vane Franklin T. Agamata, MBA, HLM IIFP FICB, CPA Basted A Comprehensive GuideLORDS = LO OO INE CKD: _ MANAGEMENT SERVICES A Comprehensive Guide # 2021 EditionPhilippine Copyright 2021 by FRANKLIN T. AGAMATA Any copy of this book not bearing the signature of the author shall be considered as preceding from an illegal source. a ALL RIGHTS RESERVED ISBN: 978-621-416-113-3 Published & Printed by: GIC ENTERPRISES & CO., INC. *National Book Development Board Registered 2017 C.M. Recto Avenue, Sampaloc Manila, Philippines For my parents to whom iam entrusted children to whom i owe their future ‘habibi to whiom i owe my blessed smiles and for those who labor in preserving our planet an amazing gift to sojournFranklin T. Agamata, MBA, FICB, CAT, CPA, has been a teacher, an academic officer, reviewer, management executive, business advisor, social development enthusiast, accounting and finance practitioner, advisor to small and medium-sized enterprises, technical speaker/presenter, trainer, facilitator, coach, researcher, and entrepreneur. His belief in egalitarian education made him organized four colleges and served in various capacities as Dean, Vice President for Academics, President, Member and Chairman of the Board of Trustees. His commtiment to restructure accounting education aptly placed him in the forefront of establishing more than a dozen of excellent CPALE Review Centers around the country always reaching to those who need it most. In 2007, he founded the Philippines’ pioneering platform for online CPALE Review, Reviewer Online. Three years later, he registered the Center of Excellence for Review and Training Services prompting the establishment of CERTS Educational Services, Inc., in 2014. Since then his team, composed of young and talented professionals, has been dedicating their resources and grit in promoting the future of digital education in the pines. To this, CERTS has already published e-Learning applications, namely, COL app mobile, COL app fundamentals, certs educ online pro, and a Learning Management System registered as ‘certs educonline” and "certs educonline Review’ trailblazing the digital and new era in accounting educational services. Today, CERTS is in partnership with a number of reputable schools and training institutions in addressing the urgent need for the online delivery of training services. True to their commiment to always spread the blessings, CERTS is also involved in promoting the interests of micro, small, and medium-sized enterprises by way of training, micro financial engineering and applied technology. He served the Philippine Institute of Certified Accountants (PICPA) as an elected Member of the Education Sectoral Council, President of Laguna Chapter, Regional Director of ‘Southern Tagalog Region, and Member of the National Board of Directors. Also, he was appointed as the Chairman/Member of the Committee on Students’ Participation and a Member in the Committee on Publications, Committee on Advocacy and Public Affairs, and the PICPA Ethics Board. In November 2002, he was awarded as the PICPA Outstanding CPA in Education and as the PICPA Outstanding CPA in Professional Development in November 2009. He led the Association of Certified Public Accountants in Education (ACPAE) as its National President in 1999 and 2000 and dedicated his terms in regaining the inspiring role of education in the practice of accountancy. In 2000, he was appointed as amemberof the Accounting Education Task Force created by the Board of Accountancy. pececomrteon fo es ees in the field of academe and professional practice, jonor of Honorar f Institute of Finance Professionals, Australia, anh saainacasnie, cama ea Heis. ic cette See insultanto various aecounting auditing, and advisory fms. He serves Deenarand acne te President of the Asian’ Council of Leaders, Administrators, member 10 reaitots in Business (ACLADEB) since 2015, He-also serves as a board ibe of adie iat and non-profit entities. His business interests cover detest on is learning ‘systems, human resources development, real estate » Social enterprises development, transportation, and micro hotel services. He is an environmental enthusiast, crusader proud Fipino, caning father ned fae © eautable opportunities for all, lacano, ‘hristian, This book aims to unfold the multidimensional perspectives of the business advisory services. Primarily, it serves the academic interests of students, reviewees and