Management Advisory Services: Management Accounting Concepts

SAN SEBASTIAN COLLEGE RECOLETOS

CANLUBANG CAMPUS

ACCOUNTING REVIEW PART 2

(ACCREV2)
MANAGEMENT SERVICES JAREYES,CPA
Management Accounting Concepts

Managerial Accounting
Managerial accounting is a field of accounting that provides economic and financial information for managers
and other internal users. Managerial accounting applies to all types of businesses - service, merchandising,
and manufacturing - and to all forms of business organizations - proprietorships, partnerships and
corporations. Moreover, managerial accounting is needed in not-for-profit entities as well as in profit-oriented
enterprises.

Comparing Managerial and Financial Accounting

There are both similarities and differences between managerial and financial accounting.
 Both fields of accounting deal with the economic events of a business and require that the results of
that company’s economic events be quantified and communicated to interested parties.
 The principal differences are the

Financial Accounting Managerial Accounting

Primary users of reports External users: stockholders, creditors Internal users: officers and
and regulators managers
Types of reports Financial Statements Management Internal Reports
Frequency of reports Quarterly, annually As frequently as needed
Purpose of reports General-purpose Special purpose for decision making
Contents of reports Pertains to business as a whole, highly Pertains to sub-units of the business,
aggregated (condensed), limited to very detailed, extends beyond
double entry accounting and cost data, double entry accounting to any
generally accepted accounting principles relevant data, standard is relevance
is to decisions
Verification Audit by CPA No independent audits

The role of the managerial accountant has changed in recent years. Whereas in the past their primary concern
used to be collecting and reporting costs to management, today they also evaluate how well the company is
using its resources and providing information to cross-functional teams comprised of personnel from
production, operations, marketing, engineering, and quality control.

Management Functions
Managers perform three broad functions within an organization:
 Planning requires managers to look ahead and to establish objectives.
 Directing involves coordinating a company’s diverse activities and human resources to produce a
smooth-running operation.
 Controlling is the process of keeping the firm’s activities on track.

Organizational Structure
In order to assist in carrying out management functions, most companies prepare organization charts to show
the interrelationships of activities and the delegation of authority and responsibility with the company.

Stockholders own the corporation but manage the company through a board of directors. The chief executive
officer (CEO) has overall responsibility for managing the business. The chief financial officer (CFO) is
responsible for all of the accounting and finance issues the company faces. The CFO is supported by the
controller and the treasurer.

Business Ethics
 All employees are expected to act ethically in their business activities and an increasing number of
organizations provide their employees with a code of business ethics.
 Due to many fraudulent activities in recent years, U.S. Congress passed the Sarbanes-Oxley Act of
2002 which resulted in many implications for managers and accountants. CEOs and CFOs must certify
the fairness of financial statements, top management must certify they maintain an adequate system
of internal controls, and other matters.

Manufacturing Costs
Manufacturing consists of activities and processes that convert raw materials into finished goods.
Manufacturing costs are typically classified as either (a) direct materials, (b) direct labor or (c) manufacturing
overhead.
 Direct materials are raw materials that can be physically and conveniently associated with the finished
product during the manufacturing process. Indirect materials are materials that (a) do not physically
become a part of the finished product or (b) cannot be traced because their physical association with
the finished product is too small in terms of cost. Indirect materials are accounted for as part of
manufacturing overhead.

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 The work of factory employees that can be physically and conveniently associated with converting raw
materials into finished goods is considered direct labor. In contrast, the wages of maintenance people,
timekeepers, and supervisors are usually identified as indirect labor because their efforts have no
physical association with the finished product, or it is impractical to trace the costs to the goods
produced. Indirect labor is classified as manufacturing overhead.
 Manufacturing overhead consists of costs that are indirectly associated with the manufacture of the
finished product. Manufacturing overhead includes items such as indirect materials, indirect labor,
depreciation on factory buildings and machines, and insurance, taxes, and maintenance on factory
facilities.

Product versus Period Costs

Product costs are costs that are a necessary and integral part of producing the finished product. 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. These are nonmanufacturing costs. Period costs include selling and administrative
expenses.

Manufacturing Income Statement

The income statements of a merchandising company and a manufacturing company differ in the cost of goods
sold section.

The cost of goods sold section of the income statement for a manufacturing company shows:
Beginning Cost of Ending Cost of
Finished Goods + Goods – Finished Goods = Goods Sold
Inventory Manufactured Inventory

Determining Cost of Goods Manufactured

The determination of the cost of goods manufactured consists of the following:

a. Beginning Work Total Current Total Cost of

in Process + Manufacturing = Work in Process
Inventory Costs

b. Total Cost of Ending Cost of Goods

Work in – Work in Process = Manufactured
Process Inventory

The costs assigned to the beginning work in process inventory are the manufacturing costs incurred in the
prior period. Total manufacturing costs is the sum of the direct materials costs, direct labor costs, and
manufacturing overhead incurred in the current period.

