Introduction to

Management Accounting
and Strategic Cost
Management

Professor: John Anthony M. Labay, CPA, MBA

Global Reciprocal Colleges
454 GRC Bldg. Rizal Ext. cor. 9th Avenue Grace Park, Caloocan City

TITLE: Introduction to Management Accounting and

Strategic Cost Management
I. Learning Outcomes
1. Definition and Concept of Managerial Accounting
2. Comparison of Financial and Managerial Accounting
3. Definition and Concept of Strategic Cost Management

II. Discussion
OVERVIEW

Managerial/Management Accounting
- the process of identifying, analyzing, recording, and presenting financial information that is used
for internally by the management for planning, decision making and control.

- a field of accounting that provides economic and financial information for internal users,
particularly the managers or decision-makers in an organization.

Three Broad Managerial Functions

1. Planning – involves setting of immediate, as well as long range goals for the organization; predicting
future conditions that are expected to prevail; considering the different means or strategies by which the
goals set may be achieved; and deciding which of the strategies should be used to attain such goals.

2. Directing and Motivating – involves overseeing the day-to-day activities, seeing to it that the
organization is functioning smoothly, and the members of the organization are mobilized to carry out plans.

3. Controlling – involves checking the performance of activities against the plan or standards set and
deciding what corrective actions to take should there be any deviation between the actual and planned
(standard) performance.

*Management functions involve decision-making (integral part of three managerial functions). In performing
the decision-making function, managers need information. Such information is provided by management
accountants.

*Management by objectives is a strategic management model that aims to improve the performance of an
organization by clearly defining objectives that are agreed to by both management and employees.
According to the theory, having a say in goal setting and action plans encourages participation and
commitment among employees, as well as aligning objectives across the organization.

Organizational Structure defines how activities such as task allocation, coordination and supervision are
directed toward the achievement of organizational aims.

Decentralization is the delegation of decision-making authority throughout an organization.

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Line and Staff Relationships

Line positions are directly related to achievement of the basic objectives of an organization. ⬥
Example: Production supervisors in a manufacturing plant.
Staff positions support and assist line positions.
⬥ Example: Cost accountants in the manufacturing plant.

The Chief Financial Officer (CFO)

A member of the top management team responsible for:
⬥ Providing timely and relevant data to support planning and control activities. ⬥
Preparing financial statements for external users.

Advantages and Disadvantages of Decentralization within an Organization The

advantages of decentralization are:
1. It helps top management recognize and develop managerial talent.
2. It allows managerial performance to be comparatively evaluated.
3. It can often lead to greater job satisfaction and provides job enrichment. 4. It makes
the accomplishment of organizational goals and objectives easier. 5. It reduces
decision-making time.
6. It allows the use of management by exception.
*Management by exception is the practice of examining the financial and operational results of a business,
and only bringing issues to the attention of management if results represent substantial differences from
the budgeted or expected amount.

The disadvantages of decentralization are:

1. It can result in a lack of goal congruence or sub-optimization by subunit managers. 2. It requires more
effective communication abilities because decision making is removed from the home office.
3. It can create personnel difficulties upon introduction, especially if managers are unwilling or unable to
delegate effectively.
4. It can be extremely expensive, including costs of training and of making poor decisions.
*Goal congruence is a situation in which people in multiple levels of an organization share the same goal.
A well-thought-out organizational design causes goal congruence and results in an organization being able
to work together to accomplish a strategy.

Comparison of Management Accounting and Financial Accounting

In contrast to financial accounting, managerial accounting is concerned with providing helpful information
and reports to internal users such as managers and entrepreneurs etc. so that they can control and plan
the business activities.

Area Management Accounting Financial Accounting

1. Users of Report Internal users: officers and decision-making, and
managers performance evaluation.
External users: stockholders, creditors, concerned
2. Purpose To provide internal users with information government agencies
that may be used by To provide external users with information about the
managers in carrying out the organization’s financial position and result of
functions of planning, controlling, operations.

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3. Types of Reports Different types of reports, such as specific needs of management.

budgets, financial projections, cost Primarily financial statements and the accompanying
analyses, etc., depending on the notes to such statements.

4. Standards of Presentation relevant to its specific needs. accounting principles (GAAP) and
In preparing reports, the Reports are prepared in other pronouncements of
management of a company can set accordance generally accepted authoritative accounting bodies.
rules to produce information most
5. Reporting Entity Focus of reports is on the week, day, etc. Reports may be
company’s value chain, such as a required as frequently as needed.
business segment, product-line, Financial reports relate to the business, as a whole.
supplier, or customer.
6. Period Covered Reports may cover any time period
– year, quarter, month, Reports usually covered a year, quarter, or month.