faculty members. Simplicity, clarity, and relevance serve as the guiding principles in making this instructional material, Established managerial models, methods, principles, and techniques as well as fresh and emerging managerial concepts that are gaining tremendous space of recent acceptance in the art and science of managing are herein covered and illustrated. This book significantly includes the topics givenin the Philippine CPA Licensure Examinations. The topics covered include: MS Concepts, Practices and Standards, Chapter 1 Management Accounting and its Environment, Chapters 2 to 11 Strategic Management Accounting, Chapters 12 and 13 nancial Management, Chapters 14 to 18 Introductory discussions on the strategic management accounting have been incorporated in Chapter 2. A more detailed discussions and illustrations on strategic management Philosophies and accounting are found in Chapters 11 and 12. This effort is part of the authors continuing program to bridge the gap between the old and the new management Patadigm not only tohighlight comparisons but to reduce the “academic pains" thatnormally characterize an industry-to-academic learning migration process. light its peculiar characteristics and its it planning and operating management. Variable costing has been emphasized to hig fellowship to the fundamental approaches in profi red in this material as a topic in financial ital underline strategic illustrations on financial ‘king capital management are integrated'in the rate chapters are dedicated o receivables techniques in the working Financial statements analysis is consider ™Management. The discussions on cost of capi and business leverages. The concepts in wor cash and marketable securities management. Sepat Management and inventory management to impress their peculiar capital management. 5 Learning objectives are provided at the start of each chapter to apprise users on relevant points they should discover in the learning process. Provided at the end of each chapter are Practice and test materials classified as straight problems and multiple-choice questions, Much of the end-of-chapter materials are adapted from actual examinations and ather ‘sources, labeled as: EEEtpepa Republic of the Philippines Certified Public Accountants licensure examinations given by the Board of Accountancy aicpa = Licensure examinations given by the American Institute of Certified Public Accountants ga-Canada = Examinations given by the Certified Public Accountants of Canada cma = Certified Management Accounts examinations given by the Institute of Certified Management Accountants ing = Prepared by Irvin N. Gleim Textbook writing, though, enourmously demanding is joyfully accomplished with the genuine warmth of a special working group. The joint layouting skills, reflective designs, and the intuitive comments of Andrew T. Chag-usen, CPA, and Tommy B. Buado, CPA, and the immeasurable efforts of the CERTS Knowledge Engineering team are embedded on the ages of this learning material. This book would not have been rep. ublished without the never-ending and loving support of Melanie Palafox-Agamata, CPA, 7 fame who keeps the spirit of this learning material aflame. ‘This edition is immensely influenced by the comments and suggestions prompted by its Preceding edition. The author truly believes in the virtue of coritinuing improvement. Your feedback would be appreciated if sent through his email address at com, May the true meaning of business advisory unfold before the Pages of this humble learnin ‘material as we thread together during these disruptive times. : FRANKLIN T. AGAMATA, MBA, FICB, CPA Davao City November 23, 2020 Foreword About the author Preface Contents in brief Course outline MS Overview ————— ss Chapter 1 MS Concepts, Practices and Standards Appendix 1.1. MS Proposal Letter Tactical Management Accounting = — 33 Chapter 2 Management Accounting Environment Appendix 2.1, Standards for €:thical Conduct for Practitioner of Management Accounting and Financial Management Pa Chapter 3 Understanding Expenses Appendix 3.1. Expense Segregation Techniques aor Chapter 4 Variable Costing Chapter 5, Profit Planning and Cost-Volume-Profit Analysis ¥ ie Chapter 6 Short-term Budgeting ‘Appendix 6.1. Master Budget Scthedules ee Chapter 7 Standard Costing and Variance “Analysis Appendix 7.1. Alternative 3-Way Overhead Variance Analysis (For Normal Costing) and Standard Costing Journal