MANAGEMENT

ACCOUNTING
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Management Accounting is the process of measuring, analyzing, and reporting financial and nonfinancial
information that helps managers make decisions to fulfill the goals of an organization.

Managers use management accounting information to:

1. Develop, communicate, and implement strategies
2. Coordinate product design, production, and marketing decisions and evaluate a company’s
performance

Objectives of Management Accounting

The primary objective of the management accounting function is to provide quality service tailored to the
information needs of managers within an organization. This can be broken down into specific sub-objectives:
1. Provision of Good Information: Information provided should be relevant, reliable, timely, clear, and
easily accessible, ensuring it is suitable for managerial decision-making and available when needed.
2. Value-for-Money Service: The cost of management accounting should be balanced with the benefits it
delivers, ensuring both quality and efficient resource use.
3. Availability of Informed Personnel: Management accounting staff should be readily available to
answer queries and resolve issues, supporting managers with their expertise.
4. Flexibility: The management accounting function should adapt to user requests, providing customized
information and reports as needed.

BASIC MANAGEMENT FUNCTIONS AND CONCEPTS

1. Planning Basic function of the management – this is the goal-setting function.

2. Organizing Process of bringing together physical, financial and human resources and developing
productive relationship among them for achievement of organizational goals.
3. Staffing Manning the organization structure and keeping it manned. Staffing aims to place the
right people in the right roles within an organization.
4. Directing Actuates the methods to work efficiently for achievement of organizational purposes.
● Supervision – overseeing the work of subordinates by their superiors
● Motivation – inspiring or encouraging the subordinates
● Leadership – process which manager guides and influences the work of
subordinates
● Communications – passing information from one person to another
5. Controlling Controlling measures accomplishments against standards and corrects deviations to
meet organizational goals, thus it is the performance evaluation function.
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Financial Accounting vs. Managerial Accounting

Financial Accounting Managerial Accounting
External users Internal users
Summarizes past transactions Strong emphasis on the future
Data should be objective and verifiable Data should be relevant
Focuses on precision Focuses on timeliness of information
Concerned with reporting for the whole company Focuses on segments of a company
Conforms to financial accounting reporting standards Not bound by financial accounting standards
Mandatory Not Mandatory

Financial Accounting vs. Cost Accounting vs. Management Accounting

FinAcc - provides cost information for accurate financial

reporting

ManAcc - provides cost information used in planning and

control.

CostAcc - Identifies, collects, measures, classifies, and

reports information that is used
by managers for costing purposes, planning, controlling,
and decision making

Roles and activities of controller and treasurer

Controller (Recording/Reporting) Treasurer (Fund/Custody)

Report Financial Statements (FS) Credit Collection
Government Reports Provision of Capital
Tax Compliance Investment (Risk Management)
Audit Line Management Investor Relations
Planning for Control Banking and Custody
Economic Appraisal Insurance
Financing
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International certifications in management accounting

Certified Management Accountant (CMA)
• professional certification credential in the management accounting and financial management fields
• signifies that the person possesses knowledge in the areas of financial planning, analysis, control,
decision support, and professional ethics

Main bodies that offer the CMA Certification:

a. Institute of Management Accountants (USA)
b. Institute of Certified Management Accountants (Australia)
c. Certified Management Accountants of Canada
d. Chartered Institute of Management Accountants of UK

Global trends in management accounting

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MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES FOR PLANNING & CONTROL

COST SEGREGATION TECHNIQUES

1. High-Low Method - basis is cost drivers not cost

2. Scatter graph- plots data points

3. Least Squares/Regression - most accurate

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COST-VOLUME PROFIT (CVP) ANALYSIS

CVP Analysis is the study of the effects of changes in costs and volume on a company’s
profits

It is important in profit planning as considers interrelationships among:

o Volume or level of activity
o Unit selling prices
o Variable cost per unit
o Total fixed costs
o Sales mix
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STANDARD COSTING AND VARIANCE ANALYSIS

o Practice of substituting an expected cost for an actual cost in the accounting records
o Involves the creation of estimated costs for some or all activities within a company
o Variances are recorded to show the difference between the expected and actual
costs

Two levels of Standard

o Ideal standards - represent optimum levels of performance under perfect operating
conditions.
o Normal standards - represent efficient levels of performance that are attainable under
expected operating conditions.

