ALDERSGATE COLLEGE

MANAGEMENT ACCOUNTING AND CONTROL I

SCHOOL OF BUSINESS AND ACCOUNTANCY
MODULE 1 MANAGEMENT ACCOUNTING: AN OVERVIEW

LEARNING FOCUS

Definition

Management Accounting 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.

It is the process of identification, measurement, accumulation, analysis,

preparation, interpretation, and communication of financial information,
which is used by management to plan, evaluate and control activities within
an organization. It also comprises the preparation of financial reports for
non-management groups such as shareholders, creditors, regulatory
agencies and tax authorities.

Objective and Scope

Objective

Management accountants provide information and participate in the

management process. They select and provide, to all levels of management,
information needed in:

1. planning, evaluating and controlling operations, decision making

2. safeguarding the organization's assets
3. communicating with interested parties outside the organization, such
as shareholders and regulatory bodies.

Management accountants at appropriate levels are involved actively in the

process of managing the entity. The process includes making strategic,
tactical and operating decisions and helping to coordinate the efforts of the
entire organization.

The management accountant participates, as part of management, in

assuring that the organization operates as a unified whole in its long-run
intermediate and short- run best interests.

Scope

Management accounting is concerned primarily with providing information

to internal managers who are charged with planning and controlling the

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operations of the firm and making a variety of management decisions.
Generally, management accountants do the following tasks:

a) Scorekeeping or data accumulation which enables both internal and

external parties to evaluate organizational performance and position.
b) Interpreting and reporting of information that helps manager to focus
on operating problems, opportunities as well as inefficiencies. This is
commonly associated with current planning and control and the
analysis and investigations of recurring routine internal accounting
reports to signal situations in which management action may be
required.
c) Problem-solving or quantification of the relative merits of possible
courses of action as well as recommendations as to the best
procedure. This is commonly associated with non-recurring decisions.

Specifically, the management accountant provides a system which allows

management to receive the necessary information used in performing its
administrative functions of:

a) planning which involves setting of goals for the firm, evaluating the
various ways to meet the goals and picking out what appears to be
the best way to meet the goals;
b) controlling which involves the evaluation of whether actual
performance conforms with planned goals; and
c) decision-making which involves determination of predictive
information (e.g. relevant costs) for making important business
decisions.

PLANNING

A key activity for all companies is planning. A plan communicates a

company’s goals to employees and specifies the resources needed to
achieve them. Cash budgets, capital budgets and projected balance sheets
are examples of contributions which accounting can make in resource
planning while break-even analysis, projected income statements are
examples of useful tools in profit planning.

CONTROL

Control of organizations is achieved by evaluating the performance of

managers and the operations for which they are responsible. The distinction
between evaluating managers and evaluating the operations they control is
important. Managers are evaluated to determine how their performance
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should be rewarded or punished, which in turn motivates them to perform at
a high level. Based on an evaluation indicating good performance, a
manager might receive substantial bonus compensation. An evaluation
indicating a manager performed poorly might lead to the manager being
fired. In part because evaluations of managers are typically tied to
compensation and promotion opportunities, managers work hard to ensure
that they will receive favorable evaluations.

Cost variance analysis, financial statements analysis, and gross profit

variance analysis are some of the accounting control reports used to
inform managers when activities which are part of their responsibility are
deviating from the plan. The reports used evaluate the performance of
managers and the operations they control are referred to as performance
reports. Although there is no generally accepted method of preparing a
performance report such reports frequently involve a comparison of current
period performance with performance in a prior period or with planned
(budgeted) performance. Performance reports may not provide definitive
answers, but they are still extremely useful. Managers can use them to
“flag” areas that need closer attention and to avoid areas that are under
control. It would not seem necessary, for example, to investigate labor, rent,
depreciation, or other costs, because these costs are either equal to or
relatively close to the planned level of cost. Typically, managers follow the
principle of management by exception when using performance reports.
This means that managers investigate departures from the plan that appear
to be exceptional; they do not investigate minor departures from the plan.

Operations are evaluated to provide information as to whether or not they

should be changed (i.e., expanded, contracted, or modified in some way).
An evaluation of an operation can be negative even when the evaluation of
the manager responsible for the operation is basically positive.

Company plans often play an important role in the control process.

Managers can compare actual results with planned results and decide if
corrective action is necessary. If actual results differ from the plan, the plan
may not have been followed properly, the plan may have not been well
thought out, or changing circumstances may have made the plan out of
date.

Figure 1.1 presents the major steps in the planning and control process.
Once a plan has been made, actions are taken to implement it. These
actions lead to results, which are compared with the original plan. Based on
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this evaluation, managers are rewarded (e.g., given substantial bonuses or
promoted if performance is judged to be good) or punished (e.g., given only
a small bonus, given no bonus, or even fired if performance is judged to be
poor). Also, based on the evaluation process, operations may be changed.
Changes may consist of expanding (e.g., adding a second shift), contracting
(e.g., closing a production plant), or improving operations (e.g., training
employees to do a better job answering customer product inquiries).
Changes may also consist of revising an unrealistic plan.

