BASIC CONCEPTS IN MANAGEMENT ACCOUNTING;

COSTS AND COST CONCEPTS

MANAGEMENT ACCOUNTING

MANAGEMENT ACCOUNTING – the process of identifying, measuring, accumulating, analyzing,

preparing, interpreting, and communicating information that helps managers fulfill
organizational objectives.

MANAGEMENT ACCOUNTANT - a person who provides financial data and advice to a company for
use in the organization and development of its business.

FUNCTIONS/OBJECTIVES OF MANAGEMENT ACCOUNTING:

The basic function of management accounting is to assist management in performing its

functions effectively. The functions of management are planning, organizing, and controlling. It
also provides information that may be used by management for decision-making.

MANAGEMENT FUNCTIONS AND THE NEED FOR MANAGEMENT ACCOUNTING INFORMATION

1. PLANNING – involves:
a. setting of immediate, as well as long-range goals for the organization;
b. predicting future conditions that are expected to prevail;
c. considering the different means or strategies by which the goals set may be achieved; and
d. deciding which of the strategies should be used to attain such goals.

2. DIRECTING AND MOTIVATING – involves overseeing the day-to-day activities, seeing to it that
the organization is functioning smoothly and the members of the organization are mobilized to carry out
plans.

3. CONTROLLING – involves checking the performance of activities against the plan or standards set
and deciding what corrective actions to take should there be any deviation between the actual and
planned/standard performance.
 All the aforementioned management functions involve decision-making. In performing the
decision-making function, managers need information. Such information is provided by
management accountants.

MANAGEMENT ADVISORY SERVICES – (also called management consulting services, business

advisory services, management services) - refers to that area of accounting work concerned with
providing advice and technical assistance to help clients improve the use of their resources to achieve
their goals.

CHARACTERISTICS OF MAS (S3 FND PH)

1. Services are rendered for the management rather than for third parties.
2. Scope is broad.
3. Engagements require highly qualified staff.
4. Future-oriented.
5. Engagements are usually non-recurring.
6. Diversity
7. Involves problem solving
8. Human relations play a vital role in each engagement.
MANAGEMENT ACCOUNTING vs. FINANCIAL ACCOUNTING

MANAGEMENT
FINANCIAL ACCOUNTING
ACCOUNTING
Internal users: officers External users: stockholders,
USERS OF and managers creditors, concerned government
REPORT
agencies

To provide internal users To provide external users with

with information that information about the
may be used by organization’s financial position
PURPOSE managers in carrying out and results of operations.
the functions of planning,
controlling, decision-
making, and performance
evaluation.
Different types of reports, Primarily financial statements and
such as budgets, financial the accompanying notes to such
TYPES OF projections, cost analyses, statements.
REPORTS etc., depending on the
specific needs of
management.
Reports are based on a Reports are based almost
BASIS OF combination of historical, exclusively on historical data.
REPORTS estimated, and projected
data.
In preparing reports, the Reports are prepared in
management of a accordance with generally
STANDARDS OF company can set rules to accepted accounting principles
PRESENTATION produce information most and other pronouncements of
relevant to its specific authoritative accounting bodies.
needs.
Focus of reports is on the Financial reports relate to the
company’s value chain, business as a whole.
REPORTING
ENTITY such as a business
segment, product- line,
supplier, or customer.
Reports may cover any Reports usually cover a year,
time period – year, quarter, or month.
PERIOD quarter, month, week,
COVERED day, etc. Reports may be
required as frequently as
needed.
MANAGEMENT ACCOUNTING vs. COST ACCOUNTING

COST ACCOUNTING MANAGEMENT ACCOUNTING

Revolves around cot Helps management make
INHERENT computation, cost control effective decisions about the
MEANING
and cost reduction business

Prevents the business Offers a big picture of how

APPLICATION from incurring costs management should strategize
beyond the budget

MEASURING Quantitative Quantitative and qualitative

GRID

One of the many subsets Vast in itself

SUBSET of management
accounting
BASIS OF Historic information Historic and predictive
DECISION
information
MAKING

Statutory audit is required Audit has no statutory

STATUTORY for big businesses requirement
REQUIREMENT

Not dependent on Dependent on both cost

management accounting accounting and financial
DEPENDENCE
to be successfully accounting for successful
implemented implementation
Management, Management only
USERS
shareholders, and vendors

CONTROLLER (COMPTROLLER) :
The Chief Management Accountant

CONTROLLER – the chief management accounting executive of an organization who is mainly

responsible for the accounting aspects of management planning and control

FUNCTIONS OF THE CONTROLLER (PREGPET)

1. PLANNING FOR CONTROL – to establish, coordinate, and administer, as an integral part of
management, an adequate plan for the control of operations.
2. REPORTING AND INTERPRETING – to compare performance with operating plans and standards
and to report and interpret results of operations to the concerned users of such reports.
3. EVALUATING AND CONSULTING – to consult with all levels of management responsible for policy
or action concerning any phase of the operation of the business as it relates to the
attainment of objectives and effectiveness of policies, organizational structures, and
procedures.
4. GOVERNMENT REPORTING – to supervise or coordinate the preparation of reports to
government agencies.
5. PROTECTION OF ASSETS – to assure protection for the assets of business through internal
control, internal auditing, and assuring proper insurance coverage.
6. ECONOMIC APPRAISAL – to continuously appraise economic and social forces and government
influences and to interpret their effect upon the business.

