Management Accounting

Management Accounting is a profession that involves partnering in decision-making, devising,

planning, and performance management systems and providing expertise in financial reporting
and control to assist management in the formulation and implementation of an organization’s
strategy.
Objective: To provide information to management to serve as a basis in making decisions.
Management accountants do the following tasks:
• Scorekeeping or data accumulation
• Interpreting and reporting information
• Problem-solving

Administrative Functions of Management

• Planning involves setting of goals for the firm, evaluating the various ways to meet the goals,
and picking out what appears to be the best way to meet the goals.
• Controlling involves the evaluation of whether actual performance conforms with planned
goals.
• Decision-making involves the determination of predictive information for making important
business decisions.
Financial Accounting involves the systematic recording of business transactions governed by a
body of international reporting standards leading to the preparation of financial statements for
the use of various interested parties, internal as well as external.
Management Accounting is concerned with providing financial information to persons within
the organization to enable them to make informed judgments and effective decisions which
further the organization’s goals.

Specific Differences Between Financial Accounting and Management Accounting

Financial Accounting
1. Reports to various interested parties (External and Internal ) Owners, Lenders, tax
Authorities, Regulators, Managers.
2. Emphasis is on summaries of financial consequences of past activities.
3. Objectivity and verifiability of data are emphasized.
4. Precision of information is required.
5. Only summarized data for the entire
6. Must follow IFRS/
7. Mandatory for external reports.
Management Accounting
1. Reports to managers within the organization for: Planning, Directing and
Motivating,Controlling,Performance Evaluation.
2. Emphasis is on future –oriented data needed in decision making.
3. Relevance is emphasized.
4. Timeliness of information is required.
5. Detailed segment reports about Departments, products, customers and employees are
prepared.
6. Need not follow IFRS
7. Not mandatory
Cost Accounting is a branch of accounting that deals with the process of recording, summarizing
the amount of cost that is spent on the company’s activities. It includes the cost of process,
product or service used, provided and sold.

Controllership is the practice of the established science of control which is the process by which
management assures itself that the resources are procured and utilized according to plans.

Controller is the financial executive primarily responsible for management accounting and
financial accounting. (highest accounting executive in the organization).

Controller’s functions as distinguished from the Treasurer

Controller Treasurer
1. Planning and control 1. Provision for capital
2. Reporting and interpreting 2. Investor relations
3. Evaluating and consulting 3.Short-term financing
4. Tax administration 4. Banking and custody
5. Government reporting 5.Credit and collection
6. Protection of assets 6. investments
7. Economic Appraisal

Line authority is the authority to command action or give orders to subordinates.

Staff authority is the authority to advise but not command others. It is exercised laterally.

Professional Ethics
Standards of Ethical Conduct for Practitioners of Management Accounting and Financial
Management

Competence –have adequate knowledge, skills, and experience in the practice of the profession.
• 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 analysis and
reliable information.

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 of 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.

Integrity is a highly professional characteristic that requires one to be honest and trustworthy.
• Avoid actual or apparent conflicts of interest and advise all parties of any potential conflict.
• Refrain from engaging in any activity that would prejudice to carry out their.
duties ethically.
• Refuse any gift, favor, or hospitality that 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.

Objectivity Practitioners of management accounting and financial management

have a responsibility to:
• Communicate information fairly and objectively.
• Disclose fully all relevant information that could reasonably be expected to influence an
intended user’s understanding of the reports, comments and recommendations presented.The
Institute of Management Accountants (IMA) is the principal organization of management
accountants in the US that instituted programs to provide certification for management
accountants and financial managers. It also promulgated a code of ethics for management
accountants.
• Global trends in management accounting

Management accounting concepts and techniques for planning and control

COST may be defined as the value foregone or sacrifice of resources for the purpose of
achieving some economic benefit which will promote the profit making ability of the firm.
Cost pools are costs collected into meaningful groups. (by type, by source, by responsibility)
Cost object is any product or service or organizational unit to which costs are assigned for some
management purpose.
Cost driver is any factor that has the effect of changing the level of total cost.
Cost assignment is the process of assigning costs to cost pools or from cost pools to cost
objects.
Cost allocation is the assignment of indirect costs to cost pools.
Allocation bases are cost drivers to allocate costs

Classification of Costs
A. Costs classified by Nature of Management Function
Manufacturing Costs are all the costs associated with production of goods.
Direct materials - all raw material costs that become an integral part of the finished
product and can be conveniently and economically assigned to specific units manufactured.
Direct Labor - all labor costs related to time spent on products that can be conveniently
and economically assigned to specific units manufactured.