Entries a a Chapter 8 Responsibility accounting and Segment Evaluation a Chapter 9 Transfer Pricing ae ver Chapter 10 Nonroutine Operating Decisions _ a Chapter 11 Product Pricing and Profit Anallysis Strategic Management Accounting a — Chapter 12 Strategic Management Philosophies Ea Chapter 13 Strategic Management Accoun tingvill Content in brief Financial Management Chapter 14 Financial Statements Analysis 661 i Chapter15 Capital Budgeting 729 Chapter 1 MS Concepts, Practices, and Standards 1 Appendix 15.1. The Time Value of Money Appendix 15.2. Refinements in Capital Budgeting ‘Appendix 15.3. Cost of Capital | Heralding the Unprecented Growth of the MS Profession... Chapter16 Cash and Marketable Securities Management 837 The numbers tell Chapter 17 Receivables Management 869 ‘The market demands for innovative services Chapter 18 Inventory management 897 ‘The Foundation of Management Services The law implies but the market yells ‘The manager as the MS client 944 The CPA as advisor or consultant 947 Analytical approach and process Areas of MS Practice Pioneering services Table 1.1. Pioneering MS Services Emerging consultancy services | Table 1.2. Emerging MS Services | MS Standards Standards in the conduct of MS work Fundamental Principles for CPAs in the PI Integrity Objectivity Professional Competence and Due Care Confidentiality Professional Behavior | ‘Technical Standards 1 Standards for Consulting Services Controlling Standards | Professional competence Due professional care Planning and supervision Sufficient relevant data Additional General Standards Client Interest Understanding with Client Communication with Client MS Engagement Process Fig. 1.1. MS Engagement Process MAS engagement negotiation Engagement planning | Engagement execution Presentation of engagement results Implementation of recommendation Appendix Subject index SSS onmaVarvvannnrweonnn BARARERORNNSIISSaa —“‘“‘“_Omt;}wtt u Course Outline Engagement evaluation ds Post-engagement follow-up uy The MS proposal letter ly The MS engagement prograrn dz Forecasts uy Role of an MS practitioner 1g Characteristics of an MS engagement as Consultancy Fees pe Methods of billing clients 19) Appendix 1.1 MS Proposal Letter 20 Table 1.3. MS engagement proposal letter for Compensation Analysis and Government Compliance 20 Table 1.4. MS Engagement Proposal for Information Technolot Services 22 ay Multiple Choice Questions 25 Chapter 2 Management Accounting Environment 33 Management Accounting and its Useful Information 34 The evolving landscape of management processes 34 Management accounting evolution 34 Table 2.1. Timeline Evolution of Management Accounting 34 Management Accounting, defined 34 Information and management 36 Ree tives of management accounting and management accounting information 37 trates and principles of management accounting information 37 Other attributes of management accounting information 39 Management processes 40 Figure 2.1. Basic Model of Managit Controllershin (1960s and before) "7 USIM€S® Organizations a Figure 2.2. Management decision hi ierarchy and functi Table 2.2, Functions of controllership ul mae oh The planning and controlling cycle 42 Figure 2.3. Planning and Controlling Cycle a2 ieee 2.3. Examples of Statement of Goals and Objectives 43 ene Problem yg Normal and exceptional variances 43 ‘xample of Normal and E) Internal controls and controllership. PO"! Variances aa Table 2s {nternal Controls Components and Purposes as igure 2.4. The Eleven (11) Cardinal Pri Galea cornste (11) Cardinal Principles of Internal Controls 45 Figure 2.5. The Five (5) Ele fe Reena (8) Elements of Transactional Responsibilites As Treasurership #6 Table 2.6. The Functions of Tr Ce 6 reasurershi Financial Accounting and Management ‘Accounting a ‘able 2.7. Financial Accountin, z 1g v. Managem, Strategic Management Accounting, cies 1985 onwards outing a ee ts xi Course Outline Management accounting information within the management accounting system a2 Open and closed systems ma Contingent factors “ Human behaviour and management accounting Information and responsibility accounting = Emerging trends in management accounting Be tion neue 1 Standards for Ethical Conduct for Practitioners of Management re Accounting and Financial Management = Competence = Confidentiality eI Integrity 2 Objectivity es Resolution of Ethical Conflict ee Multiple Choice Questions: : True or False 67 Chapter 3 Understanding Expenses 68 Controlling Expenses 3 ss c Tabled. 