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MANAGEMENT ADVISORY SERVICES TRINIDAD/ALENTON

MAS 3101 – Overview of Management Advisory Services OCTOBER 2021

Three objectives of management accounting: Three roles of management accountants

1. To provide information for costing services, • Problem solving: comparative analysis for decision
products, and other objects of interest to
making
management.
2. To provide information for planning, • Scorekeeping: accumulating data and reporting
controlling, evaluation, and continuous reliable results
improvement. • Attention directing: The function of managerial-
3. To provide information for decision making. accounting information in pointing out to managers
issues that need their attention, thereby helping
managers properly focus their attention.

Distinctions Between Management Accounting and Financial Accounting

Management Accounting Financial Accounting

Targeted user: internal users external users

managers stockholders and creditors

Restrictions: no mandatory rules for preparing must follow GAAP when preparing
reports financial statements

Types of information: financial and nonfinancial information financial information

Time orientation: emphasizes the future (planning and historical orientation (reports what
decision making) has already occurred)

Aggregation: detailed information about product information about overall firm

line, departments, etc. performance

In general, accounting information needed by internal
users differs from that needed by external users in the
following ways:
a. More flexible
b. Does not have to comply with GAAP or other rules
c. Forward looking
d. Timely
e. Emphasizes segments, not necessarily the entire
organization
The Work of Management and the Planning and
Control Cycle. The work of managers can be usefully
classified into three major categories: planning,
directing and motivating, and controlling. All of these
activities involve making decisions.
1. Planning consists of strategic planning and
developing more detailed short-term plans. Most
of what we refer to below is with reference to the
more detailed short-term plans.
2. Directing and motivating involves mobilizing
people to implement the plan.
3. Control is concerned with ensuring that the plan
is followed. Accountants maintain the databases
and prepare the reports that provide feedback to
managers. The feedback can be used to reward
particularly successful employees, but more
importantly the feedback can be used to identify
potential problems and opportunities that were not
anticipated in the plan.
4. Decision-making is an integral part of the other
three management activities.
HOW MANAGERIAL ACCOUNTING ADDS VALUE
• Provides managers with information (e.g., product
costs, budgets, cash flows). The information
includes financial and nonfinancial data to help
managers with strategic planning and decision
making.
• Assists in directing and controlling (analyzing and
comparing actual performance to budgeted plans;
attention-directing to highlight successful or
problem areas).
• Motivates managers to achieve the organization's
goals by communicating the plans, providing a
measurement of how well the plan was achieved,
and prompting an explanation of deviations from
plans.
• Measures performance not only for the entire
organization, as in financial accounting, but also
for many subunits (divisions, departments,
managers).
• Assesses the organization's competitive position in
the rapidly changing business environment. Looks
at how well the firm is doing internally, in the eyes
of its customers, from the standpoint of innovation
and continuous improvement, and financially.
The Changing Business Environment
1. Just-In-Time - The term JIT means that materials
are received just in time to be used in production,
manufactured parts are completed just in time to
be assembled into products, and products are
completed just in time to be shipped to customers.
As a result, inventories are virtually eliminated in
a JIT system.
Key Elements of JIT
• Improved plant layout
• Reduced setup time
• Low defect rates
• Flexible workforce
Benefits of JIT
• Inventories are reduced.
• Space is freed up.

