Accounting 111

COST ACCOUNTING AND CONTROL

Sheryll May P. Briones
SY 2020-2021

CHAPTER I

OBJECTIVES, ROLE AND SCOPE OF MANAGEMENT ACCOUNTING

Table of Contents

Basic management functions and concepts 1-3

Distinction among management accounting, cost accounting and financial 3-4
accounting
Role and activities of controller and treasurer 4-5
International certifications in management accounting 6
Code of ethics of management accountants 6-8
Unit Quiz 8-10
References 10

Learning Outcomes

At the end of the unit, the students must be able to:

1. Enumerate ways the managers use accounting information to create value in
organizations
2. Distinguish between uses and users of cost accounting, financial accounting and
management accounting
3. Explain how cost accounting information is used for decision making and performance
evaluation in organizations
4. Enumerate roles and activities held by a controller and treasurer
5. Compare the controller’s function with that of a treasurer
6. Identify and distinguish the different forms of certifications in management accounting
7. Understand professional ethics and code of conduct for management accountants
8. Be familiar with codes of conduct and know the typical challenges
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1. Basic Management Function and Concepts

The four basic functions of management are planning, organizing, coordinating or directing
and controlling. These functions work together in the creation, execution and realization of
organizational goal. The four functions of management can be considered a process where
each function builds on the previous functions.

A. Planning
Planning is the most fundamental of the management functions, and as such it logically
precedes all other functions. Planning is the projection of actions intended to reach specific
goals. In other words, a plan is a blueprint for the future; it is the expression of what we
wish to accomplish or the prediction of what might occur in the future. Planning begins with
the questions of what and why, then focuses on the how, when, who and where.

Benefits of Planning
1. Planning ensures that we work effectively and efficiently, or at the very least,
improves our chances of doing so. Planning reduces procrastination and wastage
of resources.
2. Planning is proactive. It decreases the need to manage from crisis to crisis.

Classification of Plans
1. Strategic plan: plans made for achieving long range goals and living up to the
expectations expressed in statements of mission and values.
2. Organizational plan: begins with a table of organization. It includes position
descriptions, staffing and channels of communication.
3. Physical plan: concerned with topography (layout of building or offices)
4. Functional plan: plans concerned with the workings of major functional units such
as human resource departments.
5. Operational plan: addresses systems, work processes, procedures, quality control,
safety and other supportive activities.
6. Financial plan: addresses the inflow and outflow of money, profit and loss, budgets,
cost and profit centers, charges and salaries.

Key Elements of Planning

1. Vision: a vision is a clear, comprehensive photograph of an organization at some
point in the future. It provides direction because it describes shat the organization
needs to be like, to be successful within the future.
2. Mission: a mission statement proclaims the purpose of an organization or
department, literally stating why the entity exists.
3. Goals: expected or desired outcome of a planning process. Goals are usually
broad, general expressions of the guiding principles and aspirants of a community.
4. Objectives: precise targets that are necessary to achieve goals. These are detailed
statements of quantitatively or qualitatively measurable results the plan hopes to
accomplish.

B. Organizing
Organizing is the process of gearing up to implement decisions that result from the
planning process; in other words, it is the establishment of the structure in which the work
gets done. Organizing involves delineating tasks and establishing a framework of authority
and responsibility for the people who will perform these tasks. It further involves analyzing
the workload, distributing it among employees and coordinating the activities so that work
proceeds smoothly.

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A manager performs organizing function with the help of the following steps:
1. Identification of activities: all the activities which have to be performed in a concern
have to be identified first. Example: preparation of accounts, making sales and record
keeping. These activities have to be grouped and classified into units.
2. Departmentally organizing the units: the manager tries to combine and group similar
and related activities into units or departments. The process of dividing the
organization into departments or independent units is called departmentalization.
3. Classifying the authority: Once the departments are made, the manager likes to
classify the powers and its extent to the managers. This activity of giving a rank in
order to the managerial positions is called hierarchy. The top management is into
formulation of policies, the middle level management into departmental supervision
and lower level management into supervision of foremen. The clarification of authority
help in bringing efficiency in the running of a concern.
4. Co-ordination between authority and responsibility: relationships are established
among various groups to enable smooth interaction toward the achievement of the
organizational goal. Each individual is made aware of his authority and he knows
whom they have to take orders from, to whom they are accountable and to whom they
have to report. A clear organizational structure is drawn and all the employees are
made aware of it.

