Since 1977

MANAGEMENT ADVISORY SERVICES BOBADILLA/URO/TRINIDAD

MAS.2901 – Overview of Management Advisory Services OCTOBER 2020

Management accounting is a discipline that includes In general, accounting information needed by internal
almost all manipulations of financial information for users differs from
use by managers in performing their organizational that needed by external users in the following
functions and in assuring the proper use and handling ways:
of an entity’s resources. a. More flexible
b. Does not have to comply with GAAP or other
Three objectives of management accounting: rules
1. To provide information for costing services, c. Forward looking
products, and other objects of interest to d. Timely
management. e. Emphasizes segments, not necessarily the
2. To provide information for planning, entire organization
controlling, evaluation, and continuous
improvement. The Work of Management and the Planning and
3. To provide information for decision making. Control Cycle.
1. Planning consists of strategic planning and
Three roles of management accountants developing more detailed short-term plans..
• Problem solving: comparative analysis for 2. Directing and motivating involves mobilizing
people to implement the plan.
decision making
3. Control is concerned with ensuring that the
• Scorekeeping: accumulating data and reporting plan is followed. Accountants maintain the
reliable results databases and prepare the reports that provide
• Attention directing: The function of feedback to managers. The feedback can be
managerial-accounting information in pointing used to reward particularly successful
employees, but more importantly the feedback
out to managers issues that need their attention,
can be used to identify potential problems and
thereby helping managers properly focus their opportunities that were not anticipated in the
attention. plan.
4. Decision-making is an integral part of the
Distinctions Between Management Accounting first three management activities.
and Financial Accounting
Management Financial HOW MANAGERIAL ACCOUNTING ADDS VALUE
Accounting Accounting
• Provides managers with information (e.g.,
Targeted user: internal users external users product costs, budgets, cash flows). The
managers stockholders and information includes financial and nonfinancial
creditors data to help managers with strategic planning
and decision making.
Restrictions: no mandatory rules must follow GAAP • Assists in directing and controlling (analyzing
and comparing actual performance to budgeted
for preparing when preparing
plans; attention-directing to highlight
reports financial
successful or problem areas).
statements • Motivates managers to achieve the
organization's goals by communicating the
Types of financial and financial plans, providing a measurement of how well
information: nonfinancial information the plan was achieved, and prompting an
information explanation of deviations from plans.
• Measures performance not only for the entire
Time emphasizes the historical organization, as in financial accounting, but
orientation: future (planning orientation also for many subunits (divisions,
and decision (reports what has departments, managers).
making) already occurred) • Assesses the organization's competitive
position in the rapidly changing business
Aggregation: detailed information about environment. Looks at how well the firm is
information about overall firm doing internally, in the eyes of its customers,
from the standpoint of innovation and
product line, performance
continuous improvement, and financially.
departments, etc.

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The Changing Business Environment • Product differentiation: A company’s ability to