Because a number of accounts are involved, the determination of costs of goods manufactured is presented in
a Cost of Goods Manufactured Schedule. The cost of goods manufactured schedule shows each of the cost
factors above. The format for the schedule is:

Beginning work in process xx

Direct materials used xx
Direct labor xx
Manufacturing overhead xx
Total manufacturing costs xx xx
Total cost of work in process xx
Less: Ending work in process (xx)
Cost of goods manufactured xx

Manufacturing Balance Sheet

The balance sheet for a manufacturing company may have three inventory accounts: finished goods
inventory, work in process inventory, and raw materials inventory.

The manufacturing inventories are reported in the current asset section of the balance sheet. The inventories
are generally listed in the order of their expected realization in cash. Thus, finished goods inventory is listed
first.

Each step in the accounting cycle for a merchandising company is applicable to a manufacturing company. For
example, prior to preparing financial statements, adjusting entries are required. Adjusting entries are
essentially the same as those of a merchandising company. The closing entries for a manufacturing company
are also similar to those of a merchandising company.

Contemporary Developments
Many companies have significantly lowered inventory levels and costs using just-in-time (JIT) inventory
methods. Under a just-in-time method, goods are manufactured or purchased just in time for use. In addition,
many companies have installed total quality management (TQM) systems to reduce defects in finished
products.

Activity-based costing (ABC) is a popular method for allocating overhead that obtains more accurate
product costs.

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The theory of constraints is a specific approach used to identify and manage constraints in order to achieve
the company goals.

The balanced scorecard is a performance-measurement approach that uses both financial and nonfinancial
measures to evaluate all aspects of a company’s operations in an integrated fashion.

Value Chain
The value chain is a set of value-adding functions or processes that converts inputs into products and services
for the organization’s customers:
 Research and development – experimenting to reduce costs or improve quality
 Design – developing alternative product, service or process designs
 Supply – managing raw materials received from vendors to reduce costs and improve quality
 Production – acquiring and assembling resources to produce a product or render a service
 Marketing – promoting a product or service to current and prospective customers
 Distribution – delivering a product or service to a customer
 Customer service – supporting customers after the sale of a product or service

***
True/False Questions
1. Although financial and managerial accounting differs in many ways, they are similar in that both rely
on the same underlying financial data.
2. Managerial accounting is a branch of financial accounting and serves essentially the same purposes as
financial accounting.
3. Managerial accounting places greater emphasis on the future than financial accounting, which is
primarily concerned with the past.
4. Managerial accounting is not needed in a non-profit or governmental organization.
5. When carrying out their planning activities, managers select a course of action and specify how the
action will be implemented.
6. When carrying out their planning activities, managers obtain feedback to ensure that the plan is
actually carried out and is appropriately modified as circumstances change.
7. The controller occupies a line position in an organization.
8. Decentralization means the delegation of decision-making authority throughout an organization by
allowing managers at various operating levels to make key decisions relating to their own area of
responsibility.
9. A firm's organization chart will normally show both the formal and informal lines of reporting and
communication.
10. The Chief Financial Officer of an organization is responsible for ensuring that line operations run
smoothly.
11. Traditionally, companies have maintained large amounts of raw materials, work in process, and
finished goods inventories to act as buffers so that operations can proceed smoothly even if there are
unanticipated disruptions.
12. Process Reengineering is generally considered to be a more radical approach to improvement than
Total Quality Management.
13. Process Reengineering emphasizes a team approach involving front-line workers, whereas Total
Quality Management is usually implemented using outside specialists and is imposed from above.
14. If ethical standards were not generally followed, one of the results would probably be fewer goods and
services available in the marketplace.
15. The Standards of Ethical Conduct for Management Accountants promulgated by the Institute of
Management Accountants specifically state that management accountants' sole ethical responsibility is
to not break any laws.

Multiple Choice Questions

1. Management accounting focuses primarily on providing data for:
a. internal uses by managers.
b. external uses by stockholders and creditors.
c. external uses by the Internal Revenue Service.
d. external uses by the Securities and Exchange Commission.

2. Managerial accounting:
a. is more future oriented than financial accounting.
b. tends to summarize information more than financial accounting
c. is primarily concerned with providing information to external users.
d. is more concerned with precision than timeliness.

3. Compared to financial accounting, managerial accounting places more emphasis on:

a. the flexibility of information.
b. the precision of information.
c. the timeliness of information.
d. both A and C above.

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4. The function of management that compares planned results to actual results is known as:
a. planning.
b. directing and motivating.
c. controlling.
d. decision making.

5. Which of the functions of management involves overseeing day-to-day activities?

a. Planning
b. Directing and motivating
c. Controlling
d. Decision making

6. Which of the following is not one of the three basic activities of a manager?
a. Planning
b. Controlling
c. Directing and motivating
d. Compiling management accounting reports

7. The delegation of decision making to lower levels in an organization is known as:

a. the planning and control cycle.
b. controlling.
c. decentralization.
d. none of these.

