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MANAGEMENT ADVISORY SERVICES REVIEW C. Gonzaga

TOPIC : MANAGEMENT ACCOUNTING
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MANAGEMENT ACCOUNTING

Managerial accounting (or management accounting) on the other hand, refers to reports designed to meet the
needs of internal users, particularly the managers. The AAA Committee on Management Accounting defined it
as “the application of appropriate techniques and concepts in processing the historical and projected economic
data of an entity to assist management in establishing a plan for reasonable economic objectives and in the
making of rational decisions with a view towards achieving these objectives”

MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING

1. Users of reports
2. Unifying Concept
3. Accounting Principles
4. Optional
5. Use of nonmonetary
Information
6. Use of Projected Data
7. Emphasis on Precision
8. Amount of detail
9. Source of Data
Differences
FINANCIAL
ACCOUNTING
Reports are primarily prepared for
external users
Built around the fundamental
equation: Assets= liabilities +
Owner’s Equity
Accounting information is prepared in
accordance with Generally Accepted
Accounting Principles to ensure
users of fairness and objectivity of
financial statements.
Financial accounting reports are
mandatory. They must be prepared
as required by outside parties,
particularly government regulatory
agencies and taxing authorities.
The financial statements, which are
the end-product of financial
accounting, show information which
is primarily monetary in nature.
Financial accounting records the
financial history of an enterprise.
Entries are prepared only after
transactions have occurred-thus
demonstrating a great reliance on
historical data
Users of financial information except
that data presented are more or less
precise or accurate.
Reports tends to compress and
simplified without necessarily
sacrificing full disclosure of relevant
information
Information is drawn heavily from the
company’s accounting system.
MANAGEMENT
ACCOUNTING
Reports are prepared for internal
users
No unifying concept or fundamental
equation. Three types of accounting:
full costs accounting, differential
accounting and responsibility
accounting.
Not necessarily governed by
Generally Accepted Accounting
Principles.
In preparing reports, the
management of a company can
make and enforce rules which it
fends most useful fiord its own
purposes, without worrying about
whether these conform to some
outside standard.
Management accounting is entirely
optional. Reports are prepared as
they are needed by management,
considering their usefulness, as well
as the comparison between the
benefit from, and the cost of
preparing such reports.
Aside from monetary information,
management accounting deals also
with nonmonetary information, like
units of products sold or produced,
number of workers, labor hours,
quantity of materials, etc.
Management accounting includes
current figures; information
representing estimates or plans for
the future; as well as information
about the past, particularly if such
past information can be useful in
making future estimates
Timeliness and relevance of
information are more important
rather than precision. Since
management needs information
rapidly, it is willing to sacrifice
precision or accuracy to gain speed
in reporting.
Reports tend to be much more
extensive and detailed for better
analysis and control.
Information is drawn not only from
the accounting system. If necessary,
other disciplines are considered as
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data source, like statistics,

10. Purpose
11. Focus on Segments
The purpose of financial accounting
is to produce financial statements.
Once these are prepared, the
purpose has been accomplished.
Financial statements relate to the
business as a whole. Though some
companies prepare separate
financial statements for branches or
divisions, still, the main focus is on
the consolidated reports for the
organization as a whole.
economics, etc.
Management accounting information
is only a means to an end, the end
being the planning, directing and
controlling activities described in the
previous sections of this chapter.
In management accounting, the main
focus is on segments that is, on
products; on individual activities; or
on divisions, departments, branches,
and other responsibility centers.

Similarities

Most elements of financial accounting are also found in management accounting. This is due to the following
reasons:
a. The same considerations that make generally accepted accounting principles sensible for the purposes
sensible for the purposes of financial accounting is applied for purposes of management accounting.
For instance, management cannot base its reporting system on unverifiable, subjective data, which is
the same reason that financial accounting adheres to some concepts and principles like objectivity and
cost concept.
b. Both financial and managerial accounting draw information from the same operating accounting system.
There is a presumption therefore that the basic data are collected in accordance with GAAP, for to do
otherwise would require duplication of data collecting activities

