LESSON 1 - INTRODUCTION TO MANAGEMENT

ACCOUNTING

DEFINITION OF BUSINESS AND BUSINESS OWNERS

A business is an organization engaged in manufacturing, trading, or service activity (or a
combination of these activities) to earn a profit. However, as the global business environment
evolves, a business is already defined as an organization sharing a vision and mission
working
for a common goal.

Individuals who invested capital into a business are called investors (or business owners). More
often than not, business owners are usually misunderstood as management. However, in its real
sense, business owners are usually contributors of capital, unless they are actively involved
in the operations of the business. Business owners, who do not want to actively participate in the
operations of the business, normally entrust the future of the business organization to its
management.

DEFINITION OF MANAGEMENT AND THE MANAGEMENT FUNCTION

Management, as the recipient of trust from the business owners, should ensure that the
organization operates effectively and efficiently and that business owners will receive
favorable
return from its investment.

However, as the global business environment changes, the military definition of management
(i.e. directing people) has evolved and has become more dynamic. Today, management is
composed of four basic process namely planning, organizing, leading, and controlling.
Specifically, the following functions are defined below:

1. Planning – is the process of setting goals for the organization and ensuring that the
company is prepared for its day to day operations. Common activities under this are
budgeting, cost volume profit analysis, and forecasting.
2. Organizing – is the process of developing an organizational structure and assigning
people to ensure the accomplishment of objectives. Common activities under this are
departmentalization or decentralization.
3. Leading – is the process of empowering an organization, including its people. Common
activities under this are human resource development, training, and team building
activities.
4. Controlling – is the process of ensuring that the organization is performing well, in
reference to their chosen standard and/or benchmark. Common activities under this are
variance analysis, performance report, and responsibility accounting.

In general, all of these four functions are performed by management to ensure that
organizational objectives are met and that business owners are receiving return from their
investment.

THE VALUE OF INFORMATION

Management, in performing its function, requires information to ensure that business is working
effectively and efficiently. Without information, management cannot assess if the plan they have
prepared worked out well, if the organizing and leading process is working effectively, and if the
control process is still being implemented. Thus, information, whether financial or non-
financial, is required in order to assist management in performing their basic functions.

DEFINITION OF MANAGEMENT ACCOUNTING

As discussed above, managers require relevant and reliable information which would serve as
the basis of their day to day decisions. Due to this need for information, accountants are
assigned to perform management accounting. Management accounting is defined to be the
branch of accounting that aims to identify, accumulate, analyze, interpret, and communicate
various information to support the management function.
Involves the application of appropriate techniques and concepts to economic data so as to assist
management in establishing plans for reasonable economic objectives and in the making of
rational decisions with a view toward achieving these objectives.
 MAIN OBJECTIVES OF MANAGEMENT ACCOUNTING
The main objectives of management accounting are the
following:
Make information available and understandable to management;
Assist management in performing its function;
And help the organization in achieving its short-term and long term goals.

SCOPE OF MANAGEMENT ACCOUNTING

The main scope of management accounting are the
following:
Information Gathering
Data Analysis and Reporting
Decision Making

FINANCIAL ACCOUNTING AND ITS DIFFERENCE FROM MANAGEMENT ACCOUNTING

Business organizations, apart from management, also have various stakeholders such
as customers, investors, government, suppliers, and etc. which demand relevant and
reliable information about the business operations specifically its profit and current financial
position. Despite this information need, these stakeholders have no direct access to the
company’s accounting records. Due to this demand, accountants are required to perform
financial accounting which involves the preparation of general-purpose financial statements for
various stakeholders.

According to the framework, stakeholders are investors (potential and current) - concerned with
the risk inherent and the return provided by their investment. It is also an important venue to
know whether the investor should hold, sell, or buy an investment; employees – main concern is
the profitability of their employers and the capacity to provide remuneration, retirement benefits
and employee opportunities; lenders – main concern is the capacity to pay the loan due to
them; suppliers (other trade creditors) – capacity to pay the debt due to them but normally on a
short term planning horizon; customers – continuance and dependence theory; and
governments – concerned with public regulation, levy of taxes, allocation of resources.

