Ateneo de Naga University

College of Business and Accountancy

DEPARTMENT OF ACCOUNTANCY RF LIM, CPA

OVERVIEW OF MANAGEMENT ACCOUNTING

MANAGEMENT ACCOUNTING (managerial accounting)

It is the branch of accounting that deals with how accounting data and other financial
information can be used to meet the information needs of management. Because it is
designed to assist internal management, it is relatively free from the restrictions imposed by
regulatory bodies and generally accepted accounting principles (GAAP) that prescribe how
accounting information should be presented to the public. It relies more upon concepts and
applications that are useful for management purposes. Specific applications depend upon the
needs and preferences of the manager rather than generally accepted guidelines. This means,
a manager has a wide range of accounting information from which to pick and choose for a
particular decision.

SCOPE OF MANAGEMENT ACCOUNTING

The internal reporting activity is directed generally to three areas of management
responsibility:
1) COST DETERMINATION also known as product costing and inventory valuation and
income determination. It deals with measuring the total amount of resources used for a
cost objective, such as product or service. Costs are calculated as the direct costs plus a
fair share of the indirect costs associated with a productive effort. The focus is on the
value added to goods or services by the productive effort of the organization. Cost
determination assists managers in attaching costs to inventory, in arriving at cost-based
selling prices, and in identifying costs incurred for services rendered clients and other
outsiders.
2) PLANNING AND CONTROL focuses on making projections and comparing actual results
with projections. Some call this budgeting and budgetary control because it identifies
costs, revenues, assets and liabilities with specific organization units (called
responsibility centers) and their managers.
Budgeting covers planning for the routine operations over the short-term period, a
year or two.
Budgetary control is the comparison of performance against the plan.

Because planning and control is for the short term, it is mainly used to keep
operations in line with objectives and to evaluate how well a manager has
performed.

3) LONG-TERM DECISIONS non-routine decisions, policy making, and long-range

planning, fall into the area of long-term decisions. This framework focuses on the
direction the company should go, the straegy management wants to follow and the
means of converting strategy into actions. It involves, in many cases, analyzing the
costs and revenues of alternative courses of action and identifying the net benefits of
selecting one course of action over another.

MAJOR FUNCTIONS OF MANAGEMENT

PLANNING involves the selection of long-range and short-term objectives and the drawing
up of strategic plans to achieve these objectives.
COORDINATING management must decide how best to put together the firms resources in
order to carry out established plans
CONTROLLING the implementation of a decision method and the use of feedback so that the
firms goals and specific strategic plans are optimally obtained

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 DECISION MAKING the purposeful selection from among a set of alternatives in the light of
a given objective.

PLANNING

DECISION MAKING

CONTROLLING ORGANIZING & DIRECTING

EXERCISE 1-1: Each of the following scenarios requires the use of accounting information to carry
out one or more of the following managerial activities: PLANNING, CONTROL (including
performance evaluation), or DECISION MAKING. Identify the managerial activity or activities that
are applicable for each scenario by putting an X mark on the appropriate column.

SCENARIOS PLANNING CONTROL DECISION

MAKING
1. MANAGER: A supplier approached me
recently and offered to sell our company
vacuum hoses for P200 each. We currently
manufacture our own hoses. I need to
know what costs we will avoid if we buy the
vacuum hoses.
2. MANAGER: This report indicates that we
have spent 30 percent more on materials
than originally planned. An investigation
into the cause has revealed the problem.
We were using a lower-quality material
than expected and the waste has been
higher than normal. By switching to the
quality level originally specified, we can cut
the excess cost to 10 percent.
3. MANAGER: Our sales people indicate that
they expect to sell 20 percent more units
than last year. I want a projection of the
effect this increase in sales will have on
profits. I also want to know our expected
cash receipts and cash expenditures on a
month-by-month basis. I have a feeling
that some short term borrowing may be
necessary.
4. MANAGER: Given the intensity of
competition, we need to do something
about increasing the efficiency of out
manufacturing process. currently, we are
considering the implementation of two
different automated manufacturing
systems. I need to know the future cash
flows associated with each system.