1. Just-In-Time - The term JIT means that materials offer superior quality products or more unique
are received just in time to be used in production,
services than competitors; such products and
manufactured parts are completed just in time to
be assembled into products, and products are services, generally, are sold at a premium price
completed just in time to be shipped to customers. 9. Empowerment - The concept of encouraging and
As a result, inventories are virtually eliminated in authorizing workers to take the initiative to
a JIT system. improve operations, reduce costs, and improve
product quality and customer service.
Key Elements of JIT
• Improved plant layout Role of Accountants and Treasurer
• Reduced setup time
• Low defect rates The chief financial officer (CFO) or controller is
• Flexible workforce the chief accountant responsible for:
• the supervision of the accounting department
Benefits of JIT • preparation of reports
• the interpretation of information to line
• Inventories are reduced.
managers.
• Space is freed up.
• Throughput time is reduced. The treasurer is responsible for:
• Defect rates are reduced. • raising capital
• safeguarding assets
2. Total Quality Management (TQM) - Total • managing investments
Quality Management means different things to • insurance coverage
different people. Nevertheless, most TQM programs • credit and collection policy of an organization.
seem to share at least two common elements—a
focus on the customer and systematic problem- Line personnel is directly involved in carrying out the
solving using teams made up largely of front-line mission of the organization. Work directly toward
attaining organizational goals. They are often held
workers.
responsible for achieving targeted balanced
3. Continuous improvement - The constant
scorecard measures or budgeted operating income
effort to eliminate waste, reduce response time, for their divisions or geographic regions
simplify the design of both products and processes, Staff personnel provides support for the
and improve quality and customer service. organization's mission, assisting and advising
4. Process Reengineering - involves completely managers.
redesigning a business process from the ground up.
In this respect, it can be differentiated from TQM Value chain: The value chain is a set of value-adding
which tends to emphasize small, incremental functions or processes that convert inputs into
improvements. The process is redesigned with a products and services for the organization’s
focus on simplification and elimination of non-value- customers.
Component of value chain:
added activities.
1. Upstream:
5. Benchmarking (or competitive benchmarking) -
1.1 research and development - experimenting to
The continual search for the most effective reduce costs or improve quality.
method of accomplishing a task, by comparing 1.2 product design - developing alternative
existing methods and performance levels with those product, service, or process designs.
of other organizations or with other subunits within 1.3 Supply - managing raw materials received
the same organization. from vendors to reduce costs and improve
6. Theory of Constraints (TOC) - The goal in the quality.
Theory of Constraints is not to eliminate all 2. Production - acquiring and assembling resources to
constraints; there is always a constraint produce a product or render a service.
somewhere in the system if the goal is to make 3. Downstream
more money. However, constraints determine the 3.1 marketing - promoting a product or service to
performance of the entire system, so they should current and prospective customers.
be intelligently managed. 3.2 Distribution - delivering a product or service to
7. Organizational Structure a customer.
• Centralization vs. decentralization 3.3 Customer service - supporting customers after
• Line and staff relationships the sale of a product or service.
• The controller Balanced scorecard: A framework that restates an
8. Strategic decisions and management organization’s strategy into clear and objective
accounting - key to a company’s success in performance measures focused on customers, internal
creating value for customers while differentiating business processes, employees and shareholders. The
itself from its competitors. scorecard helps balance management’s view and
• Cost leadership - Providing a quality product or execution of strategy with:
service at a lower cost than competitors thereby • Long term and short term measures.
providing itself competitive advantage by • Internal and external measures.
undercutting competitor prices • Financial and non-financial measures.

