Department of Accounting Education

Mabini Street, Tagum City

Davao del Norte
Telefax: (084) 655-9591, Local 116

A. Big Picture in Focus: ULOa. Describe the nature,

scope, objective and responsibilities of management
accounting.

Metalanguage
In this section, the most essential terms relevant to the study of curriculum
and to demonstrate ULOa will be operationally defined to establish a common frame
of refence as to how the texts work in your chosen field or career. You will encounter
these terms as we go through the study of taxation. Please refer to these definitions
in case you will encounter difficulty in the understanding educational concepts.
1. Management Accounting. Management accounting measures analyzes,
and reports financial and non-financial information that helps managers make
decisions to fulfill the goals of an organization.

2. Financial Accounting. Financial accounting focuses on reporting to external

parties and measures and records business transactions and provides
financial statements that are based on GAAP.

3. Cost Accounting. Cost accounting provides information for managerial

accounting and financial accounting.

Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for the first two
(2) weeks of the course, you need to fully understand the following essential
knowledge that will be laid down in the succeeding pages. Please note that you are
not limited to exclusively refer to these resources. Thus, you are expected to utilize
other books, research articles and other resources that are available in the
university’s library e.g. ebrary, search.proquest.com etc.

I. Overview of Managerial Accounting

1.0 The Basic Objective of Accounting

 The basic objective of accounting is to provide (stakeholders) with useful
information about a business enterprise in order to help them make rational
economic decisions.

 The basic objective of financial accounting is to provide external users with

useful financial information about the financial performance health, and cash
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

flows of a business enterprise in order to help them make investment and

credit decisions.

 The basic objective of management accounting is to provide internal users

with financial and non-financial information about a business enterprise that
help them make business decisions so as to achieve the goals of the
organization.

 The study of modern cost accounting yields insights into how managers and
accountants can contribute to successfully running their businesses.

1.1 Financial Accounting, Management Accounting, and Cost Accounting

 Accounting systems take economic events and transactions, such as sales

and materials purchases, and process the data into information helpful to
managers, sales representatives, production supervisors, and others.

 Processing any economic transaction means collecting, categorizing,

summarizing, and analyzing.

 Accounting systems provide the information found in the income statement,

the balance sheet, the statement of cash flow, and in performance reports,
such as the cost of serving customers or running an advertising campaign.

 Managers use accounting information to administer the activities, businesses,

or functional areas they oversee and to coordinate those activities,
businesses, or functions within the framework of the organization.

 Individual managers often require the information in an accounting system to

be presented or reported differently.
o E.g. Sales order information: Sales manager → total dollar amount of
sales to determine the commissions to be paid; Distribution
manager → sales order quantities by geographic region and requested
delivery dates to ensure timely delivery; manufacturing manager →
quantities of various products and desired shipping dates in order to
develop an effective production schedule.

 Companies create a database—sometimes called a data warehouse or info-

barn—consisting of small, detailed bits of information that can be used for
multiple purposes.

 Many companies are building their own Enterprise Resource Planning (ERP)
systems → single databases that collect data and feed it into applications that
support the company's business activities, such as purchasing, production,
sales, and distribution
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

1.1.1 Financial Accounting

 Financial accounting focuses on reporting to external parties and
measures and records business transactions and provides financial
statements that are based on GAAP.
1.1.2 Managerial Accounting
 Management accounting measures, analyzes, and reports financial and
non-financial information that helps managers make decisions to fulfill the
goals of an organization.

 It is used to develop, communicate, and implement strategy.

 It is also used to coordinate product design, production, and marketing

decisions and to evaluate performance.

 The information and reports generated do not have to follow set principles
or rules.

 The key questions are always:

 How will this information help managers do their jobs better?
 Do the benefits of producing this information exceed the costs?
Benefits > Costs

1.1.3 Comparing Managerial Accounting 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.

 Reports such as balance sheets, income statements, and statements of

cash flows are common to both fields of accounting.