Thus, accounting saves management at all stages of die management

process, from the formulation of objectives and so on up to the feedback of
performance information which in turn helps in the reformulation of
objectives.

DECISION MAKING

As indicated in Figure 1.1, decision making is an integral part of the planning

and control process - decisions are made to reward or punish managers, and
decisions are made to change operations or revise plans. Should a firm add
a new product? Should it drop an existing product? Should it manufacture a
component used in assembling its major product or contract with another
company to produce the component? What price should a firm charge for a
new product? These questions indicate just a few of the key decisions that
confront companies. And how well they make these decisions will determine
future profitability and, possibly, the survival of the company.

Plan

Decisions to change operations

Action taken to implement plan
or revise plans

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Results

Decisions to reward or punish Comparison of planned and

managers actual results

Evaluation

Figure 1.1 Planning and Control Process

Comparison of Financial Accounting and Management Accounting

Financial accounting involves the systematic recording of business

transactions, governed by a body of generally accepted accounting
principles (GAAP) leading to die preparation of financial statements for the
use of various interested parties, internal as well as external.

Management accounting is concerned with providing financial

information to persons within the organization to enable them to make
informed judgments and effective decisions which further the organization’s
goals.

Figure 1.2 summarizes the accounting differences between Financial

Accounting and Management Accounting. These differences are discussed in
the following paragraphs.

The specific differences between Financial Accounting (FA) and Management

Accounting (MA) are as follows:

1. As to objective

FA: To provide data for both internal (management) and external

users (e.g. creditors, owners, government, etc.).

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MA: To provide data for internal users within the business
organization.

Financial accounting is aimed primarily at external users of

accounting information, whereas managerial accounting is aimed
primarily at internal users. External users includes investors,
creditors, and government agencies, which need information to
make investment, lending and regulation decisions. Their
information needs differ from those of internal managers, who need
information for planning, control, and decision making.

2. As to compliance with GAAP

FA: Financial data should be recorded and presented in accordance

with GAAP.

MA: Reports need not be presented in conformity with GAAP to be

able to present more useful data to management.

Much of financial accounting information is required. The Securities

and Exchange Commission (SEC) requires large, publicly traded
companies to prepare reports in accordance with generally
accepted accounting principles (GAAP). Even companies that are
not under the jurisdiction of the SEC prepare financial accounting
information in accordance with GAAP to satisfy creditors.
Managerial accounting, on the other hand, is completely optional. It
stresses information that is useful to internal managers for
planning, control and decision making. If a managerial accountant
believes that deviating from GAAP will provide more useful
information to internal managers, GAAP need not be followed.

3. As to emphasis on the future

FA: This primarily provides summaries of past financial transaction.

MA: This has a strong future orientation.

Financial accounting is primarily concerned with presenting the

results of past transactions. Managerial accounting, on the other
hand, places considerable emphasis on the future. As indicated,
previously, one of the primary purposes of managerial accounting
is planning. Thus, managerial accounting information often involves
estimates of the costs and benefits of future transactions.
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4. As to the relevance and flexibility of data

FA: All-purpose reports with historical data are prepared for use of
different parties.

MA: Special repents containing both historical and projected data

are prepared to meet the needs of specific users. They contain
information, quantitative and qualitative, that are relevant for a
particular decision.

Both managerial and financial accounting reports generally contain

monetary information (information expressed in pesos such as
revalue and expense). But, managerial accounting repeats can also
contain a substantial amount of nonmonetary information. The
quantity of material consumed in production, the number of hours
worked by the office staff, and the number of product defects are
examples of important nonmonetary data that appear in
managerial accounting reports.

Also, financial accounting presents information in a highly

summarized form. Net income, for example, is presented for the
company as a whole. To run a company, however, managers need
more detailed information - for example, information about the cost
of operating individual departments in addition to the cost of
operating the company as a whole.

5. As to emphasis on precision and timeliness of report

FA: Reports are still useful even if submitted late and show
summaries of financial consequences of actual and past activities
where precision is required.

MA: Timeliness is often more important than precision to managers.

Prompt submission of the report is necessary to preserve its
usefulness and good estimates may be enough to make good
decisions.

6. As to reporting requirements of an organization

FA: This is primarily concerned with reporting for the company as a

whole.

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MA: This focuses reporting on the parts or segments (i.e., product
line, sales, territories, divisions, departments) of the company.

7. As to requirement for compliance with law

FA: This is required by law as exemplified by the report

requirements of the BIR, SEC and other governmental entities.

MA: This is not mandatory.

Similarities between Financial and Managerial Accounting

The differences between financial accounting and managerial accounting in

terms of their respective user groups should not be overstated. Financial
accounting reports are aimed primarily at external users, and
managerial accounting reports are aimed primarily at internal users.
However, managers also make significant use of financial accounting
reports, and external users occasionally request financial information that is
generally considered appropriate for internal users. For example, creditors
may ask management to provide them with detailed cash flow projections. A
comparison of financial and management accounting is shown in Figure 1.2.

