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UNIT 1: Introduction to Managerial Accounting

Introduction

Management is expected to ensure that the organization uses its resources wisely, operates
profitably, pays its debts, and abides by laws and regulations. To fulfill these expectations,
managers establish the goals, objectives, and strategic plans that guide and control the
organization’s operating, investing, and financing activities. In this unit, we describe the
approaches that managers have developed to meet the challenges of today’s changing
business environment and the role that management accounting plays in meeting those
challenges in an ethical manner.

Unit Learning Objectives

By the end of this unit, you should be able to:

• Explain the essential features of management accounting, similarities and
differences between managerial accounting and financial accounting and the code
of ethics for managerial accountants.

Timing

This unit is good for less than a week—2 days at maximum. You can devote three hours per
day on the subject. Don’t worry, the content is abridged, which means it only includes the
most salient points you need to know relative to our module learning outcomes (MLO).

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For easier monitoring of your progress, you may use the study planner attached to this
module. Be sure to make use of your planner to have a more organized and orderly studying.
Plus, the planner is a PROCRASTINATION-beater!

Getting Started!

1.1 THE MEANING OF MANAGEMENT

Management is defined as the “determination of set of actions” to organize the

“entity’s resources” to achieve an “objective”.

❖ “SET OF ACTIONS”
✓ The activities needed to be carried out to achieve
organization’s objectives.
✓ People who’ll execute the activities, the participating and
affected parties… timing, duration, extent and resources
should also be recognized.
✓ Actions can be routine or non-routine.

ROUTINE ACTIONS NON-ROUTINE

-encompasses the day to
day operations or those
that are done on a
regular interval in the
organization (e.g. selling
of goods, rendering of
services, purchasing of
supplies and inventories,
hiring of employees, etc.)
ACTIVITIES
-those that are expected
to occur only once or
not done on a regular
basis (e.g. purchase or
construction of a PPE,
issuance of debt or equity
securities, etc.)

❖ “ENTITY’S RESOURCES”
✓ Anything that the entity can use to perform its function
and achieve its objectives—assets, human & natural
resources, technology & information, etc.… that can
provide the organization with tangible benefits.

❖ “OBJECTIVES”
✓ Main objective: To earn profit.
✓ 3 types of business objectives:
(1) Short-term/Operational/Tactical Objectives;
(2) Mid-term/Bridge Objectives;
(3) Long-term/Sustainability Objectives.

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1.1.2 WHO’S IN CHARGE?

A manager is a person who is responsible for a part of a company, i.e., they ‘manage’
the company. Managers may be in charge of a department and the people who work
in it. In some cases, the manager is in charge of the whole business. For example, a
‘restaurant manager’ is in charge of the whole restaurant.

A manager is a person who exercises managerial functions primarily. They should

have the power to hire, fire, discipline, do performance appraisals, and monitor
attendance. They should also have the power to approve overtime, and authorize
vacations. He or she is the boss.

The Manager’s duties also include managing employees or a section of the company
on a day-to-day basis.

Classification of Managers:

- Frontline/Operational Managers (e.g. supervisors and team leaders)

- Functional/Middle Managers (e.g. department heads)
- General/Executive Managers (overall decision-maker)

Levels of management. Quora, https://www.quora.com/What-are-the-three-levels-of-management

1.2 WHAT IS MANAGERIAL ACCOUNTING?

Managerial accounting is concerned with providing information to managers-that

is, people inside an organization who direct and control its operation. It came from
two terms – management and accounting. Accounting provides quantitative
information, primarily financial in nature, about economic entities, that is intended
to be useful in making economic decisions while management is the coordination
and administration of tasks to achieve a goal or simply, the process of planning,
organizing & controlling.
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1.2.1 THE MANAGEMENT FUNCTIONS

❖ PLANNING
Selecting a course of action and specifying how the action will be implemented.
(Ex. Budgets)
(1) Setting of goals and objectives.
(2) Identifying the alternative actions necessary to reach the desired goals and
objectives.

❖ ORGANIZING
Simply putting plans into action.
(1) Tackling of necessary activities.
(2) Utilization of resources

❖ CONTROLLING
Keeping the companies activities on track.
(1) Make sure that the company’s activities are geared towards achieving those
goals and objectives.
(2) In case of discrepancies, adjustments or redirection should be made.