ROLE OF MANAGEMENT ACCOUNTANT

 The role of managerial accountants has expanded in recent years. Formerly in staff positions,
managerial accountants now serve as internal business consultants, trusted advisors, and
“business partners.”
 Line personnel are directly involved in carrying out the mission of the organization (e.g.,
assembly workers in a factory, doctors in a hospital, teachers in a school).
 Staff personnel (accountants, lawyers, personnel directors, and other administrative positions)
provide support for the organization’s mission.
 An accountant in a CPA firm would be in a line position, because the organization’s
mission is providing accounting services. In contrast, an accountant at a university
would be in a staff position.
 The chief financial officer (CFO) or controller is the chief accountant responsible for the
supervision of the accounting department, preparation of reports, and the interpretation of
information to line managers.
The treasurer is responsible for raising capital, safeguarding assets, managing investments,
insurance coverage, and the credit policy of an organization.
 The internal auditor reviews accounting procedures, reports, and performance on behalf of top
management.
 More and more, managerial accountants work throughout an entire enterprise and are deployed
in cross-functional management teams, working with top executives and personnel from a
variety of functional areas (e.g., marketing, production, engineering, and operations).

MANAGEMENT FUNCTIONS
 Management functions performed within an organization can often be summarized as decision
making, planning, the directing of operational activities, and controlling.
Decision making—the process of choosing among available alternatives.
Planning—developing a detailed financial and operational description of anticipated
operations.
Directing operational activities—running the organization on a day-to-day basis.
Controlling—ensuring that the organization operates in the intended manner to achieve
its goals.

HOW MANAGEMENT ACCOUNTING ADDS VALUE

 Provides managers with information (e.g., the cost of products, budgets, cash flows). The
information includes financial and nonfinancial data to help managers with strategic planning
and decision making.
 Assists in directing and controlling (analyzing and comparing actual performance to budgeted
plans; attention-directing to highlight successful or problem areas).
 Motivates managers to achieve the organization’s goals by communicating the plans, providing
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a measurement of how well the plan was achieved, and prompting an explanation of deviations
from plans.
 Motivation is achieved, in part, through employee empowerment—the concept of
encouraging and authorizing workers to improve operations, reduce costs, and improve
product quality and customer service.
 Measures performance not only for the entire organization, as in financial accounting, but also
for many subunits (divisions, departments, managers).
 Assesses the organization’s competitive position in the rapidly changing business environment.
Looks at how well the firm is doing internally, in the eyes of its customers, from the standpoint
of innovation and continuous improvement, and financially.
 The preceding factors are integrated in a model of performance evaluation known as
the balanced scorecard.

EVOLUTION OF MANAGEMENT ACCOUNTING

Growth of e-business (including supply-chain management and e-budgeting).
 Growth of the service sector.
Emergence of new industries, such as superconductivity and genetic engineering.
Global environment and increasing international competition.
 An increased focus on the customer.
 The growing popularity of cross-functional teams.
 Computer-integrated manufacturing (CIM) that moves production from a labor-intensive
process to an automated process. The accounting system must evolve to provide
measurements in a new environment.
 Product life cycles that are becoming shorter to keep up with changing technology and more
diverse product lines.
 Time-based competition, which is assuming a greater role in business, with customer-response
time and time-to-market being critical factors for the truly competitive enterprise.
 Information and communication technology (the Internet, intranets, cellular technology) that
increase the key facts supplied to executives so they can better manage their businesses.
 Just-in-time (JIT) inventory management that reduces costs by decreasing inventory levels,
encouraging a more efficient production process, and improving quality.
 Programs of total quality management (TQM) that improve product or service quality and do
the best possible job of satisfying the customer.
 Programs of continuous improvement that strive to eliminate waste, reduce response time,
simplify design, and improve quality and customer service.
The growing use of cost management systems—planning and control systems that measure the cost
of resources and eliminate non-value-added costs (costs that can be eliminated with no
deterioration of product quality, performance, or perceived value).
 These systems also help determine the efficiency and effectiveness of the enterprise,
and identify new opportunities for the organization. Activity-based costing and
activity-based management are helpful in this regard.

STRATEGIC COST MANAGEMENT AND THE VALUE CHAIN

 More attention is being paid to the value chain—the set of linked, value-creating activities, from
conducting product research, to manufacturing, to providing customer service.
 A number of activities occur prior to the production of a good or service (i.e., upstream
activities) and several occur after (so-called downstream activities).
 Managers must understand the cost-causing factors (cost drivers) in an organization’s value
chain.
 Managing the cost relationships within a value chain to the firm’s advantage is called strategic
cost management.
Part of this process involves the identification of constraints that prevent an organization from reaching
greater achievements.