FORMULAS AND JOURNAL ENTRIES

Variance AP x AQ - SP x AQ

Direct
Materials Quantity SP x AQ - SP x SQ

Rate AR x AH - SR x AH
Efficiency SR x AH - SR x SH
Direct
Labor

*Actual > Standard = unfavorable; Actual < Standard = favorable

MIX AND YIELD - Only applicable to DM and DL

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Factory Overhead (FOH) Variance

1. Two-way Analysis
a. Controllable Variance - responsibility of the production department managers to the
extent that they can exercise control over the costs to which the variances relate.

Actual FOH xx
BASH (xx)
Controllable Variance xx

b. Volume Variance - responsibility of the executive and

departmental management.

BASH xx
Standard FOH (xx)
Volume Variance xx

2. Three-way Analysis
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VARIABLE VS. ABSORPTION COSTING

Absorption Costing Variable Costing

- normal accounting - use only internally, for management
- accepted for external reporting purposes
- compliance with GAAP/PFRS - Costing method that includes only variable
- includes all manufacturing costs (direct manufacturing costs (direct materials, direct
materials, direct labor and both variable and labor, and variable manufacturing overhead)
fixed overhead) in the cost of a unit of product. in the cost of a unit of product.
- Treats fixed manufacturing overhead as a - Treats fixed manufacturing overhead as a
product cost period cost.
- Also called Full Costing and Conventional - Also called Direct Costing.
Costing.

Treatment of Fixed Overhead Cost

under the two methods:

Product costs are costs that are a necessary and integral part of producing the finished product, they do not
become expenses until the company sells the finished goods inventory.

Period Costs are costs that are matched with the revenue of a specific time period rather than included as part
of the cost of a salable product, they include selling and administrative expenses and companies deduct them
from revenues in the period in which they are incurred.
o Selling and administrative expenses are period costs under both absorption and variable
costing.
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FINANCIAL PLANNING AND BUDGETING

Budgeting is a planning tool used by the management to set the following to achieve the objectives
of the organization:
1. Goals
2. Targets
3. Performance reviews

Spearheaded by the Budget committee which is:

- overall responsible for budget preparation
- composed of the President, Treasurer, Controller and Managers of different
departments
- head by the Budget Director

A budget is a formal written statement of management’s plans for a specified time period,
expressed in financial terms.

The role of accounting during the budgeting process is to:

- Provide historical data on revenues, costs, and expenses.
- Express management’s plans in financial terms.
- Prepare periodic budget reports

BUDGETING PROCESS
1. Budgeting Preparation
a. Top-down Approach - (imposed) senior management prepares budget and then
passes it on to department managers for implementation.
b. Bottom-Up Approach - (participative) department managers make their budget and
submitted to senior management for consideration in the overall budget.
2. Budget Approval by the budget committee
3. Budget Communication through the budget manual and procedures
4. Budget Implemantation where the control function and monitoring occurs
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BUDGET VS. STANDARD

Budget Standard

Purpose Budgets are statements of Standards pertain to what costs

expected costs might be if certain highly
desirable performances are
attained

Emphasis costs levels that should not be levels to which costs should be
exceeded reduced

Preparation customized for all departments usually set for the

manufacturing division

Analysis Actual Cost < Budget Actual Cost < Standard

indication of good perf favorable variance

Sales Budget: the starting point in preparing the master budget.

Budgeted Income Statement: the important end product of the operating budgets.
- This budget indicates the expected profitability of operations for the budget period.
- The budgeted income statement provides the basis for evaluating company
performance.
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Cash Budget: shows anticipated cash flows.

- Because cash is so vital, this budget is often considered to be the most important
financial budget.
- The cash budget contains three sections, (a) Cash receipts, (b) Cash disbursements and
(c) Financing.

Flexible Budget
- A flexible budget projects budget data for various levels of activity. In essence, the flexible
budget is a series of static budgets at different levels of activity.
- Flexible budget reports are appropriate for evaluating performance since both actual and
budgeted costs are based on the actual activity level achieved.

Management by Exception
- Management by exception means that top management’s review of a budget report is
focused either entirely or primarily on differences between actual results and planned
objectives.
- For management by exception to be effective, there must be guidelines for identifying an
exception. The usual criteria are:
● Materiality—usually expressed as a percentage difference from budget.
● Controllability of the item—exception guidelines are more restrictive for
controllable items than for items the manager cannot control.

Types of Budget:
1. A continuous twelve-month budget results from dropping the month just ended and adding a
future month.
2. Zero-based budgeting is a budget and planning process in which each manager must justify a
department’s entire budget from a base of zero every period.
3. Life-cycle budget estimates a product’s revenues and expenses over its entire life cycle
beginning with research and development, proceeding through the introduction and growth
stages, into the maturity stage, and finally, into the harvest or decline stage.
4. Kaizen budgeting assumes the continuous improvement of products and processes, usually by
way of many small innovations rather than major changes.
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MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES FOR PERFORMANCE MEASUREMENT

Responsibility Accounting involves accumulating and reporting costs (and revenues) on the basis
of the manager who has the authority to make the day-to-day decisions about the items.