Relationship between Management Accounting and Cost Accounting

Cost accounting is a systematic set of procedures for recording and

reporting measurements of the cost of manufacturing goods and performing
services in the aggregate and in detail. It includes methods for recognizing,
classifying, allocating, aggregating and reporting such costs and comparing
them with standard costs.

Management accounting is a newer interest of cost accounting. Its

purpose is to provide managers with information which aids decision. There
are no generally accepted principles which specify how management
accounting information is to be reported. While systems such as direct
costing and standard costing exist in management accounting, each
accounting report should be tailored to the needs of the decision and the
decision maker. The most effective systems result when the manager-
decision maker and the accountant work together until the accountant

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understands the decision to be made and the manager understands the
source of information that the accountant will report.

Activities of Management Accountants

Managers of line functions are concerned with the primary operating

activities of the organization - manufacturing (or buying) and selling a
physical product or performing a service. A staff manager manages a
department that serves other departments. For example, financial managers
obtain the cash to keep operations running smoothly. The manager of the
legal department advises other managers regarding the legal ramifications
of actions.

Accounting is a staff function, with management accountants providing

information to other managers. Information can relate to financial
statements, tax problems, dealings with governmental authorities, and
other matters. The management accountant, like other staff managers,
often recommends courses of action to those using the information. But
neither die management accountant, nor any other staff manager, can
impose recommendations on line managers. Nevertheless, because of their
expertise, staff managers can influence decisions Staff managers, like all
managers, also manage their own departments.

Accounting

 Recording
 Estimating Financial and
 Organizing Operational Data
 Summarizi
ng

Financial Management
Accounting Accounting

 Reports to those  Reports to those

outside at well as inside the
inside the organization for:
organization:  Planning

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 Owners  Directing and
 Lenders motivating
 Tax authorities  Controlling
 Regulators  Performance
 Managers evaluation

 Emphasis is on  Emphasis is on
summaries of decisions affecting
financial the future.
consequences of past
activities.

 Objectivity and  Relevance is

verifiability of data emphasized.
are emphasized.

 Precision of  Timeliness of
information is information is
required. required.

 Only summarized  Detailed segment

data for the entire reports about
organization are departments,
prepared. products,
customers, and
employees are
prepared.

 Must follow GAAP.  Need not follow

GAAP.

 Mandatory for  Not mandatory.

external reports

Figure 1.2 Comparison of Financial and Management Accounting

Management accountants discharge their responsibilities and achieve their

objectives by organizing and implementing activities in the following
categories:

1. Planning - This involves quantifying and interpreting the effects on

the organization of planned transactions and other economic
events. The planning responsibility, which includes strategic,
tactical and operating aspects, requires that the accountant

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provide quantitative historical and prospective information to
facilitate planning. It includes participation in developing the
planning system, setting obtainable goals, and choosing
appropriate means of monitoring the progress toward the goals.

2. Reporting - Reporting relates to both internal and external needs

for information about past or future events and circumstances.
Management accountants make available to managers timely
reports that provide information and perspective necessary for
them to make decisions in a goal- congruent manner. The reports
may concern financial, physical, and human resources and the
markets and regulatory environments: in which entities operate. In
addition to reporting internally, management accountants make
appropriate information available to shareholders, creditors, and
governmental regulatory agencies and tax authorities.

3. Controlling - Management accountants interpret all forms of

internal and extern! information pertinent to the various segments
of the organization and communicate the implications of the
information being reviewed, including its relevance and reliability.
Management accountants thus must understand both the sources
and uses of the information. This also involves judging implications
of historical and expected events and helping to choose the
optimum course of action. Evaluating includes translating data into
trends and relationships. Management accountants must
communicate effectively and promptly the conclusions derived
from the analyses. The management accountant assures the
integrity of financial information concerning an organization’s
activities and resources; monitoring and measuring performance
and inducing any corrective actions required to return the activity
to its intended course. Management accountants provide
information to executives operating in functional areas who can
make use of it to achieve desirable performance.