C. Coordinating or Directing
Coordinating is the process of synchronizing activities and participants so that they
function smoothly with each other. When coordination fails, conflict and confusion run
rampant. Proactive coordinating involves activities intended to anticipate and prevent
problems. Reactive coordinating consists of regulatory activities aimed at the
maintenance of existing structural and functional arrangements and corrective
activities that rectify errors after they have occurred.

Tools of Coordination
1. Committees: a major purpose of committee is to increase coordination. The
strength of committee action comes through a synthesis of divergent viewpoints.
2. Coordinators

D. Controlling
Controlling simply means follow-up and correction. It is the process of
evaluating the execution of the plan and making adjustments to ensure that the
organizational goal is achieved. During the controlling stage managers performs tasks
such as training employees as necessary and managing deadlines. Managers monitor
employees and evaluate the quality of their work.
Part of the control process includes preparing performance reports. A
performance report compares budgeted data to actual data in an effort to identify and
learn from excellent performance and to identify and eliminate sources of
unsatisfactory performance.

Management Accountants at appropriate levels are involved actively in the process of

managing the entity. The process includes making strategic, tactical and operating decisions
and helping to coordinate efforts of the entire organization.

Generally management accountants do the following tasks:

1. Planning which involves setting goals for the firm. Cash budgets, capital budgets and
projected financial statements are examples of contributions which accounting can

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make in resource planning while break even analysis, projected financial statements
are examples of useful tools in profit planning.

2. Controlling which involves evaluation of whether actual performance conforms to

planned goals or budgets. Cost variance analysis, financial statement analysis, and
gross profit variance analysis are some of the accounting control reports used to inform
managers when activities which are part of their responsibility are deviating from thee
plan.

3. Decision making which involves determination of predictive information (relevant

costs) or making important business decisions. Should a firm add a new product?
Should a firm drop a product line? Should a firm manufacture its own component or
source it outside? What price shall a company charge for a new product? These
questions are some of the key decisions that Management Accountants encounter.

Activity 1
1. How do managers make decisions to implement strategy?
2. Distinguish between the planning and control decisions of managers
3. Describe three ways management accountants support managers

2. Distinction among Management Accounting, Cost Accounting and Financial

Accounting

A. Management Accounting
Management accounting measures, analyzes, and reports financial and
nonfinancial information that helps managers make decisions to fulfill the goals of an
organization.
Managers use management accounting information to develop, communicate,
and implement strategy. They also use management accounting information to
coordinate product design, production, and marketing decisions and to evaluate
performance. Management accounting information and reports do not have to follow
set principles or rules. The key questions are always (1) how will this information help
managers do their jobs better, and (2) do the benefits of producing this information
exceed the costs?
Management accounting information is not required to adhere to GAAP and
thus can provide both historical and forward-looking information to managers.
Management accounting information commonly addresses individual or divisional
concerns rather than those of the firm as a whole.

B. Financial Accounting
Financial accounting focuses on reporting to external parties such as investors,
government agencies, banks, and suppliers. It measures and records business
transactions and provides financial statements which requires compliance with GAAP
established by the FASB, the IASB, and the SEC (or other influential organizations
such as the APB and the AICPA). Financial accounting information is typically
historical, quantitative, monetary, and verifiable and usually reflects the activities of the
whole organization.

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Major Differences between Management and Financial Accounting

Management Financial Accounting
Accounting
Purpose of information Help managers make Communicate
decisions to fulfill an organization’s financial
organization’s goals position to investors,
banks, regulators,
and other outside parties
Primary users Managers of the External users such as
organization investors, banks,
regulators, and suppliers
Focus and emphasis Future-oriented Past-oriented
Rules of measurement Internal measures and Financial statements
and reporting reports do not have to must be prepared in
follow GAAP but are accordance with GAAP
based on cost-benefit and be
analysis certified by external,
independent auditors
Time span and type of Varies from hourly Annual and quarterly
reports information to 15 to 20 financial reports, primarily
years, with financial and on the company as a
nonfinancial reports on whole
products, departments,
territories, and strategies