PAGE 1-2
DISTINCTIONS BETWEEN MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING

As to Financial accounting Management accounting

Application of Financial data should be May not necessarily adhere
generally accepted recorded and presented to GAAP to be able to
accounting according to GAAP present more useful data to
principles management
Objective To provide financial Provide assistance to
statement for both internal management in the areas of
and external users planning and control
User and nature of Financial statements must Financial statements must
report be presented in be designed for
conventional form for both managements use (internal)
internal and external users
Necessity Financial accounting is Management accounting is
mandatory or is required by optional and not mandatory.
law Statements are only
prepared when the need
arises.
Time orientation Must generate accurate and Emphasizes relevance and
timely data; emphasizes the flexibility of data; has more
past emphasis on the future.

DISTINCTIONS BETWEEN COST ACCOUNTING AND MANAGEMENT ACCOUNTING

The major function of cost accounting is cost accumulation for inventory valuation and
income determination. Management accounting, however, emphasizes the use of these cost data
for planning, control and decision making purposes. Management accounting typically does not deal
with the details of how costs are accumulated and how units are computed for inventory valuation
and income determination. Although unit cost data are used for pricing and other managerial
decisions the method of computation itself is not a major topic of management accounting but
rather of cost accounting.

EXERCISE 1-2: Financial Accounting information and managerial accounting information have a
number of distinguishing characteristics. For each of the characteristics listed below. Indicate which
characteristics are more closely related to financial accounting by placing the letter F in the
space to the left of the item and indicate those characteristics which are more closely associated
with managerial accounting by placing the letter M to the left of the item.

1) General purpose reports 6) reporting standard is relevant to the

decision to be made
2) Reports are used internally 7) classified financial statements

3) Prepared in accordance with 8) reports generally pertain to the company as

generally accepted accounting a whole
principles
4) Special purpose reports 9) reports generally pertain to sub-units
5) Limited to historical cost data 10) reports issued quarterly or annually

PAGE 1-3
ORGANIZATIONAL ASPECT OF MANAGEMENT ACCOUNTING

There are two types of authorities in the organizational structure of an entity, they are:

1) LINE authority the authority to give orders to subordinates. Line management are
responsible for attaining the goals set by the organization as efficiently as possible. Production
and sales managers typically possess line authority
2) STAFF authority the authority to give advice, support and service to line departments. Staff
managers do not command others. Examples of staff authority are found in personnel,
purchasing, engineering and finance.

EXERCISE 1-3: the job responsibility of two employees of Celine Manufacturing follow:

LINE STAFF
Ethan Del Sol, Cost Accounting Manager: Ethan is responsible for
measuring and collecting costs associated with the manufacture of the
garden hose product line. He is also responsible for preparing periodic
reports, comparing the actual costs with planned costs. These reports
are provided to the production line managers and the plant manager.
Ethan helps explain and interpret the reports.

Liam De Lara, Production manager: Liam is responsible for the

manufacture of the high quality garden hose. He supervises the line
workers, helps develop the production schedule and is responsible for
seeing that production quotas are met. He is also held accountable for
controlling manufacturing costs.

REQUIRED: Identify Ethan and Liam as line or staff authority by putting an X mark on the
appropriate column.

CONTROLLERSHIP

The chief management accountant or chief accounting executive of an organization is called

the controller (often called comptroller in the government sector). The controller is in charge of the
accounting department. Its authority is basically staff authority in that the controllers office gives
advice and service to other departments. But at the same time, the controller has line authority
over members of his/her own department such as internal auditor, bookkeepers, budget analysts
etc

SEVEN BASIC FUNCTIONS OF A CONTROLLER:

1) planning and controlling 5) protection of assets
2) reporting 6) economic appraisal
3) evaluation 7) tax administration
4) government relations

TREASURERSHIP
Controllership and treasurership constitute corporate finance. 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. A treasurer knows the sources
of money and exercise prudence in using the money of an organization.

FUNCTIONS OF TREASURERSHIP

PAGE 1-4
1) provision for capital 5) credit and collection
2) investor relations 6) investments
3) short-term borrowings 7) insurance
4) banking and custodianship

PAGE 1-5
 President

VP for production VP -finance

Production Controller Treasurer

Supervisor

Machine Assembly Internal audit Financial

foreman foreman

Figure 1-1: Partial Organization chart, Manufacturing Company