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• Throughput time is reduced.
• Defect rates are reduced.
2. Total Quality Management (TQM) - Total Quality
Management means different things to different
people. Nevertheless, most TQM programs seem to
share at least two common elements—a focus on the
customer and systematic problem-solving using
teams made up largely of front-line workers.
3. Process Reengineering - involves completely
redesigning a business process from the ground up.
In this respect, it can be differentiated from TQM
which tends to emphasize small, incremental
improvements. The process is redesigned with a
focus on simplification and elimination of non-value-
added activities.
4. Theory of Constraints (TOC) - The goal in the
Theory of Constraints is not to eliminate all
constraints; there is always a constraint
somewhere in the system if the goal is to make
more money. However, constraints determine the
performance of the entire system, so they should
be intelligently managed.
5. Organizational Structure
• Centralization vs. decentralization
• Line and staff relationships
• The controller
6. Strategic decisions and management accounting -
key to a company’s success in creating value for
customers while differentiating itself from its
competitors.
• Providing a quality product or service at a lower
price than competitors
• Providing a unique product or service at a higher
price than competitors
Role of Accountants and Treasurer
The chief financial officer (CFO) or controller is
the chief accountant responsible for:
• the supervision of the accounting department
• preparation of reports
• the interpretation of information to line
managers.
The treasurer is responsible for:
• raising capital
• safeguarding assets
• managing investments
• insurance coverage
• credit policy of an organization.
Line personnel are directly involved in carrying out
the mission of the organization (e.g., assembly
workers in a factory, doctors in a hospital,
teachers in a school).
Staff personnel (accountants, lawyers, personnel
directors, and other administrative positions) provide
support for the organization's mission.
Value Chain - The value chain is a set of value-
adding functions or processes that convert inputs
into products and services for the organization’s
customers:
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1. Research and Development—experimenting to
reduce costs or improve quality.
2. Design—developing alternative product,
service, or process designs.
3. Supply—managing raw materials received from
vendors to reduce costs and improve quality.
4. Production—acquiring and assembling
resources to produce a product or render a
service.
5. Marketing—promoting a product or service to
current and prospective customers.
6. Distribution—delivering a product or service to
a customer.
7. Customer Service—supporting customers after
the sale of a product or service.
Corporate governance
Corporate governance is designed to compensate for
the agency problem resulting from the fact that
corporations are managed by professional
management that may not operate them in the best
interest of the shareholders.
Components of Corporate governance
Policies, procedures and mechanism that are
established to control management. These major
controls over management include:
• compensation systems,
o boards of directors (including major
committees),
o external auditors, internal auditors, attorneys,
regulators, creditors, securities analysts. and
internal control systems.
Forms of Executive Compensation
A key objective in setting executive compensation is to
align management's decisions and actions
with the long-term interests of shareholders (e.g., long-
term stock price). If managers are given too much fixed
compensation, they may become too complacent and not
take appropriate risks to increase share price. If
managers are given too much incentive compensation
based on operating profit or short-term stock price, they
have incentives to manage profit or take excessive risks
to maximize their compensation.
Common types of management compensation
a. Base salary and bonuses. Using this system,
managers are compensated based on performance
which is typically measured by accounting profit.
Compensation systems based on accounting
measures of profit are problematic because
accounting profit can be manipulated or managed.
b. Stock options. The use of stock options as a form of
compensation provides managers with an incentive
to manage the corporation to increase the stock
price, which is consistent with the goal of
shareholders. A disadvantage of stock options is
that managers may have an incentive to increase the
stock price in the short-term at the expense of long-
term stock value, even by manipulating accounting
income to increase stock price. In addition, stock
options may encourage management to take on risks
that are that are in excess of shareholders' risk
appetite.
c. Stock grants-Stock grants involve issuing shares of
stock as part of management's compensation. Two
common types of stock grants:
(1) Restricted stock. The issuance of stock that
cannot be sold by the manager for a specific
period of time, usually about 10 years. This form
of compensation is effective because it
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encourages managers to undertake operations
that increase the long-term value of the
corporation's stock price.
(2) Performance shares. The issuance of stock to
management if certain levels of performance are