4. Resource Management - This involves implementing a system of

reporting that is aligned with organizational responsibilities. This
reporting system will contribute to the effective use of resources
and measurement of management performance. The transmission
of management's goals and objectives throughout the organization
in the form of assigned responsibilities is a basis for identifying

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accountability. Management accountants must provide an
accounting and reporting system that will accumulate and report
appropriate revenues, expenses, assets, liabilities, and related
quantitative information to managers. Managers then will have
better control over these dements. Management accountants must
establish systems which facilitate planning and control of the
organization’s resources to ensure that their use is consistent with
established policies. These systems also should meet the needs of
management, investors, creditors, and other interested parties.
Some of these needs are:

 Custody and management of working capital, including credit

and collections and inventory management
 Creating and maintaining the most appropriate debt and equity
capital structure
 Developing and implementing a system to control plant,
property, and equipment
 Administering a pension or similar plan
 Tax planning and compliance
 Insurance management
 Creating and (moating a system of internal accounting control
that can detect misuses of assets, taking into account the
cost/benefit aspects of the control system

5. Information Systems Development - The information system

must meet the needs of all people who require informatics) to
perform their jobs. Managers responsible for sales of a particular
product might need weekly sales reports for each territory. Their
supervisor, who also supervises other sales managers, might need
only a weekly report for a group (or line) of products. The chief
sales executive might want only monthly, not weekly, reports of
sales by product groups and sales territories. Management
accountants must ensure that the system meets these varying
needs. Design and development of the overall management
information system implies:

 Determining the output required by users

 Specifying the data inputs needed to obtain the required output
 Developing the requirements for a processing system that
converts input to output
 Managing and securing the data bases
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6. Technological Implementation - Modem equipment and

techniques should be employed to facilitate the selection,
accumulation, transmission, analysis, and safeguarding of
information. Management accountants therefore should be familiar
with current technology relative to information processing and the
accounting techniques appropriate to controlling and using the
information. Some examples are:

 Computer applications
 basic accounting functions and data-base management
 techniques in financial planning and decision making, such as
models for optimizing asset utilization and resource allocation
 Network and communications systems

Computers usually record transactions in journals and ledgers.

Accountants are responsible for supervising the gathering of data
and for monitoring the system, making sure it functions as
intended and is used appropriately. Regular, periodic reporting is
the heart of management accountants’ work in many
organizations. One of the challenges here is ensuring that other
managers receive relevant information and are not overwhelmed
by irrelevant information. For some years, many people believed
that managers should receive all of the information that could
possibly be relevant. This view no longer prevails; managers’ time
is too valuable to spend sifting through material until they find
what they need.

7. Verification - Management accountants assure the accuracy and

reliability of information derived from the accounting system or
related sources that is used throughout the organization. They also
must be satisfied that actions taking place throughout the entity
are consistent with policies of the organization. Both of these
activities use the internal control system and are reviewed by
internal audit.

8. Administration - Administration includes development and

maintenance of an effective and efficient management accounting
organization. This organization addresses and resolves issues
relevant to the accounting and financial structure such as:

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 Assignment of management accounting responsibilities
 Interface between accounting and other operations
 Delegation of authority and determinations relevant to
centralization or decentralization
 Recruiting, training, and developing personnel in the various
areas of responsibility
 Separation of duties

Other important administrative activities performed by

management accountants include the development and
maintenance of:

 Accounting policy and procedure manuals

 A cost-effective records management program
 Records adequate to meet the requirements of tax laws, other
laws and regulatory agencies, and independent auditors

Operation Processes

The operation processes that are inherent throughout the range of activities
described above include:

1. Identification - recognition and evaluation of business transactions

and other economic events for appropriate accounting action.

2. Measurement - quantification, including estimates, of business

transactions or other economic events that have occurred or forecasts
of those that may occur.

3. Accumulation - disciplined and consistent approaches to recording

and classifying appropriate business transactions and other economic
events.

4. Analysis - determination of the reasons for the reported activity and

its relationship with other economic events and circumstances.
5. Preparation and Interpretation - meaningful coordination of
accounting and/or planning data to provide information, presented
logically, and including, if appropriate, the conclusions drawn from
those data.

6. Communication - reporting pertinent information to management

and others for internal and external uses.

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Organization Structure and the Management Accountant

Many of the activities constituting the field of management accounting are

interrelated and thus must be coordinated, ranked and implemented by the
management accountant in such a fashion as to meet the objectives of the
organization as perceived by him or her, A major function of the
management accountant is that of tailoring the application of the process to
the organization so that the organization’s objectives are achieved
effectively.

Management accounting is intended to include persons involved in such

functions as controller ship, treasury, financial analysis, planning, and
budgeting, cost accounting, internal audit, systems, and general accounting.
Management accountants thus may have titles as financial director, chief
Financial officer, vice president of finance, controller, treasurer, budget
analyst, cost analyst, and accountant, among others.

Line and Staff Relationship

Line authority is the authority to command action or give orders to

subordinates. Line managers are directly responsible for attaining the
objectives of the business firm as efficiently as possible. Sales and
production managers typically have line authority. Staff authority is the
authority to advise but not command others; it is exercised laterally or
upward. Staff managers give support, advice and service to line
departments. Examples of staff authority are found in personnel,
purchasing, engineering and finance.

The accounting function is usually “staff’, with responsibility for providing

Iine managers and also other staff managers, with specialized services. This
includes advice and help in the areas of budgeting, controlling, pricing and
special decisions.

