STRATEGIC COST MANAGEMENT

MANAGEMENT ACCOUNTING – Basic Concepts

Management – is the process of planning, organizing, and controlling a certain task to realize the objectives of the
organization.

Basic Functions of Management

Planning - involves setting immediate and long-term objectives and deciding which alternative is best suited to attain the set
objectives.

An important part of planning is to identify alternatives and then to select from among the alternatives the one that
does the best job of furthering the organization’s objectives. Once alternatives have been identified, the plans of management
are often expressed formally in budgets. Budgets are usually prepared under the direction of the controller, who is the manager
in charge of the accounting department. Typically, budgets are prepared annually.

Organizing - involves deciding how to utilize available resources as plans are carried out and tackling activities necessary to
achieve objectives such as staffing, subordinating, directing and motivating.

Controlling – involves comparing actual performance with set plans and standards and deciding what corrective actions to take
should there be any deviation (variance) between actual and planned performance.

In carrying out the control function, managers seek to ensure that the plan is being followed. Feedback, which signals
whether operations are on track, is the key to effective control. A performance report compares budgeted to actual results. It
suggests where operations are not proceeding as planned and where some parts of the organization may require additional
attention.

NOTE: Decision-making is an inherent function of management; all management functions would require certain amount of
decision-making.

Management by Objectives – is a procedure in which a subordinate and a supervisor agree on goals and the methods of achieving
them and develop a plan in accordance with that agreement. The subordinate is then evaluated with reference to the agreed
plan at the end of the period.

Management by Exception – is a technique of highlighting those which vary significantly from plans and standards in line with
the management principle that executive time should be spent on items that are non-routine and are identified as top priority.

Management Accounting - refers to reports designed to meet the needs of internal users, particularly the managers. The
American Association of Accountants (AAA) defined it as the application of appropriate techniques and concepts in processing
the historical and projected economic data of an entity to assist management in establishing a plan for reasonable economic
objectives and in the making of rational decisions with a view towards achieving these objectives.

Management Accounting vs. Financial Accounting

Managerial accounting is concerned with providing information to personnel within an organization so that they can
plan, make decisions, evaluate performance, and control operations. There are no rules and regulations associated with this
field since the information is intended solely for use within the firm.

Financial accounting, in contrast, focuses on financial statements and other financial reports. This area deals with
reporting to groups outside of an organization (e.g., stockholders, lenders, government agencies) so that some assessment of
profitability and overall financial health can be made. Given the large number of firms in our economy and the varying level of
user sophistication, the field is heavily regulated (by the Financial Accounting Standards Board and, to a lesser degree, by the
Securities and Exchange Commission).

Summary of Differences:

FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING

1. Users of information
2. Accounting principles
3. Optional/Mandatory
Primarily for external users Exclusively for internal users
Should be in accordance with
Generally Accepted Accounting Management wants and needs
Principles
Mandatory, particularly by the
Discretionary or optional
government

1

4. Type of information
5. Emphasis on reports
6. Purpose/End result
7. Source of data
8. Amount of detail
9. Focus of information
10. Frequency of reports
11. Time orientation
12. Unifying concept
The end-product which is the financial
statements are primarily monetary
(financial) in nature
Reliability (precision of data)
To produce financial statements
From company’s (internal) information
system
Reports are compressed and simplified
Financial statements focus mainly on
business as a whole
Periodic (annually, quarterly)
Mainly historical (past) data
Assets = Liabilities + Equity
Monetary and also non-monetary like
units produced, units sold, number of
labor hours, etc.
Relevance and timeliness of data.
To assist the management in decision-
making
From internal and external users such as
economics, etc.
Reports are more extensive and detailed
Focus on segments (e.g., products,
divisions, departments within the
company) and business as a whole
As frequent as management need arises
Future-oriented using current and past
data
No unifying concept or equation

The Controller: Chief Management Accountant

Controllership - is the practice of the established science of control, which is the process by which management assures itself
that the company’s resources are obtained and utilized according to plans that are in line with the company’s set objectives.

Controller – is an officer of an organization who has responsibility for the accounting aspect of management control. He generally
performs two basic roles:
1. Accumulation and reporting of accounting information to all levels of management and;
2. Directing management’s attention to problems and assisting them in solving such problems.

