AE 27

MANAGEMENT ACCOUNTING
LESSON 1
MANAGEMENT ACCOUNTING: An Overview
The Role, Historical Perspective, and Direction of Management
Accounting.
OVERVIEW

DEFINITION:
-application of appropriate techniques
and concepts to economic data
◼to assist management in establishing
plans or company’s objectives and
making rational decisions to achieve
these objectives
-the process of identification, measurement,
accumulation, analysis, preparation,
interpretation and communication of financial
information which are used by management in
in the planning, evaluation and control of day
to day activities
- the preparation of financial reports for non-
management group such as shareholders,
regulatory agencies and tax authorities.
Objectives and Scope

Objectives
-to provide information to managers thru
a variety of reports
-as part of management, to participate
actively in managing the organization,
ensuring that the organization operates as
a unified whole in the best interest of the
organization
Scope
A. Management accountants generally
perform the ff tasks
-Scorekeeping and data accumulation
-Interpreting and reporting of information
-Involvement in Problem solving by means of
quantification of the relative merits of possible
courses of actions and making
recommendations as to the best option
B. Management Accountants also provide a
system which allows management the
necessary information to perform its
administrative functions of:
-Planning
-Controlling
-Decision Making
PLANNING
– goal setting
- identifying alternatives
-selecting a specific course of action
-specifying how to implement the action
-identifying the resources needed to achieve
the goals
PLANS are expressed in BUDGETS:
-Cash Budgets
-Capital Budgets
-Projected Statements of Financial Position
Management accountants use some tools in their
participation in the planning process, some examples
are:
Resource Planning
Break-even Analysis
Projected Income Statements
CONTROLLING
-evaluating performance of each department and its
managers
-rewarding good performers and “penalizing” bad
performers
Management uses PERFORMANCE REPORTS to evaluate
performance, some of Accounting Control reports which
management accountants prepare are:
-Cost Variance Analysis
-Financial Statements Analysis
-Gross Profit Variance Analysis
MANAGEMENT BY EXCEPTION – a concept or
principle by which managers focus on
investigating the deviation from the plan which
appear to be exceptional, minor deviations are
not investigated.
PLANNING & CONTROL PROCESS
PLAN

Decision to change ACTIONS TAKEN TO

operations or revise IMPLEMENT PLAN
plans

RESULTS

Decision to reward COMPARISON OF

or punish managers PLANNED & ACTUAL
RESULTS

EVALUATION
DECISION MAKING
-integral part of the planning and control process
-decision to reward or punish managers based on the
results of evaluation
-decision to change operations or revise plans

Management Accountant develops cost management

information to help Chief Financial Officer and other
managers to manage the firm and make the firm
competitive and successful
ACTIVITIES OF MANAGEMENT ACCOUNTANT

◼Planning
◼Reporting
◼Controlling
◼Resource Management
◼Information Systems Development
◼Technological Implementation
◼Verification
◼Administration
◼PLANNING
-quantifying and interpreting the effects on
the organizations of the planned transactions
and other economic events
-providing historical and prospective
information to facilitate planning
◼REPORTING
▪ Providing timely reports that provide information
and perspective necessary for management to
make decisions in a goal-congruent manner
◼CONTROLLING
▪ Interprets all forms of internal and external
information pertinent to the various segment of
the organization
▪ Communicate the implications of the information
being reviewed including its relevance and
reliability
▪ Judging effects or implications of historical and
expected events and helping to choose the
optimum course of action
◼Controlling (continuation)
▪ Translating data into trends and relationships
▪ Communicating the effectively and promptly the
conclusions derived from the analysis
▪ Assuring the integrity of the financial information
▪ Monitoring and measuring performance and
inducing any corrective actions
▪ Providing information to executives or heads of each
function/department who can make use of these
information to achieve the desired results
◼RESOURCE MANAGEMENT
▪ Establishing systems and policies necessary for the effective use &
management of resources and measurement of management performances.
Examples of these systems are:
Custody & management of working capital, including:
-Credit and Collection Management
-Inventory Management
Creating and maintaining the most appropriate debt and equity capital structure
System on controlling plant, property and equipment
Administering Pension or similar plan
Tax Planning and Compliance
Insurance Management
Internal Accounting Control
◼INFORMATION SYSTEMS DEVELOPMENT
▪ Management Accountant must ensure that the
system will be able to meet the varying needs of
each specific function
▪ -determining the output required by users
▪ -specifying the inputs needed to obtain the required
output
▪ =developing the requirements for processing system
that converts the input into the desired output
▪ Managing and securing the data bases
◼TECHNOLOGICAL IMPLEMENTATION
Supervising the gathering of data and monitoring the
system, ensuring that it functions as intended and is
used as intended

◼ VERIFICATION
◼ Ensuring the accuracy and reliability of information
derived from the accounting system or related sources
◼ADMINISTRATION
▪ Developing and maintenance of :
▪ Accounting Policy and Procedure manual
▪ A cost effective Cost Management program
▪ Records adequate to meet the requirements of tax laws
and other laws and regulatory agencies and
independent auditors
OPERATION PROCESSES
Identification
Measurement
Accumulation
Analysis
Preparation and Interpretation
Communication
Organization Structure and the
Management Accountant

