g. The basic accounting equation is: ( Assets= Liabilities+ Owners Equity) h. Examples of assets are receivable, buildings, investments, advances to employees and notes payable. i. The theory of debit and credit is simply the observance of the basic accounting equation, that is, debit increases in items that are on the left side of the equation, credit increases in those item that are on the right side and vice versa. j. It is advisable for everybody to have some knowledge of accounting regardless of the kind of undertaking he has. k. Each individual must try to improve his own balance sheet. l. Income and expenses increase owners equity.

m. Corporate and partnership net earnings are closed to retained earnings. n. In a manufacturing firm, materials are converted into finished products. o. Manufacturing cost of a product consists of materials, labor and factory overhead.

EXERCISE 2: REVIEW OF ACCOUNTING

a. Accounting was defined before as the art of _______, ______ and ________ in a significant manner and in terms of money, transactions and _______ which are in part at least of a financial character and ______ the results thereof. b. Accounting is defined these days as follows: Accounting is _______ activity. Its function is to provide ________ information, primarily financial in nature, about economic entities that is intended to be useful in making ______ decisions. c. The basic financial statements and the information they contain are following: ________. It shows the results of operations for a given period because it contains the income, cost and expense accounts. ________. It shows the financial position of a business (what it owns, what it owes, and the equity of its owner or owners). ________. It provides relevant information on case receipts and cash payments. d. The different parties interested in accounting reports are the following: ________. Accounting data are used as one of the bases in making decisions regarding the daytoday operations of a business. ________. This group uses accounting reports in determining whether the money they have put in business in safe, if it is earning, and how much it is earning. ________. This group makes use of accounting reports to determine the ability of a company to pay its obligations by looking into the composition and liquidity of company assets, the nature of existing obligations, and the companys profitability. ________. This group uses accounting reports in economic planning, formulating policies, rules and regulation, and in collecting revenue based on earnings. ________. They use accounting reports to determine whether the business concern involved is stable for their peace of mind and feeling of security and to determine whether the particular business concern can afford to grant increases in pay and more fringe benefits. ________. It is interested in accounting reports for the economic well-being of everybody in the community because each one is somehow affected by the operations of a business either directly or indirectly.

e. In a business transaction, there are two groups of values involved, namely, those _________ and those ________. f. Bookkeeping refers to the recording of business transactions in a ________ and ________ manner. g. An account is an accounting device used to summarize changes in the accounting values, namely, _______, ________, ________, ________, and ___________. h. The basic accounting equation is: ________ = ________+ _________ i. _________ refers to anything, whether tangible or intangible, that has money value. It is something from which future economic benefit may be expected. j. _________ are debts owed to outsiders (creditors).

k. _________ refers to the excess of assets over liabilities. l. _________ refers to the left side of an account.

m. _________ refers to the right side of an account. n. The theory of debits and credits is based on the basic accounting equation so that when the items on the left side of the accounting equation increase, they are _______ (debited or credited) and when the items on the items on the right side of the equation increase, they are _________ (debited or credited). o. Income ______ (increase or reduces) owners equity while expenses _________ (increases or reduces) it. p. When costs and expenses exceed income, the difference is called ___________. q. When income or realized revenue exceeds costs and expenses, the difference is called _________. r. The books of original entry are called ______ while the book of final entry is called __________.

s. The formal list of account titles to be used in recording the transactions of a business entity is called the ___________. t. When an account has a debit balance, it means that the __________ postings exceed the __________ postings.

EXERCISE 3: MANAGEMENT AND ITS FUNCTIONS Complete the following sentences:

a. Management has been defined as the _____________ of men and the _________ of resources to attain predetermined objectives. b. The functions of management are ___________, ________, _________, and ____________. c. The function of _____________ refers to determining in advance what should take place. d. __________ means that management sees to it that performance is in accordance with plans and adopts remedial measures in case there are variances. e. The process by which management determines the structure and allocation of resources is ______________. f. The function of _______________ refers to the carrying out of plans or converting them into reality.

Indicate after each of the following statements whether it refers to financial accounting or to management accounting by writing X in the corresponding column: Financial Accounting Management Accounting a. It is history oriented b. It is future oriented c. It existence is merely optional depending upon how management appreciates and makes use of the data provided. ______________ d. Provides information to management to assist in decision making. e. Reports are in the form of all purpose financial statements that will reasonably serve the needs of any of the external users. f. Adherence to GAAP is optional for the emphasis is on relevance and timeliness of information. ______________ ______________ ______________ ______________ ______________ ______________ ______________ ______________ ______________ ______________ ______________

EXERCISE 5: MAKING USE OF ACCOUNTING IN MANAGEMENT FUNCTIONS

True or False. Explain if your answer is false. a. Accounting is a staff function. b. All recorded accounting data are useful in the decision making process. c. All process of planning, management makes use of accounting data in making projections based on different alternatives so that a reasoned choice can be made therefrom. d. In the performance of its functions, management uses all recorded accounting data. e. In carrying out its controlling function, management compares actual results of operations (as contained in accounting reports) with budgets so that remedial measures can be promptly adopted. f. Accounting data are useful to management in carrying out its controlling function only.

g. In assisting management in carrying out its planning functions, accounting provides the latter with projected based on recorded results of operations. h. Inasmuch as accounting is also concerned with safeguarding company resources, it assists management in carrying out its organizing function by making recommendations on delineation of duties and responsibilities. i. Decision making, although considered by some as another function of management, has not been included in the enumeration of management functions for all the given functions involved in decision making. j. Progress reports are provided by accounting to management to enable the latter to determine how much have been achieved to attain its goals for a given period.

EXERCISE 6: FUNCTION OF FINANCE OFFICIALS Generally, the finance functions are carried out by a chief financial officer who may be the Vice President for Finance, the Treasurer, or the Controller. Which of the following are included in their functions?

Budgeting Employees Benefit Insurance Purchasing Tax Administration

Production Economic Appraisal Investment Management Personnel Cash Management

Systems Installation Credit and Collection Management Accounting EXERCISE 7: SUMMARY

Marketing Financial Accounting Internal Audit

True or False. If your answer is false, explain a. The balance sheet shows hoe the company raises and uses its financial resources. b. The statement of cash flows is a statement of financial position and accordingly shows the cash balance at the end of the period. c. There are different concepts of funds so that they may be construed as cash, quick assets, net quick assets or working capital. d. The internal auditor may also be the external auditor. e. The planning and controlling functions of management are inter-related because planning is undertaken to effect control and control can be more effective it there are plans and standards with which performance may be compared. f. Although the finance function is a staff function, the chief financial officer exercises line authority within his department. g. Aside from the annual financial statements, other accounting reports are also prepared as often as desired by management. h. Considering the needs of modern management, accounting information must be timely and relevant. i. j. The finance function starts and ends with providing funds. The income statement shows the results of operations during a given period and accordingly shows income, cost and expenses.