MANAGEMENT ACCOUNTING AS A CAREER

*0 The Institute of Management Accountants (IMA) administers the Certified Management Accountant
(CMA) program. Students interested in internal accounting rather than employment in a public
accounting firm may wish to pursue this designation.
*1 Professional ethics require high standards of conduct from management accountants in the areas of
competence, confidentiality, integrity, and credibility.

CONTROLLERSHIP

Controllership may be identified as the function of business management which combines the responsibility for
accounting, reporting, measurement, auditing, taxes, operating controls and other related areas.
Functions of the controller
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1. Planning for control

2. Reporting and interpreting
3. Evaluating and consulting
4. Tax administration
5. Government reporting
6. Protection of assets
7. Economic appraisal

DISTINCTIONS BETWEEN CONTROLLER & TREASURER

CONTROLLERSHIP TREASURERSHIP
1. Planning and control 1. Provision of capital
2. Reporting and interpreting 2. Investors relations
3. Evaluating and consulting 3. Short-term financing
4. Tax administration 4. Banking and custody
5. Government reporting 5. Credit & collections
6. Protection of assets 6. Investments
7. Economic appraisal 7. Insurance

Standards of Ethical Conduct for Management Accountants ( IMA Code of Ethics)

COMPETENCE
Practitioners of management accounting and financial management have responsibility to:
• Maintain an appropriate level of professional competence by ongoing development of their knowledge and
skills.
• Perform their professional duties in accordance with relevant laws, regulations, and technical standards.
• Prepare complete and clear reports and recommendations after appropriate analyses of relevant and
reliable information.

CONFIDENTIALITY
Practitioners of management accounting and financial management have responsibility to:
• Refrain from disclosing confidential information acquired in the course of their work except when authorized,
unless legally obligated to do so.
• Inform subordinates as appropriate regarding the confidentiality of information acquired in the course of their
work and monitor their activities to assure the maintenance of that confidentiality.
• Refrain from using or appearing to use confidential information acquired in the course of their work for
unethical or illegal advantage either personally or through third parties.

INTEGRITY
Practitioners of management accounting and financial management have responsibility to:
• Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict.
• Refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically.
• Refuse any gift, favor, or hospitality that would influence or would appear to influence their actions.
• Refrain from either actively or passively subverting the attainment of the organization’s legitimate and ethical
objectives.
• Recognize and communicate professional limitations or other constraints that would preclude responsible
judgment or successful performance of an activity.
• Communicate unfavorable as well as favorable information and professional judgments or opinions.
• Refrain from engaging in or supporting any activity that would discredit the profession.

OBJECTIVITY
Practitioners of management accounting and financial management have responsibility to:
• Communicate information fairly and objectively.
• Disclose fully all relevant information that could reasonably be expected to influence an intended user’s
understanding of the reports, comments, and recommendations presented.

SOURCE: http://www.imanet.org/content/Abou...cle_of_Ethics/Ethical-standards.htm. May 1, 2000, 10:30 a.m.,

Statements on Management Accounting Number 1C: Standards of Ethical Conduct for Management
Accountants (Montvale, N.J.: NAA, June 1, 1983). Copyright by Institute of Management Accountants (formerly
National Association of Accountants), Montvale, N.J.

MULTIPLE CHOICE

1. Which of the following is not a characteristic of "Staff" authority?

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a. It gives support, advise, and service to line managers.

b. It is exercised literally or upward.
c. It has the authority to command action or give orders to subordinates.
d. None of the above.

2. Which of the following characteristics does not relate to management accounting?

a. Accounting reports may include non-monetary information.
b. It is subject to restrictions imposed by PFRS;
c. Reports are often based on estimates and are seldom useful for anything other than the
purpose for which they are prepared;
d. It provides data for internal users within the business organization.

3. That kind of accounting concerned with providing information to management in making decisions about the
operations of the business:
a. Responsibility accounting;
b. Cost accounting;
c. Management accounting;
d. Correct answer not given.

4. Management accounting is used by an organization's management for a multitude of purposes that do not
include
a. Marketing
b. Control
c. Evaluation
d. Reporting

5. Managerial accounting differs from financial in that financial accounting is

a. More oriented toward the future.
b. Primarily concerned with external financial reporting.
c. Concerned with nonquantitative information.
d. Heavily involved with decision analysis and implementation of decisions.

6. Controllers are ordinarily not concerned with

a. Preparation of tax returns;
b. Reporting to government;
c. Protection of assets;
d. Investor relations.