met. If the price of the corporation's stock
increases, the value of the manager's
compensation increases.
d. Executive perquisites (perks). Management also
may get various perquisites such as retirement
benefits, use of corporate assets, golden parachutes,
and corporate loans.
e. The best forms of executive compensation-It is
generally believed that the best compensation
systems include a combination of fixed compensation
and incentive compensation that is related to long-
term stock price.
Audit committee - a "committee established by and
amongst the board of directors of an issuer for the
purpose of overseeing the accounting and financial
reporting processes of the issuer, and audits of the
financial statements of the issuer." A major
responsibility of the audit committee is the appointment,
compensation and oversight of the corporation's external
auditor, including the resolution of any disagreements
between management and the external auditor
Other important characteristics of an audit
committee
(a) At least one member should be a "financial expert."
The names of the financial experts must be
disclosed. A financial expert is one that possesses all
of the following attributes:
1] An understanding of generally accepted
accounting principles and financial statements;
2] Experience in preparing, auditing, analyzing, or
evaluating financial statements of the breadth
and complexity expected to be encountered with
the company;
3] An understanding of internal controls and
procedures for financial reporting: and
4] An understanding of audit committee functions.
Enterprise risk management: Enterprise risk
management is a process, effected by an entity's board
of directors, management and other personnel, applied
in a strategy-setting and across the enterprise, designed
to identify potential events that may affect the entity,
and manage risk to be within its risk appetite, to provide
reasonable assurance regarding the achievement of
entity objectives.
ERM helps align the risk appetite of the organization with
its strategy, enhances risk response decisions, reduces
operational surprises and losses, identifies and manages
cross-enterprise risks, provides integrated responses to
multiple risks, helps the organization seize opportunities,
and improves the deployment of capital.
A key aspect of ERM is the identification and
management of events that have a negative impact,
positive impact, or both. Events with negative impact
represent risks. Events with positive impact may offset
negative impacts or represent opportunities. The risk
management process involves (1) identifying risks,
assessing risks, prioritizing risks, determining risk
responses. and monitoring risk responses.
Interrelated components of ERM
(1) internal environment
(2) objective setting
(3) event identification
(4) risk assessment
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(5) risk response
(6) control activities
(7) information and communication
(8) monitoring.
TERMINOLOGIES
Benchmarking (or competitive benchmarking) -
The continual search for the most effective
method of accomplishing a task, by comparing
existing methods and performance levels with
those of other organizations or with other subunits
within the same organization.
Continuous improvement - The constant effort to
eliminate waste, reduce response time, simplify
the design of both products and processes, and
improve quality and customer service.
Empowerment - The concept of encouraging and
authorizing workers to take the initiative to
improve operations, reduce costs, and improve
product quality and customer service.
Line position - Position held by managers who are
directly involved in providing the goods or services
that constitute an organization's primary goals.
Non-value-added costs - The costs of activities that
can be eliminated without deterioration of product
quality, performance, or perceived value.
Reengineering - The complete redesign of a process,
with an emphasis on finding creative new ways to
accomplish an objective.
Total quality management (TQM) - The broad set of
management and control processes designed to
focus an entire organization and all of its
employees on providing products or services that
do the best possible job of satisfying the customer.
Treasurer - An accountant in a staff position who is
responsible for managing an organization's
relationships with investors and creditors and
maintaining custody of the organization's cash,
investments, and other assets.
Theory of constraints - A management approach that
focuses on identifying and relaxing the constraints
that limit an organization's ability to reach a
higher level of goal attainment.
Type of Cost
Out-of-pocket costs require a cash outlay.
Opportunity costs are the benefits you give up when
you choose one alternative over another.
Direct costs can be directly and conveniently traced
to a specific cost object.
Indirect costs either cannot be traced to a specific
cost object or are not worth the effort of tracing.
Variable costs change, in total, in direct proportion to
changes in activity.
Fixed costs remain the same, in total, regardless of
activity.
Manufacturing costs are associated with making a
physical product. They can be classified as direct
materials, direct labor, or manufacturing
overhead.
Nonmanufacturing costs are associated with selling a
product or service or running the overall
business.
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Product costs are assigned to a product as it is being