C. Cost Accounting
Cost accounting information addresses the demands of both financial and
management accounting and is thus represented as the intersection of the financial
and management accounting systems.
Cost accounting supports the financial accounting system by providing product
cost information to external parties (stockholders, creditors, and various regulatory
bodies) for investment and credit decisions. For external reporting purposes, GAAP
defines product cost as the sum of the costs incurred within the factory to make one
unit of product.
Cost accounting supports the management accounting system by providing
product cost information to internal managers who are responsible for planning,
controlling, decision making, and evaluating performance.

Activity 2
Describe how cost accounting supports management accounting and
financial accounting

3. Role and activities of controller and treasurer

The controller (also called the chief accounting officer) is the financial executive
primarily responsible for management accounting and financial accounting. This book
focuses on the controller as the chief management accounting executive. Modern
controllers do not do any controlling in terms of line authority except over their own

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departments. Yet the modern concept of controllership maintains that the controller
exercises control in a special sense. By reporting and interpreting relevant data, the
controller influences the behavior of all employees and exerts a force that impels line
managers toward making better-informed decisions as they implement their strategies.

Basic Functions of Controllership

1. Planning: establish and maintain an integrated plan of operation consistent with
the company’s goals and objectives , both short and long term, analyzed and
revised as required, communicated to all levels of management, with appropriate
systems and procedures installed.
2. Control: develop and revise standards against which to measure performance and
provide guidance and assistance to other 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, evaluate the data with reference to
company and unit objectives; prepare and file external reports as required to satisfy
government regulatory bodies, shareholders, investors and general public.
4. Accounting: design, establish and maintain general and cost accounting systems
at all company levels.
5. Other primary responsibilities which includes management and supervision of
functions such as taxes, maintain appropriate relationships with internal and
external auditors, develop record retention program and supervise treasury
functions.

The main role of Treasurer is the fact that he identifies the financial official and then
looks at the task of financing and its own related activities. Treasury always handles liquid
assets therefore the primary role of treasurer is to look at the cash and its other liquid
investments.

Basic tasks of Treasurer are as follows:

1. He formulate the complete capital composition of the business relating to goals of
the business and then to apply it to the business.
2. He also manages the quantity of liquid assets and everything kind of cash.
3. He basically serves as a cashier.
4. He plays the role of your expert signatory on payment cheques like the authority to
approve such cheques.
5. Reconciliation in Loan Company accounts.
6. He manages the overall credit function of the company.
7. He also offers the authority to utilize the surplus cash of the business whenever
there is any kind of short term beneficial assets.
8. He also makes the companies policies matching to decision on trade special
discounts and vendor repayment.
9. He also maintains romantic relationships with bankers and distributors.

All of the above mentioned functions of treasurer are integrated by making use of
cash manger, fund manager and credit supervisor.

Generally, the functions of the Controller revolves around 1. Control Planning; 2.

Reporting and Interpreting; 3. Evaluating and Consulting; 4. Administering Tax;
5. Government Reporting; 6. Asset Protection and 7. Appraising the Economy.

On the other hand, Treasurers normally deal with 1. Capital Provision; 2.

Investor Relations; 3. Short Term Financing; 4. Banking and Custody; 5. Credit
and Collections; 6. Investments and 7. Insurance.

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Activity 3
Describe how cost accounting supports management accounting and
financial accounting

4. International certifications in management accounting

Accounting certifications are credentials that accounting professionals use to enhance

their careers and grow their skill sets. Which one is right for you can vary according to your
career path, specialization and eligibility. Following are the common certifications in
management accounting:
a. Certified Public Accountant (CPA)
This is the most commonly held certification in accounting and is required to hold
many accounting positions. It verifies your abilities in forensic accounting, risk
management, compliance, taxes and other skills that are required for top
accounting roles.
b. Certified Financial Analyst (CFA)
This certification verifies a financial professional's knowledge and abilities
regarding portfolio management, economics, professional and ethical standards
and investment analysis. This certification requires a bachelor's degree along with
four years of experience in financial services.
c. Certified Management Accountant (CMA)
This certification verifies that you are a professional in cost management, decision
analysis, forecasting and internal control auditing. The CMA certification
demonstrates a mastery of critical accounting and financial management skills from
an internal, managerial or generalized perspective. To obtain this certification, you
must have a bachelor's degree and two consecutive years in management
accounting or financial management.
d. Registered Cost Accountant (RCA)