Manufacturing overhead - includes all costs of manufacturing except direct materials

and direct labor.
 Indirect materials - materials and supplies used in the manufacturing operation
that do not become part of the product.
Indirect labor labor costs that cannot be identified or traced to specific units
manufactured.

Other manufacturing overhead

Non manufacturing costs - generally includes costs related to selling and other activities not
related to the production of goods.
Marketing costs or selling costs - all costs associated with marketing or selling a product.
General and administrative costs - include all executive, organizational and clerical costs
associated with the general management of the organization rather than with manufacturing,
marketing or selling.

B. Timing of Recognition as Expense

Product cost - include all the costs that are involve in acquiring or making the product. Also
called cost.
Period Cost - all the costs that are identified with accounting periods and not included in
product cost.

C. Cost classification for predicting cost behavior

Cost behavior -refers how a cost will react or respond to changes in the business activity.
Variable costs -costs that change directly in proportion to changes in activity (volume). Ex.
Direct materials, direct labor
Fixed costs -costs that remain unchanged for a given period regardless of change in activity
(volume). Ex. rent, depreciation of factory equipment
Semivariable costs- costs that contain both fixed and variable elements.

D. Costs classified by types of inventory

Raw materials inventory – the cost of all raw material and production supplies that have been
purchased but not used at the end of the period.
Work-in-process inventory – the cost associated with goods partially completed at the end of
the period.
Finished goods inventory - cost of completed goods that have not been sold at the end of the
period

E. Costs classification according to traceability to cost objective

Direct costs – costs that can be economically traced to a single cost object.
Indirect costs – costs that are not directly traceable to the cost object.

F. Cost classification according to managerial influence

Controllable cost – cost that is subject to significant influence by a particular
manager within the time period under consideration.
Non controllable cost – cost over which a given manager does not have a significant influence.

G. Cost classification according to a time-frame perspective

Committed cost – cost that is inevitable consequence of a previous commitment.
Discretionary cost – cost for which the size or time of incurrence is a matter of choice.

H. Cost classified according to time period for which the cost is incurred
Historical costs (Past costs) – costs that were incurred in a past period.
Future costs – budgeted costs that are expected to be incurred in a future period.

I. Cost terminologies used for Planning and Control

Standard costs – predetermined cost estimates that should be attained; usually expressed in
terms of cost per unit.
Budgeted costs – used to represent the expected /planned cost for a given period.
Absorption costing – a costing method that includes all manufacturing costs in the cost of unit
of product. It is also referred to as the full cost method.
Direct Costing – product where fixed costs are charged against revenue as incurred and are not
assigned to specific units of product manufactured. ( Variable Costing)Information costs – costs
of obtaining information.
Ordering costs – costs that increase with the number of orders placed for inventory.
Out of pocket costs – costs that must be met with a current expenditure or cash outlay

J. Cost classifications for decision making and other analytical purposes.

Relevant cost – future costs that are different under one alternative than under another
alternative.
Incremental costs – the difference in cost between two or more alternatives. Incremental cost is
the additional revenue to determine the feasibility of this particular alternative.
Sunk costs – past costs that have been incurred and are irrelevant to a future decision.
Opportunity costs – the value of the best alternative foregone as a result of selecting a different
use of resource or by choosing a particular strategy.
Marginal costs – is the change in total cost for a business as a result of a one unit change in
output.
Value added cost – costs that add value to the product. These costs result from activities that
are necessary to satisfy requirements of the customer.