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DECISION-MAKING is an inherent function of management and an integral part in

planning and control process. It is made to reward or punish managers and is made
to change operations or revise plans. Also, this is “a common attribute among
different managers”.

1.3 KINDS OF MANAGEMENT

❖ MANAGEMENT BY OBJECTIVES (MBO)

Subordinate and supervisor agree on goals and the methods of achieving them.
There is daily feedback, and the focus is on rewards rather than punishment.
Personal growth and development are emphasized, rather than negativity for
failing to reach the objectives.

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 (i) Identify common goals;
(ii) Define each person’s responsibilities;
(iii) Use these measures as guides for appreciating & rewarding.

❖ MANAGEMENT BY EXCEPTIONS (MBE)

Based on the management principle that executive time should be spent on items
that are non-routine and are identified as top priority. It is the practice of
examining the financial and operational results of a business, and only bringing
issues to the attention of management if results represent substantial differences
from the budgeted or expected amount.

For example, the company controller may be required to notify

management of those expenses that are the greater of $10,000 or 20%
higher than expected.

The purpose of the management by exception concept is to only bother

management with the most important variances from the planned direction or
results of the business. Managers will presumably spend more time attending to
and correcting these larger variances.
The concept can be fine-tuned, so that smaller variances are brought to the
attention of lower-level managers, while a massive variance is reported straight
to senior management.

1.4 MANAGERIAL ACCOUNTING VS. FINANCIAL ACCOUNTING

There are both similarities and differences between managerial and financial
accounting. The differences and similarities of the two branch of accounting are
summarized below:
❖ SIMILARITIES
1) Both deal with economic events.
2) Both require quantifying the results of economic activity.
3) Both are concerned with revenues and expenses, assets, liabilities
and cash flows.
4) Both involve financial statements.

❖ DIFFERENCES

FINANCIAL MANAGERIAL
ACCOUNTING ACCOUNTING

1. User of Primarily for external Exclusively for

information users internal users
(management)
2. Guiding principles Generally Accepted Management wants
Accounting Principles and
needs
3. Mandatory (especially Discretionary or
Optional/Mandatory for public entities) optional
4. Type of Primarily monetary Monetary or non-
information (financial) in nature monetary

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 5. Emphasis of Reliability (precision of Relevance
reports data) (timeliness of data)

6. Purpose/End Financial reporting and Decision-making

Result compliance

7. Source of data From company’s internal From internal and

info system external sources
8. Amount of detail Compressed and Extensive and
simplified detailed
9. Focus of Focus mainly on Focus on segments
information business as a whole and business as a
whole
10. Frequency Periodic (annually, As frequent as the
quarterly) need arises

11. Time orientation Mainly historical (past) Future-oriented

data using current and
past data
12. Unifying model Assets = Liabilities + No unifying model
Equity or equation

1.5 ORGANIZATIONAL STRUCTURE

An organizational structure is a system that outlines how certain activities are

directed in order to achieve the goals of an organization. These activities can include
rules, roles, and responsibilities. It refers to the way that an organization arranges
people and jobs so that its work can be performed and its goals can be met.

The organizational structure also determines how information flows between levels
within the company. For example, in a centralized structure, decisions flow from
the top down, while in a decentralized structure, decision-making power is
distributed among various levels of the organization.

Having an organizational structure in place allows companies to remain efficient and

focused.

An organizational structure tells us something about the…

… Employees
What do they do?
Who they report to?

…Managers
What do they do?
Who reports to them?

In order to assist in carrying out management functions, most companies prepare

organization charts to show the interrelationships of activities and the delegation
of authority and responsibility within the company.

An organizational chart is a diagram that visually conveys a company's internal

structure by detailing the roles, responsibilities, and relationships between
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 individuals within an entity. Organizational charts either broadly depict an
enterprise company-wide or drill down to a specific department or unit.

Below is an example of a typical organization chart, which outlines the delegation of

responsibility.