1. The Basic Strategy in Managing Operating Results 88 Costs Concepts es ‘Accountant's perspective a 's perspective oS meee Srcis Organizational Chart and Controllable Costs ea Sample Problem 3.1. Budgeted Costs v. Standard Costs a Economist's perspective Es Costs sensitivity gai 7 blem. 3.2. Variable Costs and Fixe r Pye ean Graphical Representation of Costs Behavior on Varying s Levels of Activity 7 Table 3.2. Costs Behavior and Control Drivers 8 Mi sts a a Ree 3.3. Graphical Representations of Mixed Costs Relevant Range 79 BS ind the relevant range on ge ore elavant Renge in Relation to Sales and Expenses 2 The Learning Curve Theory ei Fig. 3.5. The Learning Curve Graph a Appendix 3.1 Expenses Segragation Techniques 82 High-low method aa - ‘Sample Problem 3.3. High-low method ee Scattergraph method ae ‘Sample Problem 3.4, Scattergraph method 85 ittergraph Fe ee ay ‘the "b" value using the Scattergraph Method 7 Least-Squares Methodxii Table 3. 3. Least-square equations Course Outline 88 Sample Problem 2.5. Least-squares method 88 Coefficient of correlation (r) and coefficient of determination (1°) 90 Table 3.4. 1 Value Interpretation Guide 1 Fig. 3.8. Degrees of Correlation between 'X" and" 92 Sample Problem 3.6. Coefficient of correlation and coefficient determination 92 The standard error of estimate (s') 93 Standard variance (or confidence interval) 93 Fig. 3.9. Standard Variance 94 The t-value 94 Table 3.5. Table of Selected Value of Student's t Distribution 95, ‘Sample Problem 3.7. The standard variance and the ‘standard error of estimate 95 Straight Problems Multiple Choice Questions a 11 Chapter 4 Variable Cost sting 135 Profit modelling The variable costing be Table 4.1. Proforma Cond tad rae cog lensed Statement of Profit or Loss - able 4.2. Pro-forma E a Vane ot E#Pended Statement of rot or Loss- The abortion costing 1 fable 4.3. Pro-formna Cond 1st nny, tbstton So lensed Statement of Profit or Loss - lfference between absorption a 95, Ind variable costi ae s Treatment of costs and eee Bree fee ideeeoae aa Ki i - Product cost vs, Period cost. 138 Saas erate panes {he absorption and variable costing systems 133 Equals Actua ron) Calculation, Assuming Normal Gapseny Table 45. Profit Drivers ie sample Problem 4.3. Profi rs it (Loss) Cak tic he fomaheaete ‘alculation, Normal Capaci The Normal Capacity | Production mee se 145 Sample Problem 4.4, Normal c: ass. S i ‘apacity Vv. Buc Sample Problem 45 Prot mri Vatale Costing 14g Profit ee 2nd Absortion cog Under the Variable Costing le Table 4.7. Variable Coe Statement of Proft or L ist The Academic Issue on Fixea, ee Statement of Profit or Lose Hea Absorption Costin arees Ig Vs. Ve ti arable Costing: The Strategie Issue AeA 154 Course Outline xi Straight Problems 155 Multiple Choice Questions 164 Chapter 5 Profit Planning and Cost-Volume-Profit Analysis W7 Profit Planning 178 Variable Costing and Profit Planning 178 Contribution Margin 178, Table 5.1. The Contribution Margin Format 178 Assumptions in Profit Planning and CVP Analysis 179 Table 5.2 Profit Planning Assumptions 170 Basic assumptions 179 Table 5.3 CVP Basic Assumptions 180 CVP Sensitivity Assumptions 180 Levels of profit planning 180 The Basic CVP Analysis 181 Sample Problem 5.1 ~ The Contribution Margin, Breakeven Point and Margin of Safety 181 Sales with profit 184 Sample Problem 5.2'- Estimating Sales with Profit 184 Multi-product CVP Analysis 186 Sample Problem 5.3 - Composite Breakeven Point Analysis (Multi-Product Sales) 187 CVP Sensitivity Analysis 191 Sample Problem 5.4 - CVP Sensitivity Analysis-1 191 ‘Sample Problem 5.5 - CVP Sensitivity Analysis-2 193 The BEP graph and CVP graph 194 ‘Sample problem 5.6 - The Profit Planning Graphs 194 Fig, 5.1. The Breakeven Point Graph 195 Fig. 4.2. The CVP Graph 196 The Degree of Operating Leverage ( OL) 197 Sample Problem 5.7. Operating Leverage 197 Consolidating the learning points! 199 Sample Problem 5.8. CVP Sensitivity Analysis - 3 199 Straight Problems 201 Multiple Choice Quesitons 213 Chapter 6 Short-term Budgeting 233 Leading and The Science of Managing... Get Things Done Through People 234 The Budgetary System... an excellent model! 234 The Budget Committee... develop an executive team! 236 The Master Budgets... a financial process model! 237 Fig. 6.1. The Master Budget Loop 237 The Sales Budget 238 Sample Problem 6.1. Estimated Sales in Units and Pesos 239