Except for exercising line authority over his department, the chief
accounting officer usually the controller generally fills the staff role in his
company as contrasted with the line roles of sales and production
executives. Theoretically, the controller transmits the best accounting
procedures to be followed by the line people to the president who will
communicate such through a manual of instructions. In practice however,
the controller holds delegated authority from top line management to direct
the line people how to apply these procedures. This is known as functional

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authority which is the right to command action laterally or downward with
regard to a specific function or specialty.

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. The responsibilities of the CFO vary among
organizations, but they usually include the following areas:

 Controllership - includes providing financial information for

reports to managers and reports to shareholders and overseeing
the overall operations of the accounting system.

 Treasury - includes banking and short- and long-term financing,

investments, and management of cash.

 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.

 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.

In some organizations, the CFO is also responsible for information systems.

In other organizations, an officer of equivalent rank to the CFO - called the
chief information officer - is responsible for information systems.

The controller (also called die chief accounting officer) is die financial
executive primarily responsible for management accounting and financial
accounting. This book focuses on the controller as the chief management
accounting executive. Modem controllers do not do any controlling in terms
of line authority except over their own departments. Yet, the modern
concept of controllership maintains that the controller does control in a
special sense. That is, by reporting and interpreting relevant data (problem-
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solving and attention-directing roles), the controller exerts a force or
influence that impels management toward making better-informed
decisions.

Figure 1.3 is an illustrative organization chart of the CFO and the corporate
controller of an apparel company.

Chairman
Chief Executive Board of Directors
Officer (CEO)

President
Chief Operating
Officer

Chief Financial
Officer

Treasury Risk Management

Tax Investor Relations

Audit Financial Planning

Controller

Figure 1.3 Reporting Relationships for the CFO and the Corporate Controller

Controllership

Definition

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

the process by which management assures itself that the resources are

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procured and utilized according to plans in order to achieve the company’s
objectives.

The Controller as the Top Management Accountant

In most organizations, the top managerial accounting position is held by the

controller. The controller provides reports for planning and evaluating
company activities (e.g., budgets and performance repeats) and provides
the information needed to make management decisions (e.g., decisions
related to construction of a new factory or decisions related to adding or
dropping a product). The controller also has responsibility for all financial
accounting reports and tax filings with the Bureau of Internal Revenue and
other taxing agencies, as well as coordinating the activities of the firm’s
external auditors.

A simplified illustration of the organization chart for the controller’s office is

shown in Figure 1.4. Note that one of the areas reporting to the controller is
cost accounting. Most medium-sized and large manufacturing companies
have such a department. Cost accountants estimate costs to facilitate
management decisions and develop cost information for purposes of valuing
inventory.

The controller is an integral part of the top management team. If one wants
a high-level career in management accounting, he/she will need not only
strong accounting skills but also skills required of all high-level executives.
These skills include excellent written and oral communication skills, solid
interpersonal skills and a deep knowledge of the industry in which the firm
competes.

In addition to the position of the controller, many companies have a position

called treasurer. The treasurer has custody of cash and funds invested in
various marketable securities. In addition to money management duties, the
treasurer is generally responsible few maintaining relationships with
investors, banks, and other creditors. Thus, the treasurer plays a major role
in managing cash and marketable securities, preparing cash forecasts and
obtaining financing from banks and other lenders. Both the controller and
the treasurer report to the chief financial officer (CFO) who is the senior
executive responsible for both accounting and financial operations.

The controller’s authority is basically staff authority in that the controller’s

office gives advice and service to other departments. However, in his own
department, he has line authority. In the modern concept of controllership, it
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is maintained that die controller does control in a special sense. That is, by
reporting and interpreting relevant data, the controller exerts a force or
influence that impels management toward logical decisions consistent with
objectives.

Controller

Budgeting and Financial

Financial Systems Taxation
Performance Analysis and Cost Accounting
Reporting Development Reporting
Reporting Special Studies

Figure 1.4 Organization Chart for the Controller’s Office

Bask Functions of Controllership

The basic principal functional responsibilities and activities of controllership

may be categorized as follows:

1. Planning. Establish and maintain an integrated plan of operation

consistent with the company’s goals and objectives, both short and
long term, analyzed and revised, as required, communicated to all
levels of management, with appropriate systems and procedures
installed.
2. Control. Develop and revise standards against which to measure
performance and provide guidance and assistance to other members
of management in insuring conformance of actual results to
standards.

3. Reporting. Prepare, analyze, and interpret financial results for

utilization by management in the decision-making process, evaluate
the data with reference to company and unit objectives; prepare and
file external reports as required to satisfy government regulatory
bodies, shareholders, financial institution, customers, and the general
public.

4. Accounting. Design, establish, and maintain general and cost

accounting systems at all company levels, including corporate,
divisional, plant, and unit to properly record all financial transactions
in the books of accounts and records in accordance with sound
accounting principles with adequate internal control.