Stockholders

Board of Directors

CEO and President

General VP VP VP VP HRM
Counsel/ Finance/CFO Operations
Secretary Marketing

Treasurer Controller

Responsibilities within the company are often classified as either line or staff
position. A line position refers to the persons directly involved in the company’s
primary revenue-generating operating activities. Examples include: Vice president
of operations, vice president of marketing, plant managers, supervisors, and
production personnel. They have the authority to give command or orders to
subordinates. They exercise direct downward authority over line departments.

On the other hand, staff positions are the persons involved in activities that support
the efforts of the line employees. Examples include: Employees on the finance, legal,
purchasing, and human resource. They have the authority to advice but not
command others. Their function is to provide line and staff managers with
specialized service and technical advice for support. They exercise lateral or upward
authority over line departments.

A controller primarily exercises a staff function as the controller’s office gives advice
and service to other departments and to entire organization as a whole; however, in
an accounting department that is headed by the controller, the controller has a line
authority over subordinates.

1.5.1 ORGANIZATIONAL LINES OF CONTROL

❖ LINE FUNCTIONS
These are management systems that have direct accountability for sales or
production target achievement.

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 ❖ STAFF FUNCTIONS
These are management structures that assist the line managers to achieve their
targets by extending support.

Line and staff relationships. SlidePlayer,

https://slideplayer.com/slide/4814585/15/images/11/Line+and+Staff+Relationships.jpg

LINE FUNCTION STAFF FUNCTION

Target Line managers are The staff function
Accountability directly responsible governs advisory
for achievement of services that impact
target oriented jobs the efficacy of the line
that form the core of function but do not
the business's directly take part in
existence, such as the production
sales or production. planning and
marketing.
Reporting Line managers have The directions given
Authority the authority to by staff managers are
overrule the expected to be
suggestions given by followed by line
the staff manager. managers.
Line function can Staff function cannot
give direct orders to give direct orders to
subordinates. subordinates.

1.6 THE CONTROLLER: CHIEF MANAGEMENT ACCOUNTANT

A Controller/Comptroller refers to an officer of an organization who has the

responsibility for the accounting aspect of management control. It is a title given to
a person holding the position of a chief management accounting executive of a
business enterprise. In many accounting texts and business literatures, the
controller is often referred to as the “chief accountant”.

Controllership is the practice of the established science of control, which is the

process by which management assures itself that company resources are obtained
and utilized according to plans that are in line with the company’s set objectives.

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1.6.1 CONTROLLER VS. TREASURER

Primarily the difference between a controller and a treasurer is that:

❖ The Controller is primarily concerned with the accounting function.

❖ The Treasurer is primarily concerned with custody of funds.

Specific duties of a controller and a treasurer include the following:

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

Treasurers serve as front liners—they are the ones who face customers, banks,
suppliers, creditors, and investors.

Controllers serve as processors—they are the ones who process information for the
management, BIR, SEC, government agencies and the like.

❖ THE TREASURER
- He is concerned with custody of funds.
- He is responsible for managing corporate assets and liabilities, planning
the finances, budgeting capital, financing the business, formulating
credit policy, and managing the investment portfolio.
- He serves as a front liner because they are the ones who face customers,
banks, suppliers, creditors and investors. He reports to the vice
president for finance.

❖ THE CONTROLLER
- The controller is in charge of the accounting department.
- His authority is basically staff authority in that his office gives advice
and service to other departments.
- He has line authority over members of his or her department such as
internal auditors, bookkeepers, budget analysts, etc.
- He serves as processors because he is the one who processes
information for the management, BIR, SEC, government agencies and the
like. He reports to the vice president for finance.

1.7 CODE OF ETHICAL STANDARDS

In response to corporate scandals, the U.S. Congress enacted the Sarbanes-Oxley

Act (SOX) to help prevent lapses in internal control. One result of SOX was to clarify
top management’s responsibility for the company’s financial statements. CEOs and
CFOs must now certify that financial statements give a fair presentation of the
company’s operating results and its financial condition. In addition, top managers
must certify that the company maintains an adequate system of internal controls to
safeguard the company’s assets and ensure accurate financial reports.

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Another result of SOX is that companies now pay more attention to the composition
of the board of directors. In particular, the audit committee of the board of directors
must be comprised entirely of independent members (that is, nonemployees) and

must contain at least one financial expert. Finally, the law substantially increases the
penalties for misconduct.