8. Which of the following statements are false concerning line and staff functions?
I. Persons occupying staff functions have authority over persons occupying line functions.
II. Both line and staff functions are depicted on the organization chart.
III. Line functions are directly related to the basic objectives of an organization.
a. Only I
b. Only II
c. Only I and II
d. I, II, and III

9. Which of following would normally be found on a manufacturing company's organization chart?

a. the layout of the factory assembly lines
b. a list of the materials needed to produce each of the company's products
c. the informal lines of reporting and communication
d. none of the above

10. For a hospital, what type of position (line or staff) is each of the following?
Emergency Room Manager Human Resources (Personnel) Manager
a. Staff Staff
b. Staff Line
c. Line Staff
d. Line Line

11. A detailed financial plan for the future is known as a:

a. budget.
b. performance report.
c. organization chart.
d. segment.

12. A performance report is:

a. a detailed report comparing budgeted data to actual data for a specific time period.
b. a formal statement of plans for the upcoming period.
c. required to be filed monthly by the Securities and Exchange Commission.
d. not used in decentralized organizations.

13. A clustering of two or more machines at a single workstation is referred to as:

a. a manufacturing cell.
b. an activity center.
c. a functional layout.
d. a setup.

14. A focused factory is:

a. a factory that makes only a single product.
b. a factory that performs a single step in the production process and subcontracts the other
steps.
c. a plant layout in which all machines needed to make a particular product are brought together
in one location.
d. required to bid for defense contracts.

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15. Large work in process inventories:
a. are essential for efficient operations.
b. reduce defect rates.
c. increase throughput time.
d. are a key part of Just-In-Time systems.

16. Ideally, how many units should be produced in a just-in-time manufacturing system?
a. budgeted customer demand for the current week.
b. budgeted customer demand for the following week.
c. actual customer demand for the current week.
d. maximum production capacity for the current week.

17. After careful planning, Jammu Manufacturing Corporation has decided to switch to a just-in-time
inventory system. At the beginning of this switch, Jammu has 30 units of product in inventory. Jammu
has 2,000 labor hours available in the first month of this switch. These hours could produce 500 units
of product. Customer demand for this first month is 400 units. If just-in-time principles are correctly
followed, how many units should Jammu plan to produce in the first month of the switch?
a. 370
b. 400
c. 430
d. 470

18. Process Reengineering includes all of the following steps except:

a. constructing a diagram flowcharting the current process.
b. redesigning the process.
c. elimination of non-value-added activities.
d. elimination of all constraints.

19. According to the Theory of Constraints, improvement efforts should usually be focused on:
a. work centers that are not constraints.
b. the work center that is the constraint.
c. the work center with the highest total cost.
d. the work center with the most obsolete equipment.

20. Which of the following is true regarding the theory of constraints?

a. The theory of constraints does not apply to companies with multiple products because of
capacity measurement difficulties.
b. In any profit-seeking company, there must be at least one constraint.
c. Constraints or bottlenecks stop organizations from selling an infinite number of units or
services.
d. both B and C above.

21. Pizza World makes forty-three kinds of pizza for takeout and delivery. Which of the following could be
the constraint at Pizza World?
a. the person who makes the pizza crust.
b. the person who puts toppings on the pizzas.
c. the pizza oven.
d. any of the above could be the constraint.

22. The Standards of Ethical Conduct for Management Accountants developed by the Institute of
Management Accountants contain a policy regarding confidentiality that requires management
accountants to refrain from disclosing confidential information acquired in the course of their work:
a. except when authorized by management.
b. in all situations.
c. except when authorized by management, unless legally obligated to do so.
d. in all cases not prohibited by law.

23. Wide-spread adherence to ethical standards in an advanced market economy tends to result in all of
the following except:
a. higher prices.
b. higher quality goods and services.
c. greater variety of goods and services available for sale.
d. safer products.

24. The Institute of Management Accountants (IMA) has developed ethical standards for management
accountants. What four categories has the IMA classified these standards into?
a. Reliability, Objectivity, Commitment, and Competence
b. Objectivity, Integrity, Commitment, and Confidentiality
c. Observation, Integrity, Closure, and Competence
d. Competence, Objectivity, Integrity, and Confidentiality
e. Reliability, Understandability, Flexibility, and Integrity

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25. Samantha Galloway is a managerial accountant in the accounting department of Mustang Industries,
Inc. Samantha has just discovered evidence that some of the corporation's marketing managers have
been wrongfully inflating their expense reports in order to obtain higher reimbursements from the
firm. According to the Institute of Management Accountants' Standards of Ethical Conduct, what
should Samantha do upon discovering this evidence?
a. notify the controller.
b. notify the marketing managers involved.
c. notify the president of the corporation.
d. ignore the evidence because she is not part of the Marketing Department.

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