Management Accounting Financial Accounting

Purpose of •Help managers make decisions •Communicate organization’s

Information to fulfill an organization' goals financial positions to investors,
banks, regulators and other
•Special-purpose for a particular
outside parties
user for a specific
•Help external users to make
investment & credit decisions

Primary users Internal users: managers of the External users: investors, banks,
organizations at all levels creditors, regulators, and
suppliers
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Focus and Current and Future-oriented Past-oriented (reports on 2010

emphasis (budget for 2011 prepared in performance prepared in 2011)
2010)

Rules of Internal measures and reports do Financial statements must follow

measurement and not have to follow GAAP but are GAAP, and be certified and
reporting based on cost-benefit analysis regulated by external,
independent auditors

Time span and type •As frequent as needed Periodic (E.g. annual/quarterly)
of reports financial reports, primarily on the
•Varies from hourly information
company as a whole
to 15 to 20 years, with financial
and non-financial reports on
products, departments,
territories, and strategies

Behavioural Designed to influence the Primarily reports economic events

implications behaviour of mangers and other but also influences behaviour
employees because manager's compensation
(bonuses) is often based on
reported financial results

Guideline for Focus is on relevance Focus is on Reliability

judging usefulness
of information

Verification process Internal audit Independent-external audit

1.1.4 Cost Accounting

 Cost accounting provides information for managerial accounting and
financial accounting.

 It measures, analyzes, and reports financial and non-financial information

relating to the costs of acquiring or using resources in an organization
o E.g. calculating the cost of a product answers financial
accounting's inventory-valuation needs and managerial
accounting's decision-making needs (such as pricing and
promotion).

 Collecting cost information is a function of the management decisions

being made.

 Thus, the difference between managerial accounting and cost accounting

is no so distinct, and it is often that both terms are used interchangeably.
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

1.1.5 Cost management

 Cost management is used to describe the approaches and activities of
managers to use resources to increase value to customers and to achieve
organizational goals.

 Decisions include whether to enter new markets, implement new

processes, and change product designs.

 Information from accounting systems help managers to manage costs but

are not cost management.

 Cost management includes decisions to incur additional costs.

Example: To improve customer satisfaction and quality and to develop

new products, with the goal of enhancing revenues and profits.

2.0 Strategic Decisions and the Managerial Accountant

 Strategy specifies how an organization matches its own capabilities with the
opportunities in the marketplace to accomplish its objectives.

 Strategy describes how an organization will compete and the opportunities its
managers should seek and pursue.

 Business follow one of two broad strategies:

1. Cost leadership strategy → providing quality products or services at
low prices by judiciously managing their costs.

2. Product differentiation strategy → ability to offer differentiated or

unique products or services that appeal to their customers and are
often priced higher than the less-popular products or services of
their competitors.

 Managerial accountants work closely with managers in formulating strategy by

providing information about the sources of competitive advantage.

 Strategic cost management describes cost management that specifically

focuses on strategic issues.

 Managerial accounting information helps managers formulate strategy by

answering questions such as:
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

 Who are our most important customers, and how can we be

competitive and deliver value to them?
 What substitute product exist in the marketplace, and how do they
differ from our product?
 What is our most critical capability? Technology, production, or
marketing? How can we leverage it for new strategic initiatives
 Will adequate cash be available to fund the strategy, or will additional
funds need to be raised?

 The best-designed strategies and best-developed capabilities are useless

unless they are effectively executed.

3.0 Value Chain and Supply Chain Analysis and Key Success Factors
 Customers demand fair price as well as quality products delivered in a timely
way.
3.1.1 Value-Chain Analysis
 Value chain is the sequence of business functions in which customer
usefulness is added to the products.

 Six primary business functions:

1. Research and development (R&D): Generating and

experimenting with ideas related to new products, services, or
processes.
○HDTV and Blu-ray

2. Design of products and processes: detailed planning,

engineering, and testing of products and processes.
○Flat screen, computer compatible, chip complexity, sizes,
controls

3. Production: procuring, transporting and storing (also called

inbound logistic), coordinating, and assembling (also called
operating) resources to product a product or deliver a service
○Suppliers, make or buy, off-shoring

4. Marketing (sales): promoting and selling products/services to

customers or potential customers.
○Advertising, promotion, pricing, availability

5. Distribution: processing orders and shipping products/services

to customers (aka outbound logistics)
○Packaging, transportation mode, security, channels
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

6. Customer service: providing after-sales service to customers

○Timing, communication, repair, servicing

 Each of these business functions is essential to companies satisfying

their costumers and keeping them satisfied and loyal over time.