To provide guidance for managerial accountants, the Institute of Management

Accountants (IMA) has developed a code of ethical standards, entitled IMA Statement
of Ethical Professional Practice. Management accountants should not commit acts in
violation of these standards. Nor should they condone such acts by others within
their organizations.

Practitioners of management accounting and financial management have an

obligation to the public, their profession, the organization they serve, and
themselves, to maintain the highest standards of ethical conduct.

Adherence to these standards internationally is integral to achieving objective of

management accounting.

Composed of:

COMPETENCE
CONFIDENTIALITY
INTEGRITY
OBJECTIVITY

❖ COMPETENCE
Practitioners of management accounting and financial management have a
responsibility to:

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✓ 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 of relevant and reliable information.

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❖ CONFIDENTIALITY
Practitioners of management accounting and financial management have a
responsibility to:

Photo Credits: Google Images

✓ 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 the maintenance of that 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
Practitioners of management accounting and financial management have a
responsibility to:

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✓ Avoid actual or apparent conflicts of interest and advise all appropriate

parties of any potential conflict.
✓ Refrain from engaging in any activity that would prejudice their ability to
carry out their duties ethically.
✓ Refuse any gift, favor, or hospitality that would influence or would appear
to influence their actions.

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 ✓ Refrain from either activity 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 judgment or opinion.
✓ Refrain from engaging or supporting any activity that would discredit the
profession.

❖ OBJECTIVITY
Practitioners of management accounting and financial management have a
responsibility to:

Photo Credits: Google Images

✓ 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.

1.8 GLOBAL CERTIFICATIONS

You are no doubt already familiar with the CPA (certified public accountant)
designation it is widely held and recognized. The certification is usually
accompanied by a state-issued license to practice public accounting. However, there
are also CMA (certified management accountant) and CFM (certified financial
manager) designations. These are not “license”, per se, but do represent significant
competency in managerial accounting and financial management skills. These
certifications are sponsored by the Institute of Management Accountants.

Certified Public Accountant (CPA)

Certified Management Accountant (CMA)
Certified Financial Management (CFM)
Certified Internal Auditor (CIA)
Certified in Control Self-Assessment (CCSA)
Certified Information Systems Auditor (CISA)
Certified Fraud Examiner (CFE)

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 Unit Summary

• Management is defined as the “determination of set of actions” to organize the

“entity’s resources” to achieve an “objective”.
• Routine actions encompass the day-to-day operations or those that are done on
a regular interval in the organization while non-routine activities are those that
are expected to occur only once or not done on a regular basis.
• A manager is a person who is responsible for a part of a company, i.e., they
‘manage’ the company.
• Managers can be classified into 3: Frontline/Operational Managers,
Functional/Middle Managers and General/Executive Managers.
• Managerial accounting is concerned with providing information to managers-
that is, people inside an organization who direct and control its operation.
• There are 3 management functions: Planning, Organizing and Controlling.
• There are 2 kinds of management: Management by Objectives (MBO) and
Management by Exception (MBE).
• Managerial accounting and financial accounting have both similarities and
differences.
• Organizational structure refers to the way that an organization arranges people
and jobs so that its work can be performed and its goals can be met.
• An organizational chart is a diagram that visually conveys a company's internal
structure by detailing the roles, responsibilities, and relationships between
individuals within an entity.
• A line position refers to the persons directly involved in the company’s primary
revenue-generating operating activities.
• Staff positions are the persons involved in activities that support the efforts of
the line employees.
• A Controller/Comptroller refers to an officer of an organization who has the
responsibility for the accounting aspect of management control.
• The Controller is primarily concerned with the accounting function while the
Treasurer is primarily concerned with custody of funds.
• In response to corporate scandals, the U.S. Congress enacted the Sarbanes-
Oxley Act (SOX) to help prevent lapses in internal control. One result of SOX
was to clarify top management’s responsibility for the company’s financial
statements.
• Standards of ethical conduct: Competence, Confidentiality, Integrity and
Objectivity.
• CMA (Certified Management Accountant) and CFM (Certified Financial
Manager) are some certifications which represent significant competency in
managerial accounting and financial management.

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