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5. Other Primary Responsibilities. Manage and supervise such

functions as taxes, including interface with the respective taxing
authorities and agents; maintain appropriate relationships with
internal and external auditors; institute insurance programs, coverage,
records and provision; develop and maintain systems and procedures;
develop record retention programs; supervise assigned treasury
functions; institute investor and financial public relations programs;
office management; and direct other assigned functions.

As circumstances warrant, there may be many deviations from die basic

functions just described. It should be pointed out that the controller’s efforts
should not be diluted and render him less effective by assigning to him
unrelated functions of an operational nature. The financial planning and
control functions are too important to the success of the business enterprise
to burden the controller with activities that others can perform.

Qualifications of the Controller

The qualifications of an effective controller would include;

1. An excellent technical foundation in accounting and finance with an

understanding and thorough knowledge of accounting principles.
2. An understanding of the principles of planning, organizing, and
control.
3. A general understanding of the industry in which the company
competes and the social, economic, and political forces involved.
4. A thorough understanding of the company, including its technologies,
products, policies, objectives, history, organization, and environment.
5. The ability to communicate with all levels of management and a basic
understanding of the other functional problems related to engineering,
production, procurement, industrial relations, and marketing.
6. The ability to express ideas clearly in writing or in making informative
presentations.
7. The ability to motivate others to achieve positive action and results.

The controller may have the technical capability and be able to lay out the
assigned tasks as well as supervise and direct his personnel, but he must
also have integrity and the ability to communicate if he is to succeed. He
must be fair, reasonable, and sincere with all concerned if he is to be
recognized for the importance of the controllership function.

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As in any executive position, the controller must be able to work with people
at all levels, have respect for the ideas and opinions of others, and have the
resourcefulness, to meet all challenges.

Professional Ethics

In recent years, many concerns have been raised regarding ethical behavior
in business and in public life. Allegations and scandals of unethical conduct
have been directed toward managers in virtually all segments of society,
including government, business, charitable organizations, and even religion.
Although these allegations and scandals have received a lot of attention, it
is doubtful that they represent a wholesale breakdown of the moral fiber of
the nation. After all, hundreds of millions of transactions are conducted
every day that remain untainted. Nevertheless, it is important to have an
appreciation of what is and is not acceptable behavior in business and why.
Fortunately, the Institute of Management Accountants (IMA) of the United
States has developed a very useful ethical code called the Standards of
Ethical Conduct for Practitioners of Management Accounting and Financial
Management. Even though the standards were specifically developed for
management accountants, they have much broader application.

Code of Conduct for Management Accountants

The Institute of Management Accountants (IMA) issued the Standards of

Ethical Conduct for Practitioners of Management Accounting and Financial
Management. These standards are presented in Figure 1.5. There are two
parts to the standards. The first part provides general guidelines for ethical
behavior. In a nutshell, the management accountant has ethical
responsibilities in four broad areas namely:

1. to maintain a high level of professional competence,

2. to treat sensitive matters with confidentiality,
3. to maintain personal integrity, and
4. to be objective in all disclosing.

The second part of the standards gives specific guidance concerning what
should be done if an individual finds evidence of ethical misconduct within
an organization.

The ethical standards provide sound, practical advice for management

accountants and managers. They require professional behavior, especially in
avoiding conflicts of interest. They require management accountants to

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bring bad news to the attention of their supervisors, and to work
competently.

Most of the rules in the ethical standards are motivated by a very practical
consideration - if these rules were not generally followed in business, then
the economy could come to a halt. The following are examples of the
consequences of not abiding by the standards:

1. Suppose employees could not be trusted with confidential information.

Top managers would therefore be reluctant to distribute confidential
information within the company. This could result to decisions being
made based on incomplete information and could lead to deterioration
of operations.

2. Suppose employees accept bribes from suppliers. Thai contracts would

tend to go to suppliers who pay the highest bribe rather than to the
most competent suppliers. Would you like to fly in an airplane whose
wings were made by the subcontractor who was willing to pay the
highest bribe to a purchasing agent?

3. Suppose the CEOs or presidents of companies routinely lied in their

annual reports to shareholders and grossly distorted financial
statements. If the basic integrity of the company’s financial statement
could not be relied on, investors and creditors would have little basis
for making informed decisions. Rational investors would suspect the
worst and would pay less for securities issued by companies. As a
result, less funds would be available for productive investments and
many firms might be unable to raise any funds at all. This ultimately,
would lead to slower economic growth, fewer goods and services, and
higher prices.

As these examples suggest, if ethical standards were not generally adhered

to, there would be undesirable consequences for everyone. Following ethical
rules such as those in the Standards of Ethical Conduct for Practitioners of
Management Accounting and Financial Management is not just a matter of
being “nice”; it is absolutely essential for the smooth functioning of an
advanced market economy.

