MANAGEMENT ACCOUNTING

Basic Concepts

Management – is the process of planning, organizing, and controlling a certain task to realize the objectives of the organization.

Basic Functions of Management

1. Planning – involves setting immediate and long-term objectives and deciding which alternative is best suited to attain the set objectives.
2. Organizing – involves deciding how to utilize available resources as plans are carried out and tackling activities necessary to achieve
objectives such as staffing, subordinating, directing and motivating.
3. Controlling – involves comparing actual performance with set plans and standards and 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 certain amount of decision-making.

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.

Management Accounting – refers to reports designed to meet the needs of internal users, particularly the managers. The American Association of
Accountants (AAA) 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 vs. Financial Accounting

Managerial accounting is concerned with providing information to personnel within an organization so that they can plan, make decisions,
evaluate performance, and control operations. There are no rules and regulations associated with this field since the information is intended solely for
use within the firm.

Financial accounting, in contrast, focuses on financial statements and other financial reports. This area deals with reporting to groups
outside of an organization (e.g., stockholders, lenders, government agencies) so that some assessment of profitability and overall financial health can
be made. Given the large number of firms in our economy and the varying level of user sophistication, the field is heavily regulated (by the Financial
Accounting Standards Board and, to a lesser degree, by the Securities and Exchange Commission).

Summary of Differences:

FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING

1. Users of information Primarily for external users Exclusively for internal users
Should be in accordance with Generally
2. Accounting principles Management wants and needs
Accepted Accounting Principles
3. Optional/Mandatory Mandatory, particularly by the government Discretionary or optional
The end-product which is the financial Monetary and also non-monetary like units
4. Type of information statements are primarily monetary produced, units sold, number of labor hours,
(financial) in nature etc.
5. Emphasis on reports Reliability (precision of data) Relevance and timeliness of data.
6. Purpose/End result To produce financial statements To assist the management in decision-making
From company’s (internal) information From internal and external users such as
7. Source of data
system economics, etc.
8. Amount of detail Reports are compressed and simplified Reports are more extensive and detailed
Focus on segments (e.g., products, divisions,
Financial statements focus mainly on
9. Focus of information departments within the company) and business
business as a whole
as a whole
10. Frequency of reports Periodic (annually, quarterly) As frequent as management need arises
11. Time orientation Mainly historical (past) data Future-oriented using current and past data
12. Unifying concept Assets = Liabilities + Equity No unifying concept or equation

Controllership – is the practice of the established science of control, which is the process by which management assures itself that the company’s
resources are obtained and utilized according to plans that are in line with the company’s set objectives.

Controller – is an officer of an organization who has responsibility for the accounting aspect of management control. He generally performs two
basic roles:
1. Accumulation and reporting of accounting information to all levels of management and;
2. Directing management’s attention to problems and assisting them in solving such problems.

Controller vs. Treasurer

CONTROLLER TREASURER

1. Planning & control 5. Government reporting 1. Provision of capital 5. Credit & collections

2. Reporting & interpreting 6. Protection of assets 2. Investor relations 6. Investments

3. Evaluating & consulting 7. Economic appraisal 3. Short-term financing 7. Insurance

4. Tax administration 4. Banking & custody

Line Function vs. Staff Function

Line Function is the authority to give command or orders to subordinates. It exercises direct downward authority over line departments
(e.g., VP for operations over operations manager).

Staff Function is 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.

 When it comes to the whole organization, a controller usually exercises staff functions since its primary function is to give advice. But when it
comes to its own department, a controller exercises line functions among its own staff.

 A Treasurer usually exercises line functions within an organization.

Standards of Ethical Conduct for Management Accountants

Management accountants have responsibility for ethical behavior in four broad areas, Competence, Confidentiality, Integrity and Objectivity.

1. Competence

In order to be competent, management accountants must:

 Maintain an appropriate level of professional competence.

 Follow applicable laws, regulations, and standards.
 Provide accurate, clear, concise, and timely decision support information.
 Recognize and communicate professional limitations that preclude responsible judgment.

2. Confidentiality

Management accountants must:

 Not disclose confidential information acquired in the course of their work unless legally obligated to do so.
 Ensure that his subordinates do not disclose confidential information.
 Not use confidential information for unethical or illegal advantage.
3. Integrity

Management accountants must:

 Mitigate conflicts of interest and advise others of potential conflicts.

 Refrain from conduct that would prejudice carrying out duties ethically.
 Abstain from activities that might discredit the profession.

4. Objectivity

Management accountants must:

 Communicate information fairly and objectively.

 Disclose all relevant information that could influence a user’s understanding of reports and recommendations.
 Disclose delays or deficiencies in information timeliness, processing, or internal controls.
 To sum up, Competence means having the capacity to function in a particular manner. Confidentiality means having the ability to maintain
or keep information undisclosed. Integrity is defined as adherence to a code of moral values. Objectivity is defined as expressing or using facts
without distortion by personal feelings or prejudices.