7. TAX ADMINISTRATION – to establish and administer tax policies and procedures.

DISTINCTIONS BETWEEN CONTROLLERSHIP AND TREASURERSHIP

CONTROLLERSHIP TREASURERSHIP
(PREGPET) (PS I3 BC)
1. Planning and control 1. Provision of capital
2. Reporting and interpreting 2. Short-term financing
3. Evaluating and consulting 3. Investor relations
4. Government reporting 4. Investments
5. Protection of assets 5. Insurance
6. Economic appraisal 6. Banking and custody
7. Tax administration 7. Credit and collections

CERTIFICATION AVAILABLE TO MANAGEMENT ACCOUNTANTS

THE CMA PROGRAM OR CERTIFICATE IN MANAGEMENT ACCOUNTING

The CMA Program or Certificate in Management Accounting is a program for management

accountants designed to recognize their unique qualifications, high standards, and professional
expertise in the field of management accounting.

Qualified management accountants earn the designation Certified Management Accountant

(CMA), the internal accountant’s counterpart to the Certified Public Accountants (CPA).

THE ORGANIZATION INVOLVED

In the United States, the CMA Program is conducted by the Institute of Management
Accountants (IMA), the largest US Professional organization of accountants.

In the Philippines, the Philippine Association of Management Accountants (PAMA) conducts

the Certificate in Management Accounting (CMA) program through its continuing education arm,
the Philippine Institute of Management Accountants (PIMA).
The PAMA is affiliated with the Institute of Management Accountants or IMA.

The PAMA was founded primarily to provide its members with professional and educational activities
that enhance their knowledge of management accounting principles and methods.

OBJECTIVES OF THE PROGRAM

The CMA has four objectives, consistent with the mission of the Philippine Association of
Management Accountants (PAMA) to "promote management accounting, enhance the capability
of its members and foster high standards of professionalism."
 To establish Management Accounting as a recognized profession in the field of business
 To encourage stricter and high quality educational standards in Management Accounting
 To provide objective means for measuring the Management Accountant's knowledge
and competence
 To encourage continued professional growth

COSTS AND COST CONCEPTS

Cost – a measurement, in monetary terms, of the amount of resources used for some purpose.
When notified by a term that defines the purpose, cost becomes operational, e.g., selling
cost, acquisition cost, variable cost, etc.
Classifications of costs

As to Function - manufacturing; selling and administrative

As to elements - materials, labor, factory overhead; all examples of selling and administrative
costs.

Alternative Classifications:

Business Function – Research and Development, Design of Products and Processes,

Production, Marketing, Distribution, Customer Service.

Assignment to Cost Object – Direct Cost, Indirect Cost.

Behavior Pattern in Relation to Activity or Volume - Variable, Fixed, Mixed Costs.

Aggregate or Average – Total Cost, Unit Cost

Assets or Expense - Inventoriable Cost or Product Cost, Period Cost

Cost Pool – an account in which a variety of similar costs are accumulated prior to allocation to cost
objects. It is a group of costs associated with an activity. Example: overhead account.

Cost object – the intermediate and final disposition of cost pools.

Example: product, job, process

Cost driver – a factor that causes a change in the cost pool for a particular activity. It is used as a
basis for cost allocation; any factor or activity that has a direct cause-effect relationship

Activity – any event, action, transaction, or work sequence that incurs costs when producing a
product or providing a service.

COST BEHAVIOR
COST BEHAVIOR – describes how a cost behaves or changes as the amount of cost driver changes.

TYPES OF COSTS AS TO BEHAVIOR:

1. FIXED COST – in total: constant within the relevant range as activity output changes; per unit:
changes as activity level changes

2. VARIABLE COST – in total: varies in direct proportion to changes in activity output; per unit:
remains constant

3. MIXED COST – has both fixed and variable components.

COST BEHAVIOR ASSUMPTIONS:

1. Relevant Range Assumption

Relevant range refers to the band of activity within which the identified cost behavior
patterns are valid. Any level of activity outside this range may have a different cost
behavior pattern.

2. Time Period Assumption

The cost behavior patterns identified are true only over a specified period of time.
Beyond this, the cost may show a different behavior.

CORRELATION ANALYSIS
Correlation – measure of the co-variation between the dependent and independent variables
 Coefficient of Correlation (denoted by r) – measure of the extent of the linear relationship
between two variables

Coefficient of Determination (denoted by r2) is computed by squaring the value of r. It

represents the percentage of the total variation in the dependent variable y that is explained
or accounted for by the regression equation.

A very high r2 means that the values in the regression equation explain virtually the entire
amount of the total cost. The variables are highly correlated, i.e., the cost driver selected is
highly related to the dependent cost.

SEGREGATION OF FIXED AND VARIABLE ELEMENTS OF MIXED COSTS:

1. High-Low Points Method – the fixed and variable elements of the mixed costs are
computed from two data points (periods)—the high and low periods as to
activity level or cost driver.

2. Statistical Scattergraph Method – various costs (the dependent variable) are

plotted on a vertical line (y-axis) and measurement figures (cost drivers or
activity levels) are plotted on a horizontal line (x-axis). A straight line is
drawn through the points and, using this line, the rate of variability and
the fixed cost are computed.

3. Method of Least Squares (Regression Analysis) – mathematically determines a

line of best fit or a linear regression line through a set of plotted points so
that the sum of the squared deviations of each actual plotted point from
the point directly above or below it on the regression line is at minimum.
This method uses the following equations in computing for the values of
unit variable cost and fixed cost:

Equation 1: ∑Y = na + b∑x

Equation 2: ∑xy = a∑x + b∑x2

COST FORMULA: y = a + bx

Where: “y” denotes total cost. It is called the dependent variable because it is dependent
on
the value of another variable, the activity level x.
“a” is an estimate of the fixed cost
“b” is an estimate of the variable cost per unit of activity.