◼ A major function of Management Accountant is that of

tailoring application of the process to the organization
so that the organization’s objectives, short-term or
long-term, are effectively achieved.
◼ Management Accounting is intended to include persons
involved in such functions as Controllership, Treasury,
Financial Analysis, Planning and Budgeting, Cost
Accounting, Internal Audit, Systems, and the General
Accounting.
◼ Management Accountants may have titles as Controller,
Treasurer, Budget Analyst, Cost Analyst and Accountant.
LINE and STAFF RELATIONSHIP
▪ Staff – is usually the accounting function with the
responsibility of providing line managers and other staff
managers with the required specialized services.
▪ Line Authority – is the authority to command action or give
orders to subordinates.
▪ Line Managers – are directly responsible for attaining the
objectives of the business firm as efficiently as possible.
▪ Staff Authority is the authority to advise but not command
others, it is exercised laterally or upward
▪ Functional Authority is the right to command action,
laterally or downward with regards to a specific function or
specialty.
 The Chief Financial Officer and The
Controller

◼ The Chief Financial Officer (CFO), also called as

the Finance Director in many countries, is the
executive responsible for overseeing the
financial operations of an organization.
◼ The responsibilities of the CFO vary among
organizations, but usually include the following:
▪ Controllership – includes providing financial
information for reports to managers and reports to
shareholders and overseeing the overall operations of
the accounting system
 ▪ Treasury – includes banking and short and long term financing,
investments and management of cash.
▪ Risk Management – includes managing the financial risk of
interest-rate and exchange rate changes and derivatives
management.
▪ Taxation – includes income taxes, sales taxes and international
tax planning
▪ Internal Audit – includes reviewing and analyzing financial and
other records to attest to the integrity of the organization’s
financial reports and to adherence to its policies and
procedures.
◼ The Controller (also called Chief Accounting Officer) is
financial executive responsible for Management
Illustrative organizational chart of the CFO and the
corporate controller in an Apparel Company
The Controller as the Top Management
Accountant
◼ Controllership is the practice of the established science of
control which is the process by which management assures
that the resources are procured and utilized according to plans
in order to achieve the company’s objectives.
◼ The Controller provides reports for planning and evaluating
company activities and provides the information needed to
make management decisions.
◼ The Controller also has responsibility for all financial accounting
reports and tax filings with the BIR and other taxing agencies,
as well as coordinating the activities of the firm’s external
auditors.
◼ The Controller’s authority is basically staff authority, wherein
the controller’s office gives advice and service to other
departments, but in his own department he has line authority.
A typical Organization Chart Showing the
Functions of the Controller
Basic Functions of Controllership

The Principal functional responsibilities and activities of

controllership may be categorized as follows:
1. Planning
▪ Establish and maintain an integrated plan of operation, consistent
with the company’s goals and objectives.
2. Control
▪ Develop and revise standards against which to measure performance
and provide guidance and assistance to their members of
management in ensuring conformance of actual results to standards.
3. Reporting
▪ Prepare, analyze and interpret financial results for utilization by
management in the decision- making process.
4. Accounting
▪ Design, establish and maintain general and cost accounting
systems at all company levels, including corporate,
divisional, plant and unit to properly record all financial
transactions in the books of accounts in accordance with
sound accounting principles with adequate internal control.
5. Other Primary Responsibilities
▪ Manage and supervise other functions such as taxes
preparation and filing, so as interface with the respective
taxing authorities and agents. Maintain appropriate
relationships with internal and external auditors. Supervise
Treasury and others.
Qualification of the Controller

◼The qualifications of an effective Controller

include the following:
1. An excellent foundation in accounting and finance
with an understanding and thorough knowledge of
accounting principles.
2. An understanding of the principles of planning,
organizing and control.
3. A general understanding of the industry in which the
company competes and the social economic and
political forces involved.
4. A thorough understanding of the company, including its
technologies, products, policies, objectives, history,
organization and environment.
5. The ability to communicate with all levels of
management and a basic understanding of the other
functional problems related to engineering, production,
procurement, industrial relations and marketing.
6. The ability to express ideas clearly in writing or in
making informative presentations.
7. The ability to motivate others to achieve positive action
and results
The Chief Financial Officer and the
Treasurer

