STRATEGIC COST MANAGEMENT

MANAGEMENT ACCOUNTING & FINANCIAL 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

1. Planning – involves setting immediate and long-term objectives and deciding which alternative is best suited to attain the
set objectives.
2. 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.
3. 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.

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

FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING

1. User on information
2. Guiding principles
3. Optional/Mandatory
4. Type of information
5. Emphasis of reports
6. Purpose/End result
7. Source of data
8. Amount of detail
9. Focus of information
10. Frequency
11. Time orientation
12. Unifying model
Primarily for external users
Generally Accepted Accounting Principles
Mandatory
Primarily monetary (financial) in nature
Reliability (precision of data)
Financial reporting and compliance
From company’s (internal) info. system
Compressed and simplified
Focus mainly on business as a whole
Periodic (annually, quarterly)
Mainly historical (past) data
Assets = Liabilities + Equity
Exclusively for internal users
Management wants and needs
Discretionary or optional
Monetary and non-monetary
Relevance (timeliness of data)
Decision-making
From internal and external users
Extensive and detailed
Focus on segments and business as a whole
As frequent as need arises
Future-oriented using current and past data
No unifying model or equation

The Controller: Chief Management Accountant

Controllership – 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 – 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.

Responsibilities of Controller:
1. Financial accounting 4. Cost & management accounting
2. Accounting systems & procedures 5. Financial analysis & special studies
3. Government & tax reporting

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.

Standards of Ethical Conduct for Management Accountants

1. Competence – maintain an appropriate level of professional competence by ongoing development of their knowledge and
skills.
2. Confidentiality – refrain from disclosing confidential information acquired in the course of their work, except when
authorized and/or unless legally obligated to do so.
3. Integrity – refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically.
4. Objectivity – communicate information fairly and objectively and disclose fully all relevant information relative to users ’
needs.

WRAP-UP EXERCISES (MULTIPLE-CHOICE)

1. The discipline of accounting concerned with providing information to management in making decisions about business
operations.
a. Cost accounting c. Government accounting
b. Financial accounting d. Management accounting

2. The primary purpose of management accounting is to provide information

a. To external users c. To both internal and external users
b. To internal users d. To management and government

3. Which of these information characteristics is deemed most important to management accounting?

a. Verifiability and accuracy c. Relevance, flexibility and timeliness
b. Comparability and full disclosure d. Conservatism and substance over form

4. Managerial accounting
a. Is governed by Generally Accepted Accounting Principles
b. Is concerned only with monetary information
c. Is discretionary rather than mandatory
d. Is focused on business as a whole rather than on segments of the business

5. Managerial accounting is similar to financial accounting in that

a. Both are governed by GAAP c. Both concentrate with historical costs
b. Both classify information in the same way d. Both deal with economic events

6. Which of the following is false?

a. Management accounting is synonymous to managerial accounting
b. Management accounting has no externally imposed standards while financial accounting has to follow the GAAP
c. Financial accounting deals with information that is primarily reported to individuals outside the organization
d. Cost accounting refers to accounting for the annual costs of operating a business.

7. Which of the following statements is true?

a. Financial accounting is a subset of cost accounting
b. Management accounting is a subset of cost accounting
c. Cost accounting is a subset of both management and financial accounting
d. Management accounting is a subset of both cost and financial accounting

8. Cost accounting system is usually utilized for

a. Internal and external reporting that may be used in making non-routine decisions and in developing plans and policies
b. External reporting to government, various outside parties and shareholders
c. Internal reporting for use in management planning and control, and external reporting to the extent its product-costing
function satisfies external reporting requirements
d. Internal reporting for use in planning and controlling routine operations

9. The basic management process does not include

a. Planning b. Controlling c. Subordinating d. Rationalizing
10. The function of management that compares planned results against actual results is known as
a. Planning b. Directing & motivating c. Controlling d. Decision-making

11. The management control process contains the following four sequential steps, including
I. Implementing a program of corrective action.
II. Comparing actual performance with standards.
III. Establishing standards of performance.
IV. Measuring actual performance.

The proper sequence of these activities is:

a. III, IV, I, II b. IV, III, II, I c. IV, II, III, I d. III, IV, II, I

12. 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

13. The controller primarily

a. Occupies a line position c. Occupies a non-supervisory rank-and-file position
b. Occupies a staff position d. Has no or very little influence in the decision-making process

14. Which is a characteristic of a line function rather than a staff function?

a. It is a function that gives support, advice and service to line managers.
b. It is the authority to command action or give orders to subordinates.
c. It is exercised laterally or upward.
d. It is a support function by provision of services to a co-department.

15. Which of the following statements is true?

a. The controller performs primarily a line function
b. The treasurer performs primarily a line function
c. The primary functions of a controller are basically the same as those of a treasurer.
d. The controller, as the title implies, exercises direct control over business operations.

16. Controllers are ordinarily not concerned with

a. Preparation of tax returns c. Protection of assets
b. Reporting to government d. Investor relations

17. The treasurer is usually not concerned with

a. Financial reporting c. Cash custody and banking
b. Short-term financing d. Credit extension and collection of bad debts

18. The professional certification most relevant for managerial accountants is the
a. CPA b. CIA c. CMA d. CFA

19. Which term is not an IMA Standard of Ethical Conduct for Management Accountants?
a. Competence b. Integrity c. Loyalty d. Objectivity

20. Management accounting information is deemed most successful if it

a. Is accurate c. Helps managers improve their decisions
b. Is easily understood by the user d. Helps creditors evaluate the company’s ability to pay its debts