produced; they accumulate in inventory accounts
until the product is sold.
Period costs are reported as expenses as they are
incurred.
Relevant costs are future oriented costs that differ
among decision alternatives.
Irrelevant costs are those that remain the same
regardless of the alternatives and thus will not
affect the decision.
IMA Standards of Ethical Conduct for Management
Accountants
1. Competence
• 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.
2. Confidentiality
• 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.
3 Integrity
• Avoid actual or apparent conflicts of interest and
advise all 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
responsible judgment or successful performance of
an activity.
• Communicate unfavorable as well as favorable
information and professional judgments or
opinions.
• Refrain from engaging in or supporting any activity
that would discredit the profession.
4 Objectivity
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• Communicate information fairly and
objectively.
• Disclose full 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,
management accountants may encounter problems in
identifying unethical behavior or in resolving an ethical
conflict. When faced with significant ethical issues,
management accountants should follow the
established polies of the organization bearing on the
resolution of such conflict. If these polies do no
resolve the ethical conflict, management accountants
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 management level. If satisfactory
resolution cannot be achieved when the
problem is initially presented, submit the
issues 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 the 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.
• Clarify relevant concepts by confidential
discussion with an objective advisor to obtain
an understanding of possible courses of action.
• If the ethical conflict still exists after
exhausting all levels of internal review, the
management accountant may have no other
recourse on significant matters that to resign
from the organization and to submit an
informative memorandum to an appropriate
representative of the organization.
Except where legally prescribed, communication of
such problems to authorities or individuals not
employed or engaged by the organization is not
considered appropriate.
Exercise No. 1
Indicate whether each of the following pertains to
financial accounting or managerial accounting.
1. An internal report used by management
2. An external report used by investors
3. A report prepared periodically (monthly,
quarterly, annually)
4. Information is subjective, relevant, future-
oriented
5. Reports are prepared as needed
6. Information is reported at the decision-making
level
7. Information is reported for the company as a
whole
8. Information is objective, reliable and historical
9. There are no regulations governing the
reports.
10. A focus on a segment of the business entity.
11. A report prepared according to GAAP
12. It is driven by rules.
13. It is prepared for shareholders.
14. Reporting of historical information.
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15. Providing information for decision making and
planning
Exercise No. 2
MULTIPLE CHOICE QUESTIONS
1. The primary purpose of management advisory
services is
a. to achieve the objectives of the MAS firm.
b. to help the client maximize its resources.
c. to improve the client's use of its capabilities
and resources to achieve the objectives of such
client's organization.
d. to help the client identify its problems.
2. Which of the following is a characteristic of
management advisory services?
a. Services rendered are for third parties.
b. Engagements are usually recurring.
c. Human relations do not play a vital role in each
engagement.
d. It involves problem solving.
3. Management accounting:
a. focuses on estimating future revenues, costs,
and other measures to forecast activities and
their results
b. provides information about the company as a
whole
c. reports information that has occurred in the
past that is verifiable and reliable
d. provides information that is generally available
only on a quarterly or annual basis
4. Management accounting is considered successful
when it:
a. helps creditors evaluate the company's
performance
b. helps managers improve their decisions
c. is accurate
d. is relevant and reported annually
5. 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.
6. The process of establishing objectives or goals for
the firm and determining the means by which they
will be met is:
a. controlling.
b. analyzing profitability.
c. planning.
d. assigning responsibility.
7. Which of the following functions is best described
as choosing among available alternatives?
a. Decision making.
b. Planning.
c. Directing operational activities.
d. Controlling.
8. Which of the functions of management involves
overseeing day-to-day activities?
a. Planning
b. Directing and motivating
c. Controlling
d. Decision making
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9. 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.
10. Which activity is NOT normally performed by
managerial accountants?
a. Assisting managers to interpret data in
managerial accounting reports.
b. Designing systems to provide information for
internal and external reports.
c. Gathering data from sources other than the
accounting system.
d. Deciding the best level of inventory to be
maintained.
11. The person MOST likely to use management