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Four perspectives embodied in the scorecard b. Stock options. The use of stock options as a form of
1. Customer value perspective: Addresses how compensation provides managers with an incentive
well the organization is doing relative to to manage the corporation to increase the stock
important customer criteria such as speed price, which is consistent with the goal of
(lead time), quality, service, and price (both shareholders. A disadvantage of stock options is
purchase and after purchase) that managers may have an incentive to increase the
2. Financial perspective: Addresses the stock price in the short-term at the expense of long-
concerns of stockholders and other term stock value, even by manipulating accounting
stakeholders about profitability and income to increase stock price. In addition, stock
organizational growth options may encourage management to take on risks
3. Internal business perspective: Addresses that are that are in excess of shareholders' risk
those things that the organization needs to do appetite.
well to meet customer needs and expectations c. Stock grants-Stock grants involve issuing shares of
4. Learning and growth perspective: Focuses stock as part of management's compensation. Two
on using the organization’s intellectual capital common types of stock grants:
to adapt to changing customer needs or to (1) Restricted stock. The issuance of stock that
influence new customer needs and cannot be sold by the manager for a specific
expectations through product or service period of time, usually about 10 years. This form
innovations of compensation is effective because it
Mission statement: A written expression of encourages managers to undertake operations
organizational purpose that describes how the that increase the long-term value of the
organization uniquely meets its targeted corporation's stock price.
customers’ needs with its products or services (2) Performance shares. The issuance of stock to
Lag indicators: Reflect historical financial data or management if certain levels of performance are
other outcomes that have resulted from past met. If the price of the corporation's stock
actions increases, the value of the manager's
Lead indicators: Reflect future financial and non- compensation increases.
financial outcomes and thereby help assess d. Executive perquisites (perks). Management also
strategic progress and guide decision making may get various perquisites such as retirement
before lag indicators are known benefits, use of corporate assets, and corporate
Cost management: Reflects management’s concern loans.
for continuously reducing costs while concurrently e. The best forms of executive compensation - It is
improving customer satisfaction generally believed that the best compensation
systems include a combination of fixed compensation
Corporate governance - Corporate governance is and incentive compensation that is related to long-
designed to compensate for the agency problem term stock price.
resulting from the fact that corporations are
managed by professional management that may Audit committee - a committee established by and
not operate them in the best interest of the amongst the board of directors of an issuer for the
shareholders. purpose of overseeing the accounting and financial
Components of Corporate governance: Policies, reporting processes of the issuer, and audits of the
procedures and mechanism that are established to financial statements of the issuer. A major
control management. These major controls over responsibility of the audit committee is the
management include: appointment, compensation and oversight of the
• compensation systems, corporation's external auditor, including the resolution
• boards of directors (including major of any disagreements between management and the
committees), external auditor
• external auditors, internal auditors, attorneys,
regulators, creditors, securities analysts. and Other important characteristics of an audit committee
internal control systems. 1] At least one member should be a "financial
expert." The names of the financial experts
Forms of Executive Compensation A key objective in must be disclosed. A financial expert is one
setting executive compensation is to align management's that possesses all of the following attributes:
decisions and actions with the long-term interests of 2] An understanding of generally accepted
shareholders (e.g., long-term stock price). If managers accounting principles and financial statements;
are given too much fixed compensation, they may 3] Experience in preparing, auditing, analyzing,
become too complacent and not take appropriate risks to or evaluating financial statements of the
increase share price. If managers are given too much breadth and complexity expected to be
incentive compensation based on operating profit or encountered with the company;
short-term stock price, they have incentives to manage 4] An understanding of internal controls and
profit or take excessive risks to maximize their procedures for financial reporting: and,
compensation. 5] An understanding of audit committee
functions.
Common types of management compensation
a. Base salary and bonuses. Using this system,
managers are compensated based on performance
which is typically measured by accounting profit.
Compensation systems based on accounting
measures of profit are problematic because
accounting profit can be manipulated or managed.