Objective: proper evaluation of responsibility -> Divisions, departments, branches, segments

centers -> Headed by managers (controllability)

Decentralization refers to the separation or division of the organization into more manageable units
wherein each unit is managed by an individual who is given decision authority and is held
accountable for his or her decisions.
- Goal congruence occurs when units of organization have incentives to perform for a
common interest. The purpose of a responsibility system is to motivate management
performance that adheres to company overall objectives.
- Sub-Optimization occurs when one segment of a company takes action that is in its own
best interests but is detrimental to the firm as a whole.

Types of Responsibility Centers

1. Cost Center Maintenance, IT, HR, Payroll, Variance Analysis (actual vs.
Production standard)
2. Revenue Center Sales Department, Marketing Variance Analysis (actual
Department revenue vs. target revenue)
3. Profit Center SM Department Store,
supermarket, cinema

4. Investment Center Head office of SM

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Return on Investment (ROI)

- Return on Investment → most common measure of performance for investment centers
- Operating income refers to earnings before interest and taxes.
● Operating assets includes all assets acquired to generate operating income.
- Residual Income – difference between operating income and the minimum peso return
required on a company’s operating assets.
- Economic Value Added – more specific version of residual income that measures the
investment center’s real economic gains.
● It uses the weighted average cost of capital (WACC) to compute the required
income.

ROI is patterned after the DuPont technique to compute Return on Assets:

Transfer Pricing
Transfer Price is the price charged by one division to another
Objective: to set transfer price to achieve goal congruence
End Goal: to maximize the NI of the whole company

Maximum vs. Minimum Transfer Prices

To minimize the effect of sub-optimization, a range for transfer price must be set based on the
following limits:
∙ Maximum transfer price: Cost of buying from outside suppliers

∙ Minimum transfer price: Variable cost per unit + Lost Contribution Margin per unit on outside
sales
▪ When a company segment is operating at full capacity, the lost CM per unit on
outside sales is the opportunity cost of transferring products to another company
segment.
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Balanced Scorecard
- financial & non-financial
– more holistic; basis for future performance of managers

FINANCIAL MANAGEMENT CONCEPTS AND TECHNIQUES FOR DECISION MAKING

Opportunity costs: The potential benefit that may be obtained by following an alternative course of action.

Type of Decisions:
1. Make or Buy - Choose the option that has the lower cost.
- In most cases, fixed costs are irrelevant.
- Consider opportunity costs, if any.
2. Accept or Reject Special Order w/ excess capacity → for relevant cost, apply
General Rule
w/o excess capacity → General Rule + Opportunity
Cost (lost CM)

- Accept the order when the additional revenue from

the special order exceeds additional cost
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- Provided the regular market will not be affected.

- In most cases, fixed are irrelevant
- The relevant information is the difference between
the variable manufacturing costs to produce the
special order and expected revenues.
- If the company is operating at full capacity, it is likely
that the special order would be rejected.
3. Retain or replace equipment Relevant items to be considered:
∙ The effects on variable costs

∙ The cost of the new equipment

Any disposal value of the existing asset must also be

considered Book value of old asset is irrelevant → Sunk Cost
4. Retain or eliminate unprofitable - Continue if segment’s avoidable revenue is greater
segment/product than the avoidable costs;
- Otherwise consider shutting down the segment since
allocated fixed cost is usually unavoidable, it is
considered irrelevant.
- Segment Margin = Sales – VC – FC (Avoiadable)
● Retain if Segment Margin is +,
eliminate if otherwise.
5. Sell immediately or Process Further Process further if additional revenue from processing
further is greater than further processing costs.

6. Which products produce given - ranking of products

scarce resources? - basis: CM per scarce resource
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References:

Accounting Notes
(Compiled notes sourced from an anonymous user, referred to as April Kae.)

MAS OCTOBER 2024 CPALE Review Notes

(Compiled notes sourced from an anonymous user, referred to as ARdalmatian.)

MS Last Minute by Hercules Notes

(Compiled notes sourced from an anonymous user, referred to as Hercules.)

MS MAY 2024 CPALE REVIEW NOTES

(Compiled notes sourced from an anonymous user, referred to as AMBE.)

MS Notes and Pinnacle Handout (Sir Brad’s Lecture)

(Compiled notes sourced from an anonymous user, referred to as CPM.)