5. Code of ethics of management accountants

Institute of Management Accountants (IMA), the association of accountants and

financial professionals in business, is one of the largest and most respected associations
focused exclusively on advancing the management accounting profession.
Globally, IMA supports the profession through research, the CMA® (Certified
Management Accountant) program, continuing education, networking, and advocacy of
the highest ethical business practices. IMA has a global network of more than 85,000
members in 140 countries and 300 professional and student chapters.

IMA has been committed to advocating the highest standards of ethical business
practices—both for its members and the profession at large—since the organization was
founded in 1919. In the early 1980s, IMA took a bold leadership role in the area of ethics
by developing its first written code of ethics: Standards of Ethical Conduct of Management
Accountants. In 2005, in the wake of global financial scandals and an increasing need
for more direct ethical guidelines, IMA issued new guidance to better reflect the ethical
climate of the time. The result was the IMA Statement of Ethical Professional Practice,
which required each IMA member to be committed to the highest ethical behavior.
After considering the many changes in the business and regulatory environment,
including the globalization of commerce and the management accounting profession, IMA
determined to issue a revised Statement in 2017. More concise and simpler to understand

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and apply, this updated version more fully reflects the global scope of management
accounting. It also requires IMA members to contribute to a positive ethical culture in their
organization and to place integrity of the profession above personal interests. These
requirements recognize the need for members to take an active role in ensuring their
organization has a strong, open, and positive ethical culture.

IMA Statement of Ethical Professional Practice

Effective July 1, 2017

Members of IMA shall behave ethically. A commitment to ethical professional practice

includes overarching principles that express our values and standards that guide member
conduct.

Principles
IMA’s overarching ethical principles include: Honesty, Fairness, Objectivity, and
Responsibility. Members shall act in accordance with these principles and shall encourage
others within their organizations to adhere to them.

Standards
IMA members have a responsibility to comply with and uphold the standards of
Competence, Confidentiality, Integrity, and Credibility. Failure to comply may result in
disciplinary action.

a. COMPETENCE
1. Maintain an appropriate level of professional leadership and expertise by
enhancing knowledge and skills.
2. Perform professional duties in accordance with relevant laws, regulations, and
technical standards.
3. Provide decision support information and recommendations that are accurate,
clear, concise, and timely. Recognize and help manage risk.

b. CONFIDENTIALITY
1. Keep information confidential except when disclosure is authorized or legally
required.
2. Inform all relevant parties regarding appropriate use of confidential information.
Monitor to ensure compliance.
3. Refrain from using confidential information for unethical or illegal advantage.

c. INTEGRITY
1. Mitigate actual conflicts of interest. Regularly communicate with business
associates to avoid apparent conflicts of interest. Advise all parties of any potential
conflicts of interest.
2. Refrain from engaging in any conduct that would prejudice carrying out duties
ethically.
3. Abstain from engaging in or supporting any activity that might discredit the
profession.
4. Contribute to a positive ethical culture and place integrity of the profession above
personal interests.

d. CREDIBILITY
1. Communicate information fairly and objectively.
2. Provide all relevant information that could reasonably be expected to influence an
intended user’s understanding of the reports, analyses, or recommendations.
3. Report any delays or deficiencies in information, timeliness, processing, or internal
controls in conformance with organization policy and/or applicable law.

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4. Communicate professional limitations or other constraints that would preclude
responsible judgment or successful performance of an activity.

Resolving Ethical Issues

In applying the Standards of Ethical Professional Practice, the member may encounter
unethical issues or behavior. In these situations, the member should not ignore them, but
rather should actively seek resolution of the issue. In determining which steps to follow,
the member should consider all risks involved and whether protections exist against
retaliation.

When faced with unethical issues, the member should follow the established policies
of his or her organization, including use of an anonymous reporting system if available.