7. Requirement Not Mandatory Mandatory for external reports

Standards of Ethical Conduct for Management Accountants

Management Accountants have an obligation to the organizations they serve, their profession, the public,
and themselves to maintain the highest standards of ethical conduct. The following Standards of Ethical
Conduct should be adhered to achieve the objectives of Management Accounting:

1. Competence – Management accountants have a responsibility to:

🖎 Maintain in appropriate level of professional competence by ongoing development of their
knowledge and skills.
 🖎 Perform their professional duties in accordance with laws, regulations, and technical standards.
🖎 Prepare complete and clear reports and recommendations after appropriate analyses of relevant
and reliable information.

2. Confidentiality – Management accountants have a responsibility to:

🖎 Refrain from disclosing confidential information acquired in the course of their work except when
authorized, and 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
unethical and illegal advantage either personally or through third person.

3. Integrity – Management accountants have a 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.

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🖎 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.

4. Objectivity – Management accountants have a 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.

Resolution of Ethical Conflicts

In applying the standards of ethical conduct, practitioners of management accounting and financial
management may encounter problems in identifying unethical behavior or in resolving an ethical conflict.
When faced with significant ethical issues practitioners of management accounting and financial
management should follow the established policies of the organization bearing on the resolution of such
conflict. If these policies do not resolve the ethical conflict, such practitioner should consider the following
course of action.
• Discuss such problems with immediate superior except when it appears that superior is involved, in
which case the problem should be presented to the next higher managerial level. If a satisfactory
resolution cannot be achieved when the problem is initially presented, submit the issue to the next
higher managerial level.
• If the immediate superior is the chief executive officer or equivalent, the acceptable reviewing authority
may be a group such as the audit committee, executive committee, board of directors, board of
trustees, or owners. Contact with a level above the immediate superior should be initiated only with
the superior's knowledge, assuming the superior is not involved. Except where legally prescribed,
communication of such problems to authorities or individuals not employed or engaged by the
organization is not considered appropriate.
• Clarify relevant ethical issues by confidential discussion with an objective adviser to obtain a better
understanding of possible course of action.
• Consult your own attorney as to legal obligations and rights concerning the ethical conflict. • If the
ethical conflict still exists after exhausting all levels of internal review, there may be no other recourse
 on significant matters than to resign from the organization and to submit an informative memorandum to
an appropriate representative of the organization. After resignation, depending on the nature of the
ethical conflict, it may also be appropriate to notify other parties.

Controllership and Treasurership

Controllership deals with records, systems, and processes to attain the objectives of internal controls and
good managing. Treasurership deals with money, cash, or wealth of an organization.

Controller is the officer who has the overall responsibility for all the accounting activities within the
organization. The chief accounting officer has the authority for accounting within the organization and for
external reporting. Treasurer is the person in charge of raising cash for operations and managing cash and
near-cash assets.
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Controllership Treasurership

1. Planning and control 7. Economic appraisal

2. Reporting and interpreting
3. Evaluating and consulting Strategic Cost Management
4. Tax administration 1. Provision of capital 2. Investor relations 3. Short-
5. Government reporting term financing 4. Banking and custody 5. Credit and
collections 6. Investments
6. Protection of assets
7. Insurance

- is the cost management technique that aims at reducing costs while strengthening the position of
the business. It is a process of combining the decision-making structure with the cost information to
reinforce the business strategy. It measures and manages costs to align the same with the company’s
business strategy.

Stages of Strategic Cost Management

1. Formulating Strategies
2. Communication of Strategies in the entire organization.
3. Planning and Carrying out tactics, to execute those strategies.
4. Developing and implementing controls to track the success.

In Strategic Cost Management, primary importance is given to constant improvement in the product to
provide better quality to its target customers. It is an essential part of the value chain that covers every
surface such as purchase, design, production, sales, and service.

Need for Strategic Cost Management

1. It is an updated form of cost analysis, in which the strategic elements are clearer and more formal
and improves the overall position of the company.

2. It is used to analyze cost information and use it to develop various measures to achieve a
sustainable competitive advantage.

3. It provides a better understanding of the overall cost structure in the quest of gaining a sustainable
competitive advantage.

4. It uses cost information specifically to govern the strategic management process – formulation,
 communication, implementation, and control.

5. It helps in identifying the cost relationship between value chain activities and its process of
management to gain competitive advantage.