Area Management Accounting Financial Accounting

End User Internal User – Management Various Stakeholders
Frequency Frequently, Depending on Annual or depending on rules and regulation
Management Needs
Reports Management Needs company
Pertains to part/entire Reports are limited to financial aspect
Future Oriented Pertains to the entire company
Regulation Optional and not regulated Past oriented/Historical
Required by various government agencies
and is regulated
Types of Unrestricted (not based on double Restricted (based on double entry
accounting entry bookkeeping) bookkeeping)
system
Measurement Not limited to monetary value (maybe Limited to monetary value (historical peso
financial, nonfinancial, or statistical) value)

LINKAGE BETWEEN FINANCIAL AND MANAGEMENT ACCOUNTING: COST

ACCOUNTING Cost pertains to a resource “given up” or “to be given up” to attain a specific
objective. Usually, costs are driven by various activities within an organization (cost driver).
Accounting, on the other hand, is simply defined as the language of business because it
identifies, analyzes, interprets, and communicates business information to various users.
Combining the two definitions together, cost accounting is a branch of accounting that deals with
the process of identifying, analyzing, interpreting, and communicating cost information to
various users.

ACCOUNTANTS IN ORGANIZATION
Note that accountants assist management in performing its various functions. As such,
accountants may be strategically positioned in various departments to obtain a more vivid
understanding of the entity’s operations. The position of accountants, although deployed in
various departments, are still usually considered as staff function and not a line function.

Staff function supports the organization although not directly involved in its front operations,
while line positions are those directly dealing with customers (that is front operations).
CONTROLLSERSHIP VERSUS TREASURERSHIP
Controllership is a science of control which is the process by which management assures itself
that the resources acquired are used effectively and efficiently. Specifically, the controller has
the following, but not limited to, functions:
1. Planning for control
2. Financial Reporting
3. Management Audit
4. Tax administration
5. Government Reporting
6. Economic appraisal

Treasurership is a science of management of funds/finances. Specifically, the treasurer has the

following functions:
1. Provision of capital
2. Investor relations
3. Short term financing
4. Banking and custody of fund
5. Investments
6. Insurance

In a traditional environment, the controller is normally the chief finance officer of the company.
However, as the organization evolves, the chief finance officer is already different in the
controller as it occupies a seat in the top management team, capable of making financial
decisions.

ETHICAL STANDARDS IN ACCOUNTING

In performing our function, the following ethical standards must be observed by all
accountants, regardless of area/subject matter:

1. Integrity –avoid being associated with incorrect, incomplete, misleading statements .

2. Objectivity – it means being fair, honest, and free from conflict of interest (e.g. bias)
3. Professional Competence and Due care – a consultant should strive to improve his
knowledge and skills to ensure that client receive a competent service. Due care
encompasses compliance with technical and professional standards, thorough examination
and on a timely
basis.
4. Confidentiality – the consultant must not disclose or use for own personal advantage any
information acquired in the course of the professional relationship, unless with authority,
required by law (evidence in court, infringement) right, or duty to disclose (quality review,
self-
protection, comply with ethics). This standard extends to social environment,
prospective client, each staff, and expert used, as well as after business relationship.
5. Professional Behavior – refrain from actions that will discredit the profession. A consultant
must not make exaggerated claims and comparisons.

References:
1. Hilton, 9th Edition. Managerial Accounting. Irwin Mc-Graw Hill.
2. Garrison/Noreen, 12th Edition. Managerial Accounting. Irwin Mc-Graw Hill.
3. Various reviewers in Management Advisory Services.
4. Actual AICPA/Philippine CPA Board Examinations in Management Advisory Services.