Controller vs. Treasurer

CONTROLLER TREASURER

1. Planning & control 5. Government reporting 1. Provision of capital 5. Credit & collections

2. Reporting & interpreting 6. Protection of assets 2. Investor relations 6. Investments

3. Evaluating & consulting 7. Economic appraisal 3. Short-term financing 7. Insurance

4. Tax administration 4. Banking & custody

Line Function vs. Staff Function

Line Function is the authority to give command or orders to subordinates. It exercises direct downward authority over
line departments (e.g., VP for operations over operations manager).

Staff Function is the authority to advise but not to command others; the function of providing line and staff managers
with specialized service and technical advice for support. It is exercised laterally or upward.

 When it comes to the whole organization, a controller usually exercises staff functions since its primary function is to
give advice. But when it comes to its own department, a controller exercises line functions among its own staff.
 A Treasurer usually exercises line functions within an organization.

Standards of Ethical Conduct for Management Accountants

Management accountants have responsibility for ethical behavior in four broad areas, Competence, Confidentiality, Integrity
and Objectivity.

1. Competence - In order to be competent, management accountants must:

 Maintain an appropriate level of professional competence.
 Follow applicable laws, regulations, and standards.
 Provide accurate, clear, concise, and timely decision support information.

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  Recognize and communicate professional limitations that preclude responsible judgment.

2. Confidentiality - Management accountants must:

 Not disclose confidential information acquired in the course of their work unless legally obligated to do so.
 Ensure that his subordinates do not disclose confidential information.
 Not use confidential information for unethical or illegal advantage.

3. Integrity – Management accountants must:

 Mitigate conflicts of interest and advise others of potential conflicts.
 Refrain from conduct that would prejudice carrying out duties ethically.
 Abstain from activities that might discredit the profession.

4. Objectivity – Management accountants must:

 Communicate information fairly and objectively.
 Disclose all relevant information that could influence a user’s understanding of reports and recommendations.
 Disclose delays or deficiencies in information timeliness, processing, or internal controls.

To sum up, Competence means having the capacity to function in a particular manner. Confidentiality means having
the ability to maintain or keep information undisclosed. Integrity is defined as adherence to a code of moral values. Objectivity
is defined as expressing or using facts without distortion by personal feelings or prejudices.

EXERCISES

TRUE OR FALSE

1. Managerial accountants more and more are considered "business partners."

2. Managerial accountants often are part of cross-functional teams.
3. An increasing number of organizations are segregating managerial accountants in separate managerial-accounting
departments.
4. The role of managerial accountants has changed considerably over the past decade.
5. Management accounting focuses on financial statements and other financial reports.
6. The primary objective of management accounting is to provide management with information useful for planning and
control of operations.
7. Both financial and management accounting rely on the same accounting information system.
8. Managerial accounting is concerned with external decision makers.
9. Management accounting is synonymous to managerial accounting.
10. Management accounting has no externally imposed standards while financial accounting has to follow the GAAP.
11. Financial accounting deals with information that is primarily reported to individuals outside the organization.
12. Cost accounting refers to accounting for the annual costs of operating a business.
13. Financial accounting is a subset of cost accounting.
14. Management accounting is a subset of cost accounting.
15. Cost accounting is a subset of both management and financial accounting.
16. Management accounting is a subset of both cost and financial accounting.
17. The controller performs primarily a line function.
18. The treasurer performs primarily a line function.
19. The primary functions of a controller are basically the same as those of a treasurer.
20. The controller, as the title implies, exercises direct control over business operations.

MULTIPLE-CHOICE

1. The day-to-day work of management teams will typically comprise all of the following activities except:
a. decision making c. cost minimizing
b. planning d. directing operational activities

2. Which of the following functions is best described as choosing among available alternatives?
a. Decision making c. Directing operational activities
b. Planning d. Controlling

3. Which of the following managerial functions involves a detailed financial and operational description of anticipated
operations?
a. Decision making c. Directing operational activities
b. Planning d. Controlling

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 4. Which of the following involves the coordination of daily business functions within an organization?
a. Decision making c. Directing operational activities
b. Planning d. Controlling

5. Marco Company has set various goals, and management is now taking appropriate action to ensure that the firm achieves
these goals. One such action is to reduce outlays for overhead, which have exceeded budgeted amounts. Which of the
following functions best describes this process?
a. Decision making b. Planning c. Coordinating d. Controlling

6. Which of the following is not an objective of managerial accounting?

a. Providing information for decision making and planning.
b. Assisting in directing and controlling operations.
c. Maximizing profits and minimizing costs.
d. Measuring the performance of managers and subunits.