EXERCISES

MULTIPLE-CHOICE

1.The day-to-day work of management teams will typically comprise all of the following activities except:
a. decision making b. planning c. cost minimizing d. directing operational activities

2.Which of the following functions is best described as choosing among available alternatives?
a. Decision making b. Planning c. Controlling d. Directing operational activities

3.Which of the following managerial functions involves a detailed financial and operational description of anticipated operations?
a. Decision making b. Planning c. Controlling d. Directing operational activities

4.Which of the following involves the coordination of daily business functions within an organization?
a. Decision making b. Planning c. Controlling d. Directing operational activities

5.Titan Company has set various goals, and management is now taking appropriate action to ensure that the firm achieves these goals. One such
action is to reduce outlays for overhead, which have exceeded budgeted amounts. Which of the following functions best describes this
process?
a. Decision making b. Planning c. Coordinating d. Controlling

6.Which of the following is not an objective of managerial accounting?

a. Providing information for decision making and planning.
b. Assisting in directing and controlling operations.
c. Maximizing profits and minimizing costs.
d. Measuring the performance of managers and subunits.

7. The role of managerial accounting information in assisting management is a(n):

a. financial-directing role c. planning and controlling role
b. attention-directing role d. organizational role

8.Managerial accounting:
a. focuses only on historical data.
b. is governed by GAAP.
c. focuses primarily on the needs of personnel within the organization.
d. provides information for parties external to the organization.

9.Managerial accounting:
a. is unregulated.
b. produces information that is useful only for manufacturing organizations.
c. is based exclusively on historical data.
d. is regulated by the Securities and Exchange Commission (SEC).

10.Which of the following would likely be considered an internal user of accounting information rather than an external user?
a. Stockholders b. Consumer groups c. Lenders d. Middle-level managers

11.Financial accounting focuses primarily on reporting:

a. to parties outside of an organization c. to an organization's board of directors
b. to parties within an organization d. to financial institutions

12.Which of the following statements represents a similarity between financial and managerial accounting?
a. Both are useful in providing information for external users.
b. Both are governed by GAAP.
c. Both draw upon data from an organization's accounting system.
d. Both rely heavily on published financial statements.

13.Which of the following employees at Philippine Airlines would not be considered as holding a line position?
a. Pilot c. Flight attendant
 b. Chief financial officer (CFO) d. Ticket agent

14.Which of the following employees would be considered as holding a line position?

a. The controller of Exxon Corporation.
b. The vice-president for government relations of Microsoft.
c. The manager of food and beverage services at Disney's Magic Kingdom.
d. A secretary employed by Hewlett-Packard.

15.Which of the following employees at Starbucks would likely be considered as holding a staff position?
a. The company's chief operating officer (COO).
b. The company's lead, in-house attorney.
c. The company's chief financial officer (CFO).
d. Both the company's lead, in-house attorney and the chief financial officer.

16.A controller is normally involved with:

a. preparing financial statements c. raising capital
b. managing investments d. safeguarding assets

17.Which of the following is not a function of the treasurer?

a. Safeguarding assets c. Preparing financial statements
b. Managing investments d. Being responsible for an entity's credit policy

18.Managerial accountants:
a. often work on cross-functional teams.
b. are located throughout an organization.
c. are found throughout an organization and work on cross-functional teams.
d. are found primarily at lower levels of the organizational hierarchy.

19.Much of managerial accounting information is based on:

a. a cost-benefit theme c. cost minimization
b. profit maximization d. the generation of external information

20.Managerial accounting has changed in recent years because of:

a. the growth of e-business. c. the emergence of new industries.
b. increased global competition. d. all of the above factors.

21.Which of the following is not an ethical standard of managerial accounting?

a. Competence b. Confidentiality c. Efficiency d. Integrity

22.Which of the following is not an element of competency?

a. To develop appropriate knowledge about a particular subject.
b. To perform duties in accordance with relevant laws.
c. To perform duties in accordance with relevant technical standards.
d. To refrain from engaging in an activity that would discredit the accounting profession.

23.Assume that a managerial accountant regularly communicates with business associates to avoid conflicts of interest and advises relevant
parties of potential conflicts. In so doing, the accountant will have applied the ethical standard of:
a. objectivity b. confidentiality c. integrity d. credibility

24. A practice in which a subordinate and a supervisor agree on goals and the methods of achieving them.
a. Management by objectives c. Management by exception
b. Management by subjective d. Management by example

25. Which of the following functions is most directly related to management by objective?
a. Reporting b. Decision making c. Control d. Planning

26. Which of the following is included in the day-to-day work of the management team?
a. decision making b. planning c. controlling d. all of the given choices

27. For internal uses, managers are more concerned with receiving information that is:
a. completely objective and verifiable. c. completely accurate and precise.
b. relevant, flexible, and immediately available. d. relevant, completely accurate, and precise.

28. How does managerial decision making compare with external performance evaluation?
Managerial Decision Making External Performance Evaluation
 a. Detailed Detailed
b. Detailed More aggregated
c. More aggregated Detailed
d. More aggregated More aggregated

29. Internal reports must be communicated

a. daily b. monthly c. annually d. as needed

30. Under which ethical standard of conduct does the managerial accountant have the responsibility to refuse any gift, favor, or hospitality that
would influence or appear to influence his or her decision?
a. competence b. confidentiality c. integrity d. objectivity