Standards of Ethical Conduct for Practitioners of Management

Accounting and financial Management

Practitioners of management accounting and financial management

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have an obligation to the public, their profession, the organization
they serve, and themselves, to maintain the highest standards of
ethical conduct. In recognition of this obligation, the Institute of
Management Accountants has promulgated the following standards
of ethical conduct for practitioners of management accounting and
financial management. Adherence to these standards, both
domestically and internationally, is integral to achieving the
Objectives of Management Accounting. Practitioners of
management accounting and financial management shall not
commit acts contrary to these standards nor shall they condone the
commission of such acts by others within their organizations.
Competence. Practitioners of management accounting and financial
management have a responsibility to:
 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 dear reports and recommendations after
appropriate analysis of relevant and reliable information.
Confidentiality. Practitioners of management accounting and
financial management have a responsibility to:
 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
advantages either personally or through third parties.
Integrity. Practitioners of management accounting and financial
management have a responsibility to:
 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.
 Refrain from either actively or passively subverting the
attainment of the organization’s legitimate and ethical
objectives.
 Recognize and communicate professional limitations or other
constraints that would preclude responsibility judgment or
successful performance of an activity.
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 Communicate unfavorable as well as favorable information and
professional judgments or opinions.
 Refrain from engaging in or supporting any activity that would
discredit the profession.
Objectivity. Practitioners of management accounting and financial
management have a responsibility to:
 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.
Resolution of Ethical Conflict. In applying the standards of ethical
conduct, practitioners of management accounting and financial
management may encounter problems in identifying unethical
behavior or in resolving an ethical conflict. When faced with
significant ethical issues, practitioners of management accounting
and financial management should follow the established policies of
the organization bearing on the resolution of such conflict. If these
policies do not resolve the ethical conflict, such practitioner should
consider the following courses of action:
 Discuss such problems with the immediate superior except
when it appears that the superior is involved, in which case the
problem should be presented initially to the next higher
managerial level. If a satisfactory resolution cannot be
achieved when the problem is initially presented, submit the
issues to the next higher managerial level.
 If the immediate superior is the chief executive officer, or
equivalent, the acceptable reviewing authority may be a group
such as the audit committee, executive committee, board of
directors, board of trustees, or owners. Contact with levels
above the immediate superior should be initiated only with the
superior’s knowledge, assuming the superior is not involved.
Except where legally prescribed, communication of such
problems to authorities or individuals not employed or engaged
by the organization is not considered appropriate.
 Clarify relevant ethical issues by confidential discussion with an
objective advisor (e.g., IMA Ethics Counseling Service) to obtain
a better understanding of possible courses of action.
 Consult your own attorney as to legal obligations and rights
concerning the ethical conflict.
 If the ethical conflict still exists after exhausting all levels of
internal review, there may be no other recourse on significant
matters than to resign from the organization and to submit an
informative memorandum to an appropriate representative of
the organization. After resignation, depending on the nature of
the ethical conflict, it may also be appropriate to notify other
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parties.

* Institute of Management Accountants, formerly National

Association of Accountants, Statements on Management
Accounting: Objectives of Management Accounting, Statement No.
1B, New York, NY, June 17, 1982 as revised in 1997.

Figure 1.5 Standards of Ethical Conduct for Practitioners of Management

Accounting and financial Management

Company Codes of Conduct

Ethical standards serve a very important practical function in an advanced

market economy. Without widespread adherence to ethical standards,
material living standards would fall. A former president of CMA emphasizes
the importance of ethics in business:

“Employees like to work for a company that they can trust.

Customers like to deal with an ethically reliable business.
Suppliers like to sell to firms with which they can have a real
partnership. Communities are more likely to cooperate with
organizations that deal honestly and fairly with them. If die
business community is to function effectively, all of the
players need to act ethically.”

It is unfortunate though that some companies place so much emphasis cm

short-term profits that may make it seem like die only way to get ahead is to
act unethically.

Those who engage in unethical behavior often justify their actions with one
a* more of the following reasons:

1. the organization expects unethical behavior,

2. everyone else is unethical, and/or
3. behaving unethically is the only way to get ahead.

To counter the first justification for unethical behavior, many companies

have adopted formal ethical codes of conduct. These codes are generally
broad-based statements of a company’s responsibilities to its employees, its
customers, its suppliers and the community in which the company operates.
Codes give broad guidelines rather than spell out specific dos and don’ts or
suggest proper behavior in a specific situation. Companies with a strong
code of ethics can create strong customer and employee loyalty. While liars
and cheats may win on occasion, their victories are often short-term.
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Companies in business for the long term find that it pays to treat all of their
constituents honestly and loyally.

Typical Ethical Challenges

Ethical issues can confront management accountants in many ways. Here

are two examples:

 Case A. Roger Cruz, a management accountant, knows that reporting

a loss for a software division will result in yet another series of layoffs,
and has concerns about the commercial potential of software for
which R&D costs are currently being capitalized as an asset rather
than being shown as an expense for internal reporting purposes. The
division manager argues that the new product will be successful and
profitable but presents little evidence to support her argument. The
last two products from this division have been unsuccessful. The
management accountant has many friends in the division and wants
to avoid a personal confrontation with the division manager.