If the organization does not have established policies, the member should consider the
following courses of action:
 The resolution process could include a discussion with the member’s immediate
supervisor. If the supervisor appears to be involved, the issue could be presented
to the next level of management.
 IMA offers an anonymous helpline that the member may call to request how key
element of the IMA Statement of Ethical Professional Practice could be applied to
the ethical issue.
 The member should consider consulting his or her own attorney to learn of any
legal obligations, rights, and risks concerning the issue.

If resolution efforts are not successful, the member may wish to consider
disassociating from the organization.

Activity 4
1. What are the ethical responsibilities of management accountants?
2. From the perspective of (a) a stockholder, (b) a company manager,
(c) an employee other than a manager, and (d) a customer, explain
why a code of ethics is important for the accountants within a
company.

Unit 1 Quiz: Choose the letter of the best answer.

1. Why do most companies adhere to GAAP for their basic internal financial statements?
A. GAAP is required by law for publicly held companies.
B. To use GAAP and another system of reporting would be too costly for most
companies.
C. Accountants are required by their code of ethics to use GAAP accounting.
D. Accrual accounting provides a uniform way to measure an organization’s financial
performance.

2. A quantitative expression of a plan of action is called a(n)

A. strategic analysis report. C. financial statement.
B. performance report. D. budget.

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3. The primary users of information provided by a management accountant are

A. downstream components to the total value chain.
B. upstream components to the total value chain.
C. managers within the organization.
D. customers of the organization.

4. A managerial emphasis for cost accounting means

A. accountants are focused on decision support.
B. accountants are the watchdogs that make sure managers adhere strictly to
strategic plans.
C. managers use cost accounting for providing financial information but look
elsewhere for nonfinancial information.
D. managers must take courses in cost accounting.

5. The design of a management accounting system should be guided by the

A. requirements for financial reporting.
B. challenges facing managers.
C. standards developed for cost accounting by the Cost Accounting Standards Board.
D. preferences of the organization’s financial officer.

6. Four themes are common to many managers. The critical theme for all of these is
A. developing relationships with suppliers.
B. benchmarking and continuous improvement.
C. reducing costs and improving efficiencies.
D. improving customer focus and customer satisfaction.

7. Which of the following is not one of the ethical responsibilities of a management

accountant?
A. Compliance C. Integrity
B. Confidentiality D. Objectivity

8. Cost accounting can best be described as

A. the intersection between financial and management accounting.
B. a system that meets the informational demands of both financial and management
accounting.
C. a system that provides product cost information to Internal managers for planning,
controlling, decision making and evaluating performance.
D. all of the above.

9. A management accountant who fails to perform professional duties in accordance with

relevant standards is acting contrary to which of the following standards?
A. Competency
B. Integrity
C. Objectivity
D. Confidentiality

10. The IMA Code of Ethics requires a management accountant to follow the established
policies of the organization when facing an ethical conflict. When management
accountants fail to resolve an ethical conflict by talking with their immediate supervisor
they should
A. communicate the problem to authorities outside the organization.
B. contact the next higher managerial level.
C. notify the audit committee of the board of directors.

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D. contact the chief financial officer.

11. According to the IMA Code of Ethics a practitioner has the responsibility to recognize
professional limitations. Under which standard of ethical conduct would this
responsibility be included?
A. Competency
B. Confidentiality
C. Integrity
D. Objectivity

12. Which of the following groups would be LEAST likely to receive detailed management
accounting reports?
A. Stockholders
B. Sales representatives
C. Production supervisors
D. Managers

References:

Guerero, Pedro P. (2018). Cost Accounting: Principles and Procedural Application. Sampaloc, Manila: GIC Enterprises &
Co., Inc.

De Leon, Norma D. et. al. (2019). Cost Accounting and Control. Quezon City: Rex Bookstore.

Raiborn, Cecily A. & Kinney, Michael R. (2013). Cost Accounting (2 nd ed.). Pasig City: Cengage Learning Asia Pte Ltd

Hansen, Don R. & Mowen, Maryanne M. (2019) Cost Accounting and Control. Quezon City: C & E Publishing Inc.

Answers to Unit Quiz

1.B 2.D 3.C 4.A 5.B 6.D 7.A 8.D 9.A 10.B 11.C
12.A
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