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Enterprise risk management: Enterprise risk 13. The reports are generally delayed and
management is a process, effected by an entity's historical.
board of directors, management and other personnel, 14. The scope tends to be highly aggregate.
applied in a strategy-setting and across the enterprise, 15. Reliance on the criterion of usefulness rather
designed to identify potential events that may affect than formal guidelines or restrictions for
the entity, and manage risk to be within its risk gathering and reporting information.
appetite, to provide reasonable assurance regarding 16. A focus on a segment of the business entity.
the achievement of entity objectives. 17. Contribution approach income statement.
ERM helps: 18. Throughput costing
• align the risk appetite of the organization with 19. Functional income statement
its strategy 20. Information focused on the short term.
• enhances risk response decisions
• reduces operational surprises and losses Exercise 2. Indicate whether each of the following
• identifies and manages cross-enterprise risks costs should be higher or lower for a world-class (or
• provides integrated responses to multiple risks JIT) manufacturer than for a conventional
• helps the organization seize opportunities, and manufacturer. Why?
improves the deployment of capital 1. Product warranty costs
2. Salaries of quality control inspectors
A key aspect of ERM is the identification and 3. Amounts paid to vendors for parts and
management of events that have a negative impact, components.
positive impact, or both. Events with negative impact 4. Wage rates for direct laborers.
represent risks. Events with positive impact may offset 5. Total supervisory salaries.
negative impacts or represent opportunities. The risk 6. Warehousing costs, including rent or depreciation
management process involves (1) identifying risks, on space, salaries and wages of employees,
assessing risks, prioritizing risks, determining risk utilities.
responses. and monitoring risk responses.
DO IT YOURSELF (DIY)
Interrelated components of ERM 1. The primary purpose of management advisory
(1) internal environment services is
(2) objective setting a. to achieve the objectives of the MAS firm.
(3) event identification b. to help the client maximize its resources.
(4) risk assessment c. to improve the client's use of its capabilities
(5) risk response and resources to achieve the objectives of such
(6) control activities client's organization.
(7) information and communication d. to help the client identify its problems.
(8) monitoring.
2. Which of the following is a characteristic of
PROFESSIONAL ACCREDITATION management advisory services?
Certified Management Accountant (CMA) is a a. Services rendered are for third parties.
professional designation in the area of b. Engagements are usually recurring.
management accounting that recognizes the c. Human relations do not play a vital role in each
successful completion of an examination, engagement.
acceptable work experience, and continuing d. It involves problem solving.
education requirements.
Certified Financial Manager (CFM) certification is 3. Management accounting:
available to individuals who pass parts 1, 3, and 4 a. focuses on estimating future revenues, costs,
of the CMA exam, plus a separate part 2 that is and other measures to forecast activities and
devoted to financial management techniques. their results
b. provides information about the company as a
whole
EXERCISES c. reports information that has occurred in the
past that is verifiable and reliable
Exercise 1. Indicate whether each of the following d. provides information that is generally available
pertains to financial accounting or managerial only on a quarterly or annual basis
accounting.
1. An internal report used by management 4. Management accounting is considered successful
2. An external report used by investors when it:
3. A report prepared periodically (monthly, a. helps creditors evaluate the company's
quarterly, annually) performance
4. Information is subjective, relevant, future- b. helps managers improve their decisions
oriented c. is accurate
5. Reports are prepared as needed d. is relevant and reported annually
6. Information is reported at the decision making
level. 5. Which consideration influences the frequency of an
7. Information is reported for the company as a internal report?
whole a. The wishes of the managers receiving the
8. Information is objective, reliable and historical report.
9. The report is verifiable and reliable. b. The frequencies with which decisions are made
10. It provides reasonable and timely estimates. that require the information in the report.
11. Information focused on the long term. c. The cost of preparing the report.
12. There are no regulations governing the d. All of the above.
reports.

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6. Modern cost accounting plays a role in: 14. Controllers are generally not concerned with
a. planning new products a. Reporting to government
b. evaluating operational processes b. Preparation of tax returns
c. controlling costs c. Protection of assets
d. all of these d. Investor relations
15. The controller of a company or other organization
7. Cost accounting can best be described as is a(n)
a. Internal reporting for use in planning and a. staff manager
controlling routine operations. b. operating manager
b. Internal reporting for use in management c. accountant, not a manager
planning and control, and external reporting to d. natural manager
the extent the product costing function
satisfies external reporting requirements. 16. The linked set of activities that increases the
c. External reporting to the government, various usefulness (or value) of the products or services of
outside parties, and shareholders. an organization is the
d. Internal and external reporting that may be a. direct chain c. value chain
used in making nonroutine decisions and in b. indirect chain d. variable chain
developing plans and policies.
17. Why do most companies adhere to GAAP for their
8. The function of management that compares basic internal financial statements?
planned results to actual results is known as: a. GAAP is required by law for publicly held
a. planning. companies.
b. directing and motivating. b. To use GAAP and another system of reporting
c. controlling. would be too costly for most companies.
d. decision making. c. Accountants are required by their code of ethics to
use GAAP accounting.
9. The process of establishing objectives or goals for d. Accrual accounting provides a uniform way to
the firm and determining the means by which they measure an organization’s financial performance.
will be met is:
a. controlling. 18. Four themes are common to many managers. The
b. analyzing profitability. critical theme for all of these is
c. planning. a. developing relationships with suppliers.
d. assigning responsibility. b. benchmarking and continuous improvement.
c. reducing costs and improving efficiencies.
10. Which of the following functions is best described d. improving customer focus and customer
as choosing among available alternatives? satisfaction.
a. Decision making.
b. Planning. 19. Osorio Corporation recently implemented a just-in-
c. Directing operational activities. time (JIT) production system along with a series of
d. Controlling. continuous improvement programs. If the firm is
now considering adopting a total quality
11. Which activity is NOT normally performed by management (TQM) program, it would likely find
managerial accountants? that TQM is:
a. Assisting managers to interpret data in a. consistent with both JIT and continuous
managerial accounting reports. improvement.
b. Designing systems to provide information for b. consistent with JIT but inconsistent with
internal and external reports. continuous improvement.
c. Gathering data from sources other than the c. consistent with continuous improvement but
accounting system. inconsistent with JIT.
d. Deciding the best level of inventory to be d. inconsistent with both JIT and continuous
maintained. improvement.