 Companies use the term customer relationship management (CRM) to

describe a strategy that integrate people and technology in all business
functions to deepen relationships with customers, partners, and
contributors.
 At different times and in different industries, one or more of these
functions is more critical than others.

 Companies gain (in terms of cost, quality, and the speed of developing
new products) if two or more of the individual business functions work
concurrently as a team.

 Managers track the costs incurred in each value-chain category; their

goal is to reduce costs and improve efficiency.

 Managerial accounting information helps managers make cost-benefit

tradeoffs.
3.1.2 Supply-Chain Analysis
 Supply chain is the parts of the value chain associated with producing
and delivering (production and distribution).

 Supply chain describe the flow of goods, services, and information from
the initial sources of materials and services to the delivery of products
to consumers, regardless of whether those activities occur in the same
organizations or other organizations.

 Cost management emphasizes integrating and coordinating activities

across all companies in the supply chain, to improve performance and
reduce costs.
Sample Supply Chain for a Cola Bottling company

Suppliers of Ingredients → Manufacturer of Concentrate → Bottling

Company → Distribution Company → Retail Company → Final
Consumers
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

3.2 Key Success Factors

 Customers want companies to use the value chain and supply chain to
deliver improving levels of performance regarding several (or even all)
factors:

1. Cost and efficiency → companies face pressure to reduce cost.

Managers must first understand the tasks and activities that cause
costs to arise. They must also be aware of the price customers are
willing to pay. From this target price, managers subtract the
operating income they want to earn to arrive at the target cost
(Price - Cost = Income). Managers strive to achieve the target cost by
eliminating some activities and by reducing the costs of performing
activities.

2. Quality → Customers expect high levels of quality. Total quality

management (TQM) aims to improve operations throughout the
value chain and to deliver products and service that exceed customer
expectations.

3. Time → New product development time is the time it takes for new
products to be created and brought to market. Customer-
response time describe the speed at which an organization responds
to customer requests which relates to customer satisfaction and
loyalty.

4. Innovation → constant flow of innovative products/services is the

basis for ongoing company success.

 Companies are increasingly applying the key success factors of cost and
efficiency, quality, time, and innovation to promote sustainability—the
development and implementation of strategies to achieve long-term
financial, social, and environmental performance.

 Management accountants help managers track performance of competitors

on the key success factors. •Competitive information serves as a
benchmark and alerts managers to market changes.

 Companies are always seeking to continuously improve their operations.

 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

4.0 Decision Making, Planning, and Control: The Five-Step Decision-Making

Process
 To decide what to, managers works through the five-step decision making
process
1. Identify the problem and uncertainties.

2. Obtain information → gathering information before making a decision

helps managers gain a better understand of the uncertainties.

3. Make predictions about the future.

4. Make decisions by choosing among alternatives → When making

decisions, strategy is a vital guidepost; many individuals in different
parts of the organization at different times make decisions. Consistency
with strategy binds individuals and time-lines together and provides a
common purpose for disparate decisions. Aligning decisions with
strategy enables an organization to implement its strategy and achieve
its goals. Without this alignment, decisions will be uncoordinated, pull the
organization in different directions, and produce inconsistent results.

 Steps 1 through 4 are collectively referred to as planning. Planning comprises

selecting organization goals and strategies, predicting results under various
alternative ways of achieving those goals, deciding how to attain the desired
goals, and communicating the goals and how to achieve them to the entire
organization.

 The most important planning tool when implementing strategy is a budget. A

budget is the quantitative expression of a proposed plan of action by
management and is an aid to coordinating what needs to be done to execute
that plan.

5. Implement the decision, evaluate performance, and learn →

Management accountants collect information to follow through on how
actual performance compares to planned or budgeted performance
(also referred to as score-keeping). The comparison of actual
performance to budgetedperformance is the control or post-decision role
of information. Control comprises taking actions that implement the
planning decisions, deciding how to evaluate performance, and providing
feedback and learning to help future decision making. Measuring actual
performance informs managers how wellthey and their subunits are
doing. Linking rewards to performance helps motivate managers.
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

 Learning is examining past performance (the control function) and

systematically exploring alternative ways to make better-informed decisions
and plans in the future.
5.0 Key Management Accounting Guidelines
 Three guidelines help management accountants provide the most value to
their companies in strategic and operational decision making: Employ a cost-
benefit approach, give full recognition to behavioural and technical
considerations, and use different costs for different purposes.
6.0 Cost-Benefit Approach
 Managers continually face resource-allocation decisions, such as whether to
purchase a new software package or hire a new employee.