◼Although organizational structures vary from

firm to firm, the role of finance is assigned to
the Chief Financial Officer (CFO) or the Vice
President for Finance who reports to the
president.
◼The financial vice-president’s key
subordinates are the Treasurer and the
Controller.
Treasurership
◼ Treasurership is concerned with the acquisition, financing and
management of assets of a business concern to maximize the
wealth of the forms for its owners.
◼ Common responsibilities of the Treasurer:
1. Funds Procurement
2. Banking and Custody of Funds
3. Investment of Funds
4. Operating Responsibilities related to
a) Credit and Collection
b) Inventory management
c) Corporate Pension and retirement fund
d) Investor Relation
e) Insurance
f) Compliance with legal regulatory boards in relation to funds procurement, use
and distribution
Ethical Standards for Management
Accountants
◼ The Institute of Management Accountants (IMA) of
the United States has developed and issued a very
useful ethical code called the Standards of Ethical
Conducts for Practitioners of Management
Accounting and Financial Management.
◼ These Ethical Standards have two parts:
▪ The First Part provides general guidelines for Ethical
Behavior.
▪ The Second Part gives specific guidance concerning what
should be done if an individual finds evidence of ethical
misconduct within an organization.
STANDARDS OF ETHICAL CONDUCT FOR PRACTITIONERS
OF MANAGEMENT ACCOUNTING AND FINANCIAL
MANAGEMENT

◼ Practitioners of management accounting and financial

management have an obligation to the public, their profession,
the organization they serve, and themselves, to maintain the
highest standards of ethical conduct. In recognition of this
obligation, the Institute of Management Accountants has
promulgated the following standards of ethical conduct for
practitioners of management accounting and financial
management. Adherence to these standards, both domestically
and internationally, is integral to achieving the Objectives of
Management Accounting. Practitioners of management
accounting and financial management shall not commit acts
contrary to these standards nor shall they condone the
commission of such acts by others within their organizations.
◼ COMPETENCE.
Practitioners of management accounting and
financial management have a 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 a 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 a
responsibility to:
▪ Avoid actual or apparent conflicts of interest and advise 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 responsibility judgement or successful performance of an activity.
▪ Communicate unfavorable as well as favorable information of professional
judgements or opinions.
▪ Refrain from engaging in or supporting any activity that would discredit the
profession.
◼ Objectivity
Practitioners of management accounting and
financial management 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 Conflict
In Applying the standards of ethical conduct,
practitioners of management accounting and financial
management may encounter problems underlying
unethical behavior or in resolving an ethical conflict.
When faced with significant ethical issuers, 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 courses of
actions:
▪ Discuss such problems with the immediate superior except when it
appears that the superior is involved, in which case the problem
should be presented initially 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 audit
committee, executive committee, board of directors, board of
trustees, or owners. Contact with levels above the immediate
superior should be initiated only with the superior’s knowledge,
assuming the superior is not involved. Except where legally
prescribed, communications 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 advisor (e.g. IMA Ethics Counselling Service) 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.
* Institute of Management Accountants, formerly National Association of Accountants,
Statements on Management Accounting: Objectives of Management Accounting, Statement 1B,
New York, NY, June 17, 198 as revised in 1987.
Company Code of Conduct

◼A former president of CMA emphasizes the

importance of ethics in Business:
“Employees like to work for a company that they
can trust. Customers like to deal with an ethically
reliable business. Suppliers like to sell to firms with
which they can have a real partnership.
Communities are more likely to cooperate with
organizations that deal honestly and fairly with
them. If the business community is to function
effectively, all of the players need to act ethically”
◼Those who engage in unethical behavior
often justify their actions with one or more
of the following reasons:
1. The organization expects unethical behavior
2. Everyone else is unethical; and/or
3. Behaving unethically is the only way to get
ahead
Codes of Conduct on the International
Level
◼ In July 1990, the International Federation of Accountants (IFAC)
in which PICPA is a member, issued the “Guidelines on Ethics
for Professional Accountants” which governs the activities of
all professional accountants throughout the world; regardless
of whether they are practicing as independent CPA, employed
in government service or employed as internal accountants.
◼ In addition to outlining the ethical requirements in matters
dealing with Competence, Objectivity, Independence, and
Confidentiality, the IFAC’s code also outlines the accountant’s
ethical responsibilities in matters relating to taxes, fees and
commissions, advertising and solicitation, the handling of
monies and cross-border activities.
International Certification

◼ The Three Certifications available to Management Accountants

are as follow:
▪ Certificate of Management Accounting (CMA)
▪ A Certified Management Accountant is one who passed the rigorous qualifying
examination, has met an experience requirement and participates in continuing
educations. The CMA is granted by the Institute of Management Accountants (IMA)
▪ Certificate in Public Accounting (CPA)
▪ A Certified Public Accountant is one who has met the pre-qualification educational
requirements, passed the CPA licensure examination given by the Professional
Regulatory Board of Accountancy and has satisfied all other legal and regulatory
requirements of a public accountant.
▪ Certificate in Internal Auditing (CIA)
▪ A Certified Internal Auditor is an individual who passed a comprehensive
examination designed to ensure technical competence and have the required
number of years of work experience
◼ Institute of Management Accountants (IMA)
▪  The Institute of Management Accountants (IMA) is a
global association for financial professionals and offers
the prestigious Certified Management
Accountant (CMA) designation.
▪ The IMA's mission is to promote education and
development in management accounting and finance.
◼ Philippine Association of Management
Accountants (PAMA)
▪ It was established in 1972 as the National Association
of Accountants (NAA) Philippines Chapter, Inc. It is
affiliated with NAA in New York.
Management Accounting Organization
THANK YOU…