12. The person MOST likely to use management 20. Cost management systems tend to focus on an
accounting information is a(n): organization's:
a. banker evaluating a credit application a. machines.
b. shareholder evaluating a stock investment b. employees.
c. governmental taxing authority c. activities.
d. assembly department supervisor d. customers.

13. Who is the manager in charge of raising cash for 21. Strategic planning, as practiced by most modern
operations and managing cash and near-cash organizations, includes all of the following except:
assets? a. top-level management participation.
a. Chief financial officer. b. a long-term focus.
b. Controller. c. strategies that will help in achieving long-
c. Treasurer. range goals.
d. Internal auditor. d. analysis of the current month’s actual
variances from budget.

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22. Which of the following statements concerning an The Sarbanes-Oxley Act provides that at least one
organization’s strategy is NOT true? member of the audit committee should be
a. Strategy specifies how an organization a. Independent.
matches its own capabilities with the b. The chief financial officer of the company.
opportunities in the marketplace to accomplish c. A financial expert.
its objectives. d. A CPA.
b. Management accountants provide input to help
managers formulate strategy. 28. In order for a company to achieve a sustainable
c. A good strategy will always overcome poor competitive advantage, it must perform value
implementation. chain activities:
d. Businesses usually follow one of two broad a. the same quality level as competitors, but at a
strategies: offering a quality product at a low lower cost, or at a higher quality level than at
price, or offering a unique product or service the same quality level as competitors, at the
priced higher than the competition. same cost.
b. at the same quality level as competitors, but at
23. Process Reengineering includes all of the following a lower cost.
steps except: c. at a higher quality level than competitors, at a
a. constructing a diagram flowcharting the higher cost.
current process. d. at a higher quality level than competitors, but
b. redesigning the process. at no greater cost.
c. elimination of non-value-added activities.
d. elimination of all constraints. 29. A long-term plan that fulfills the goals and
objectives of an organization is known as a(n)
24. Which of the following best identifies the reason a. management style.
that effective corporate governance is important? b. strategy.
a. The separation of ownership from c. mission statement.
management. d. operational mission.
b. The goal of profit maximization.
c. Excess management compensation. 30. The value chain
d. Lack of oversight by boards of directors. a. reflects the production of goods within an
organizational context.
25. Which of the following forms of compensation b. is concerned with upstream suppliers, but not
would most likely align management's behavior downstream customers.
with the interests of the shareholders? c. results when all non-value-added activities are
a. A fixed salary. eliminated from a production process.
b. A salary plus a bonus based on current period d. is the foundation of strategic resource
net income. management.
c. A salary plus stock options that cannot be
exercised for 10 years.
d. A salary plus stock.
– end -
26. Which of the following forms of compensation
would encourage management to take on
excessive risk?
a. A fixed salary.
b. A salary and bonuses based on current period
net income.
c. A salary plus stock options that cannot be
exercised for 10 years.
d. A salary plus restricted stock.

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