 They use a cost-benefit approach when making these decisions: Resources

should be spent if the expected benefits to the company exceed the expected
costs.

 Managers rely on management accounting information to quantify expected

benefits and expected costs although all benefits and costs are not easy to
quantify.

 The cost-benefit approach is a useful guide for making resource-allocation

decisions
7.0 Behavioural and Technical Considerations
 The technical considerations help managers make wise economic decisions
by providing them with the desired information in an appropriate format and at
the preferred frequency.

 Now consider the human (the behavioural) side of why budgeting is used.

 Budgets induce a different set of decisions within an organization because of

better collaboration, planning, and motivation.

 The behavioural considerations encourage managers and other employees to

strive for achieving the goals of the organization.

 Both managers and management accountants should always remember that

management is not confined exclusively to technical matters.

 Management is primarily a human activity that should focus on how to help

individuals do their jobs better
8.0 Different Costs for Different Purposes
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

 Managers should use alternative ways to compute costs in different decision-

making situations, because there are different costs for different purposes.

 A cost concept used for the external-reporting purpose of accounting may not
be an appropriate concept for internal, routine reporting to managers.
9.0 Organization Structure and the Management Accountant
9.1 Line and Staff Relationships
 Organizations distinguish between line management and staff
management.

 Line management, such as production, marketing, and distribution

management, is directly responsible for attaining the goals of the
organization.

 Staff management, such as management accountants and information

technology and human-resources management, provides advice, support,
and assistance to line management.
 A plant manager (a line function) may be responsible for investing
in new equipment.
 A management accountant (a staff function) works as a business
partner of the plant manager by preparing detailed operating
cost comparisons of alternative pieces of equipment.

9.2 The Chief Financial Officer and the Controller

 The chief financial officer (CFO)—also called the finance director in many
countries—is the executive responsible for overseeing the financial
operations of an organization.

 Their responsibilities include:

 Controllership—includes providing financial information for reports
to managers and shareholders, and overseeing the overall
operations of the accounting system
 Treasury—includes banking and short- and long-term financing,
investments, and cash management
 Risk management—includes managing the financial risk of
interest-rate and exchange-rate changes and derivatives
management
 Taxation—includes income taxes, sales taxes, and international tax
planning
 Investor relations—includes communicating with, responding to,
and interacting with shareholders
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

 Internal audit—includes reviewing and analyzing financial and

other records to attest to the integrity of the organization’s financial
reports and to adherence to its policies and procedures

 The controller (also called the chief accounting officer) is the financial
executive primarily responsible for management accounting and financial
accounting.

 It should be clear that the successful management accountant must have

technical and analytical competence as well as behavioural and
interpersonal skills.

Self Help: You can also refer to the sources below to help
you further understand the lesson.

Cabrera, M.E (2017). Management Accounting: Concepts and Applications. GIC

Enterprises & Co.

Bobadilla, D. (2015). Comprehensie reviewer in management advisory services.

Manila, Philippines: Lares Bookstore.
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Guia, M. B. M.(2016). Basics of managerial accounting. Ma-a, Davao City: MS Lopez

Printing & Pub.

Let’s Check

Activity 1. Classify each cost into one of the business functions of value chain,
either (1) R&D, (2) Design, (3) Production, (4) Marketing, (5) Distribution, or (6)
Customer Service.

1. Cost of Samples mailed to promote sales of a new product.

2. Labor cost of workers in the manufacturing plant.
3. Bonus paid to person with 90% satisfaction rating in handling customers with
complaints.
4. Transportation costs for shipping products to retail outlets.
5. Cost of customer order forms.
6. Cost of paper used in packing cartons to ship books.
7. Cost of paper used in display at national trade show.
8. Depreciation of trucks used to transport books to college bookstores.
9. Cost of wood to manufacture paper.
10. Salary of scientists attempting to find another source of printing ink.