7. The role of managerial accounting information in assisting management is a(n):

a. financial-directing role c. planning and controlling role
b. attention-directing role d. organizational role

8. Managerial accounting:
a. focuses only on historical data.
b. is governed by GAAP.
c. focuses primarily on the needs of personnel within the organization.
d. provides information for parties external to the organization.

9. Managerial accounting:
a. is unregulated.
b. produces information that is useful only for manufacturing organizations.
c. is based exclusively on historical data.
d. is regulated by the Securities and Exchange Commission (SEC).

10. Which of the following would likely be considered an internal user of accounting information rather than an external
user?
a. Stockholders b. Consumer groups c. Lenders d. Middle-level managers

11. Financial accounting focuses primarily on reporting:

a. to parties outside of an organization c. to an organization's board of directors
b. to parties within an organization d. to financial institutions

12. Which of the following statements represents a similarity between financial and managerial accounting?
a. Both are useful in providing information for external users.
b. Both are governed by GAAP.
c. Both draw upon data from an organization's accounting system.
d. Both rely heavily on published financial statements.

13. Which of the following employees at Philippine Airlines would not be considered as holding a line position?
a. Pilot b. Chief financial officer (CFO) c. Flight attendant d. Ticket agent

14. Which of the following employees would be considered as holding a line position?
a. The controller of Exxon Corporation.
b. The vice-president for government relations of Microsoft.
c. The manager of food and beverage services at Disney's Magic Kingdom.
d. A secretary employed by Hewlett-Packard.

15. Which of the following employees at Starbucks would likely be considered as holding a staff position?
a. The company's chief operating officer (COO).
b. The company's lead, in-house attorney.
c. The company's chief financial officer (CFO).
d. Both the company's lead, in-house attorney and the chief financial officer.

16. A controller is normally involved with:

a. preparing financial statements c. raising capital
b. managing investments d. safeguarding assets

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17. Which of the following is not a function of the treasurer?
a. Safeguarding assets c. Preparing financial statements
b. Managing investments d. Being responsible for an entity's credit policy

18. Managerial accountants:

a. often work on cross-functional teams.
b. are located throughout an organization.
c. are found throughout an organization and work on cross-functional teams.
d. are found primarily at lower levels of the organizational hierarchy.

19. Much of managerial accounting information is based on:

a. a cost-benefit theme c. cost minimization
b. profit maximization d. the generation of external information

20. Managerial accounting has changed in recent years because of:

a. the growth of e-business. c. the emergence of new industries.
b. increased global competition. d. all of the above factors.

21. Which of the following is not an ethical standard of managerial accounting?

a. Competence b. Confidentiality c. Efficiency d. Integrity

22. Which of the following is not an element of competency?

a. To develop appropriate knowledge about a particular subject.
b. To perform duties in accordance with relevant laws.
c. To perform duties in accordance with relevant technical standards.
d. To refrain from engaging in an activity that would discredit the accounting profession.

23. Assume that a managerial accountant regularly communicates with business associates to avoid conflicts of interest and
advises relevant parties of potential conflicts. In so doing, the accountant will have applied the ethical standard of:
a. objectivity b. confidentiality c. integrity d. credibility

24. A practice in which a subordinate and a supervisor agree on goals and the methods of achieving them.
a. Management by objectives c. Management by exception
b. Management by subjective d. Management by example

25. Which of the following functions is most directly related to management by objective?
a. Reporting b. Decision making c. Control d. Planning

26. Which of the following is included in the day-to-day work of the management team?
a. decision making b. planning c. controlling d. all of the given choices

27. For internal uses, managers are more concerned with receiving information that is:
a. completely objective and verifiable. c. completely accurate and precise.
b. relevant, flexible, and immediately available. d. relevant, completely accurate, and precise.

28. How does managerial decision making compare with external performance evaluation?
Managerial Decision Making External Performance Evaluation
a. Detailed Detailed
b. Detailed More aggregated
c. More aggregated Detailed
d. More aggregated More aggregated

29. Internal reports must be communicated

a. daily b. monthly c. annually d. as needed

30. Under which ethical standard of conduct does the managerial accountant have the responsibility to refuse any gift,
favor, or hospitality that would influence or appear to influence his or her decision?
a. competence b. confidentiality c. integrity d. objectivity