The strategic cost management must be implemented at the initial stages of production to reduce heavy
cost failure.

Advantages of Strategic Cost Management

Strategic Cost Management provides number of benefits to different organizations. It has provided the
business with an improved understanding of its sources of profits. Some benefits are given below:
1. It has developed a framework for reviewing the strategic allocation of resources across the business
based on core business processes and activities.
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2. It has improved the businesses understanding of its cost drivers leading to improved articulation of
its strategic plans in cost terms.

3. It has enabled the business to assess, at a high level, how activity-based techniques can be
deployed at different levels in the business to improve its cost management process, such as in
budgeting and in process improvement.

III. Learning Exercises

TRUE/FALSE

_____ 1. Managerial accounting is most concerned with meeting the needs of internal users. _____ 2.
Managerial accounting is highly regulated by rules and regulations. _____ 3. Financial accounting is most
concerned with addressing the needs of the firm as a whole

_____ 4. Managerial accounting is most concerned with addressing the needs of individual departments of
the firm.

_____ 5. Mission statements typically remain unchanged throughout the life of an organization. _____ 6.
An organization’s strategy should reflect the organization’s core competencies. _____ 7. Line personnel
give assistance to staff employees.

_____ 8. Generally accepted accounting principles govern financial accounting but not managerial
accounting.

_____ 9. Some managerial accounting reports contain costs not incorporated in the basic accounting
system.

_____ 10. Managerial accountants should, but have no obligation to, maintain their professional skills.

MULTIPLE CHOICE
1. Which item is NOT an IMA Standard for Ethical Conduct?
A. Integrity.
B. Competence.
C. Loyalty.
D. Objectivity.

2. 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.
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3. 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.

4. The set of processes that transform raw materials into finished products is known as a A.
differentiation strategy.
B. flexible manufacturing system.
C. lowest cost strategy.
D. value chain.

5. Which function is most directly related to management by objectives? A.

Planning.
B. Control.
C. Decision making.
D. Reporting.

6. Planning is a function that involves

A. hiring the right people for a particular job.
B. coordinating the accounting information system.
C. setting goals and objectives for an entity.
D. analyzing financial statements.

7. The managerial function of controlling

A. is performed only by the controller of a company.
B. is only applicable when the company sustains a loss.
C. is concerned mainly with operating a manufacturing segment.
D. includes performance evaluation by management.

8. In determining whether planned goals are being met, a manager is performing the function of A.
planning.
B. follow-up.
C. motivating.
D. controlling.

9. The major functions of management are

 A. strategic management and long-range planning.
B. planning and decision making.
C. identifying threats and opportunities for the firm.
D. all of the above

10. In the contemporary business environment, cost management focus is on A.

financial reporting and cost analysis.
B. common emphasis on standardization and standard costs.
C. development and implementation of the business strategy.
D. A and C.

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IV. Assessment

_____ 1. Managerial accounting is most concerned with addressing the needs of the firm as a whole

_____ 2. An organization’s strategy is the guiding force for its mission.

_____ 3. Line managers are directly responsible for achieving organizational goals.

_____ 4. One of the ways managerial accounting differs from financial accounting is that
managerial accounting
A. is bound by generally accepted accounting principles.
B. classifies information in different ways.
C. does not use financial statements.
D. deals only with economic events.

_____ 5. 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.

_____ 6. 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.

_____ 7. Management and financial accounting are used for which of the following purposes?
Management accounting Financial accounting
A internal external B external
internal C internal internal D
external external
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_____ 8. One major difference between financial and management accounting is that A financial
accounting reports are prepared primarily for users external to the company.
B management accounting is not under the jurisdiction of the Securities and Exchange
Commission.
C government regulations do not apply to management accounting. D all of
the above are true.

_____ 9. A managerial accountant who communicates information objectively is exercising which

of the following standards?
A objectivity C competence
B integrity D confidentiality

_____ 10. A managerial accountant who prepares clear reports and recommendations after
analyzing relevant facts is exercising which of the following standards? A objectivity C competence
B integrity D confidentiality

V. References
Brewer, Peter C., Garrison, Ray H., and Noreen, Eric W. Managerial Accounting Datar,

Srikant M., Horngren, Charles T., and Rajan, Madhav V. Cost Accounting Hilton, Ronald

W. Management Advisory Services

Kinney, Michael R. and Raiborn, Cecily A. Cost Accounting

Management Accounting. URL: http://www.accountingexplained.com/

Management Accounting. URL: https://www.accounting4management.com/