7. The treasury function is usually not concerned with

a. Financial reporting.
b. Short-term financing.
c. Cash custody and banking.
d. Credit extension and collection of bad debts.

8. The responsibility for safeguarding financial assets and arranging financing is given to the
a. Controller
b. Chief financial officer
c. Comptroller
d. Treasurer

9. Managerial accounting is similar to financial accounting in that

a. both are governed by generally accepted accounting principles.
b. both deal with economic events.
c. both concentrate on historical costs.
d. both classify reported information in the same way.

10. Managerial accounting differs from financial accounting in that it is

a. more concerned with the future.
b. more concerned with segments of a company.
c. less constrained by rules and regulations.
d. all of the above.

11. Which activity is NOT normally performed by managerial accountants?

a. Assisting managers to interpret data in managerial accounting reports.
b. Designing systems to provide information for internal and external reports.
c. Gathering data from sources other than the accounting system.
d. Deciding the best level of inventory to be maintained.
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12. Which function is most directly related to management by objectives?

a. Planning.
b. Control.
c. Decision making.
d. Reporting.

13. Which consideration influences the frequency of an internal report?

a. The wishes of the managers receiving the report.
b. The frequency with which decisions are made that require the information in the report.
c. The cost of preparing the report.
d. All of the above.

14. The professional certification most relevant for managerial accountants is the
a. CMA.
b. CPA.
c. CSA.
d. MAS.
15. A firm that is competing using a _________________strategy is attempting to create a perception of
uniqueness that will permit a higher selling price.
a. value chain
b. lowest cost
c. lead time
d. differentiation

16. Planning and control are

a. different names for the same thing.
b. the basic functions of management.
c. described equally well by the terms "decision making" and "performance evaluation."
d. exemplified by, respectively, financial statements and budgeting.

17. Managerial accounting is applicable to

a. business organizations only c. both businesses and non-profit organizations
b. non-profit organizations only d. neither business nor non-profit organizations

18. Integrity is an ethical requirement for all management accountants. One aspect of integrity
requires
a. Maintenance of an appropriate level of professional competence.
b. Performance of professional duties in accordance with applicable laws.
c. Refraining from improper use of confidential information.
d. Avoidance of actual or apparent conflicts of interest and advise all appropriate parties of any
potential conflict.

19. If a management accountant has a problem in resolving an ethical conflict, the first action that
should normally be taken is to
a. resign from the company.
b. notify the police.
c. discuss the problem with his/her immediate superior.
d. remain silent.

20. The treasury function includes

a. preparation of tax returns.
b. cash custody and banking.
c. reporting to government.
d. financial reporting

TRUE OR FALSE

1. In performing his functions, the manager should rely solely on accounting information.
2. Managerial accounting information merely assists managers in rendering judgment, but it is not a substitute
for judgment.
3. Management accounting reports should always be prepared in accordance with generally accepted
accounting principles.
4. Management accounting reports are mandatory while those of financial accounting are optional.
5. Aside from monetary information, management accounting deals also with nonmonetary information like
units of products sold or produced numbers of workers, labor hours, quantity of materials, etc.
6. In management accounting, precision is more important than timelines and relevance of information.
7. Reports prepared under financial accounting are more extensive and detailed as compared with the reports
prepared under managerial accounting.
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8. Management accounting information is only a means to an end, the end being the financial statements.
9. Both financial and management accounting adhere to objectivity and cost concepts.
10. The chief management accounting executive of an organization is called a controller.
11. In an organizational set-up, the controller’s immediate superior is the treasurer.
12. Controllership may be defined as the function of business management which combines the responsibility
for accounting, reporting, measurement, auditing, taxes, operating controls and other related areas.
13. Strictly speaking, the controller controls operations.
14. The controller is responsible for providing capital and short-term financing for the firm.
15. Cost accounting is a toll of both financial and managerial accounting.
16. Managerial accounting draws heavily on economics, statistics, operations research, and other disciplines as
necessary in providing accounting information.
17. In management accounting, emphasis is given to identifying or matching costs with functions, projects or
responsibilities rather than with time periods.
18. Financial accounting provides information to individuals within the business organization while management
accounting provides information to parties outside the business entity.
19. Accounting reports are not prepared for the supervisory management level because foremen and
supervisors exercise control through direct personal supervision.
20. A controller does not control operations.
21. The development of management accounting systems involves behavioral problems.

END