Let’s Analyze
Activity 1. Choose the correct answer.

1. The primary objective of management accounting is

a. To provide stockholders and potential investors with useful information for
decision making.
b. To provide banks and other creditors with information useful in making
credit decisions.
c. To provide management with information useful for planning and control of
operations.
d. To provide supervising government agencies with information about the
company’s management affairs

2. Management accounting information

a. Uses historical cost as the basis for reports to managers who are making
decisions about future courses of action.
b. Should be developed and provided only if its benefits exceed its costs.
c. Does not reflect the financial criteria of verifiability or consistency.
d. Should serve the basic needs of investors and creditors.

3. Which of the following statement is FALSE?

a. Managerial accounting need not conform to GAAP.
b. Financial accounting reports focus on subunits of the organization.
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

c. Managerial accounting is not required

d. Managerial accounting focuses on the needs of internal users.

4. Managerial accounting information:

a. Pertains to the entity as a whole and is highly aggregated.
b. Pertains to subunits of the entity and may be very detailed.
c. Is prepared only once a year.
d. Is constrained by the requirements of generally accepted accounting
principles.

5. Managerial accounting differs from financial accounting in that it is

a. More concerned with segments of a company.
b. Less constrained by rules and regulations.
c. More concerned with the future.
d. All of the above.

6. Management accountants would not

a. Assist in budget planning.
b. Prepare reports primarily for external users.
c. Determine cost behavior.
d. Be concerned with the impact of cost and volume on profits.

7. Which of the following activities is not usually performed by a management

accountant?
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.

8. The major reporting standard for presenting managerial accounting information is

a. Relevance
b. Generally accepted accounting principles
c. The cost principle
d. The current tax law

9. The major functions of management is (are):

a. Strategic management and long-range planning.
b. Planning and decision making.
c. Identifying threats and opportunities for the firm.
d. All of the above.

10. Which of the following statements correctly distinguishes financial and

managerial accounting?
a. Managerial accounting reports on the whole organization
b. Financial accounting is oriented toward the future
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

c. Financial accounting is primarily concerned with providing information

for internal users
d. Managerial accounting is oriented more toward the planning and control
aspects of management

Activity 2. Getting acquainted with the essential terms in the study of management
accounting principles is not enough, what also matters is you should also be able to
explain its concepts. Now, I will require you to explain thoroughly your answers.

1. The job responsibilities of two employees of Boots Manufacturing are as

follows:

Jamie Reyes, Cost Accounting Manager, Jamie is responsible for measuring

and collecting costs associated with the manufacture of the garden hose
product line. She is also responsible for preparing periodic reports comparing
the actual costs with planned costs. These reports are provided to the
production line managers and the plant manager. Jamie helps explain and
interpret the reports.

Stephen Santos, Production Manager, Stephen is responsible for the

manufacture of the high quality garden hose. He supervises the line workers,
helps develop the production schedule, and is responsible for seeing that
production quotas are met. He is also held accountable for controlling
manufacturing costs.

Required: Identify Jamie and Stephen as line or staff and explain your
reasons.

_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________

2. Management Accountants are actively involved in the process of managing

the entity. This process includes making strategic, tactical, and operating
decisions while helping to coordinate the efforts of the entire organization. To
fulfill these objectives, the management accountant accepts certain
responsibilities that can be identified as (1) Planning, (2) Controlling, (3)
Evaluating Performance (4) Ensuring Accountability of resources, and
(External Reporting).
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Required: Describe each of these responsibilities of the management

accountant and identify examples of practices and techniques.
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
In a Nutshell

In this part you are going to jot down what you have learned in this unit. The said
statement of yours could be in a form of concluding statements, arguments, or
perspective you have drawn from this lesson.

Now it’s your turn!

1. ________________________________________________________.
2. ________________________________________________________.
3. ________________________________________________________.
4. ________________________________________________________.
5. ________________________________________________________.

Q and A

In this section you are going to list what boggles you in this unit. You may indicate
your questions but noting you have to indicate the answers after your questions is
being raised and clarified. You can write your questions below:

Questions/ Issues Answers

1.
2.
3.
4.
5.

Keywords

 Cost Accounting
 Financial Accounting
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

 Key Success Factor

 Management Accounting
 Supply Chain
 Value Chain