accounting information is a(n):
a. banker evaluating a credit application
b. shareholder evaluating a stock investment
c. governmental taxing authority
d. assembly department supervisor
12. Who is the manager in charge of raising cash for
operations and managing cash and near-cash
assets?
a. Chief financial officer.
b. Controller.
c. Treasurer.
d. Internal auditor.
13. ________ management exists to provide advice
and assistance to those responsible for attaining
the objectives of the organization.
a. Line
b. Functional
c. Staff
d. Risk
14. The person(s) directly responsible for the
attainment of organizational objectives is/are
a. the treasurer.
b. line management.
c. the controller.
d. the chief financial officer.
15. An approach to developing new ways to perform
existing activities is called
a. process value analysis
b. re-engineering
c. caveat analysis
d. benchmarking
16. Which of the following best describes the term
“benchmarking?”
a. producing a particular product at the lowest
possible cost.
b. designing the highest quality product in a
given market.
c. developing the best selling product
d. improvement gained through measuring one’s
products against the best products.
17. What modern production methodology emphasizes
strengthening the weakest link of the company to
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improve operations to become more efficient and
effective?
a. Weakest link theory
b. Just-in-time
c. Total quality
d. Theory of constraints.
18. Osorio Corporation recently implemented a just-in-
time (JIT) production system along with a series of
continuous improvement programs. If the firm is
now considering adopting a total quality
management (TQM) program, it would likely find
that TQM is:
a. consistent with both JIT and continuous
improvement.
b. consistent with JIT but inconsistent with
continuous improvement.
c. consistent with continuous improvement but
inconsistent with JIT.
d. inconsistent with both JIT and continuous
improvement.
19. 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.
20. 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.
21. Which item is not an IMA Standard for Ethical
Conduct?
a. Integrity c. Loyalty
b. Competence d. Objectivity
22. Which of the following statements relating to
Standards of Ethical Conduct for Management
Accountants is correct?
a. A management accountant should refuse all
gifts and hospitality offered by one of the
company’s suppliers.
b. A management accountant should inform his
superiors regarding the confidentiality of
information acquired in the course of their
work and monitor their activities to assure the
maintenance of that confidentiality.
c. A management accountant should prepare
complete and clear reports and
recommendations before appropriate analyses
of relevant and reliable information.
d. Management accountants have a responsibility
to disclose fully all relevant information that
could reasonably be expected to influence an
intended user’s understanding of the reports,
comments, and recommendations presented.
23. This principle imposes the obligation on all
professional accountants to be fair, intellectually
honest, and free of conflicts and interests.
a. Integrity c. Maturity
b. Objectivity d. Independence in mental
attitude
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24. Which ethical standard has been violated if an
accountant fails to prepare financial statements
according to industry standards?
a. Competence c. Integrity
b. Confidentiality d. Credibility
25. Which ethical standard is violated when an
accountant uses information from a financial
statements he is preparing to advise a relative of a
stock purchase?
a. Competence c. Integrity
b. Confidentiality d. Credibility
26. 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.
27. The Standards of Ethical Conduct for Management
Accountants developed by the Institute of
Management Accountants state that when faced
with significant ethical issues, management
accountants should first:
a. discuss such problems with the immediate
superior except when it appears that the
superior is involved.
b. clarify relevant concepts by confidential
discussion with an objective advisor to obtain
an understanding of possible courses of action.
c. follow the established policies of the
organization bearing on the resolution of such
conflict.
d. submit an informative memorandum describing
the ethical issue to an appropriate
representative of the organization and resign if
no action is taken as a result of the
memorandum.
28. The Standards of Ethical Conduct for Management
Accountants developed by the Institute of
Management Accountants states that significant
ethical issues should be discussed with an
immediate superior unless the superior is involved.
If satisfactory resolution cannot be achieved when
the problem is initially presented, then the issues
should be:
a. submitted to the next higher managerial level.
b. submitted to the chief executive officer.
c. submitted to the audit committee, executive
committee, board of directors, or owners.
d. submitted to outside legal counsel.
29. An advantage of downsizing is
a. decreased costs in the long run.
b. layoffs.
c. one-time losses.
d. reduced communication.
30. The question "How much information is enough?"
for managerial purposes should be answered on
a. a cost/benefit basis.
b. a cost, but not benefit, basis.
c. a benefit, but not cost, basis.
d. neither costs nor benefits, but some other
criteria.
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