 Case B: A packaging supplier, bidding for a new contract, offers the

management accountant of the purchasing company an all-expense
paid weekend to the Boracay Resort. The supplier does not mention
the new contract when giving the invitation. The accountant is not a
personal friend of the supplier. He knows cost issues are critical in
approving the new contract and is concerned that the supplier will ask
for details about bids by competing packaging companies.

In both cases, the management accountant is faced with an ethical

dilemma. Case A involves competence, objectivity, and integrity. The
management accountant should request that die division manager provide
credible evidence that the new' product is commercially viable. If the
manager does not provide such evidence, expensing R&D costs in die
current period is appropriate. Case B involves confidentiality and integrity.
Ethical issues are not always clear-cut. The supplier in Case B may have no
intention of raising issues associated with the bid. However, the appearance
of a conflict of interest in Case B is sufficient for many companies to prohibit
employees from accepting “favors” from suppliers. Figure 1.5 includes the
IMA’s guidance on “Resolution of Ethical Conflict.” The accountant in Case B
should discuss the invitation with his immediate supervisor. If die visit is
approved, the supplier should be informed that the invitation has been

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officially approved subject to his following corporate policy (which includes
the confidentiality of information).

Codes of Conduct on the International Level

In July 1990, the International Federation of Accountants (IFAC) in which the

Philippines through the PICPA is a member, issued the “Guidelines on Ethics
for Professional Accountants” which governs the activities of all professional
accountants throughout the world; regardless of whether they are practicing
as independent CPAs, employed in government service or employed as
internal accountants. In addition to outlining ethical requirements in matters
dealing with competence, objectivity, independence, and confidentiality, the
IF AC’s code also outlines the accountant’s ethical responsibilities in matters
relating to taxes, fees t and commissions, advertising and solicitation, the
handling of monies and cross- border activities. Where cross-border
activities are involved, the IFAC ethical requirements must be followed if
these requirements are stricter than the ethical requirements of the country
in which the work is being performed.

The Board of Accountancy of the Professional Regulation Commission

approved the implementation of the new Code of Ethics for Professional
Accountants in the Philippines effective January 1, 2004.

Institute of Management Accountants (IMA)

Management accountants have gained status in recent years as they now

spending more time analyzing a company’s operations and less with the
problems of recording and computing costs of products. The Institute of
Management Accountants (IMA), the principal organization of management
accountants in the United States, has instituted a program to provide
certifications for management accountants and financial managers. The
Certified Management Accountant (CMA) examination was first given in
1972. A listing of die required subject areas in die CMA examination
indicates the breadth of knowledge expected of the professional
management accountant. The examination consists of die following four
parts: Economics, Finance, and Management; Financial Accounting and
Reporting; Management Reporting, Analysis and Behavioral Issues; and
Decision Analysis and Information Systems. The Certified in Financial
Management (CFM) examination was first given in 1996. The CFM
examination is similar to the CMA examination with one major difference:
die Financial Accounting and Reporting section is replaced with Corporate

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Financial Management. The IMA also promulgated a code of ethics for
management accountants, with is discussed in the previous section.

The Institute of Management Accounting (IMA) is a professional organization

that publishes the monthly magazine Strategic Finance. Since 1973, die IMA
has conducted a comprehensive examination to test the knowledge a
management accountant must have to be successful in a complex and fast-
changing business world. More than 3,000 individuals take the exam each
year. Those who pass the exam are issued a Certificate in Management
Accounting and are proud to indicate the designation CMA on resumes and
business cards. For details on student and professional memberships in the
IMA and for information on the CMA examination, visit the IMA Web site.

One of contributions of the IMA is the development of standards of ethical

conduct and maintenance of an ethics hotline that members can call to
discuss ethical conflicts. One may also visit the IMA website to review these
ethical standards.

Philippine Association of Management Accountants (PAMA)

PAMA was established in 1972 as the National Association of Accountants

(PAMA) Philippine Chapter, Inc. It is affiliated with NAA in New York. It was
founded primarily to provide its members with educational and professional
activities that supplement in the knowledge of management accounting
practices and methods. Monthly technical meetings, seminars and
workshops are held to present relevant and current topics by leading
speakers from the government, private and educational sectors. The open
forum provides the nerve for the exchange of ideas and experiences among
the participants and the speakers. Publication of technical materials is also
part of the Association’s efforts to service its members.

To propagate and professionalize Management Accounting in the Philippines,

PAMA conducts the Certificate in Management Accounting (CMA) Program
through its continuing education arm, the Philippine Institute of
Management Accounting (PIMA). Basic objectives of the program are:

1. To establish management accounting as a recognized profession

by identifying the role of the management accountant and the
underlying body of knowledge, and by outlining a course of
study by which such knowledge can be acquired.
2. To foster higher educational standards in the field of
management accounting.
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3. To assist employees, educators and students by establishing an
objective measure of an individual’s knowledge and competence
in the field of management accounting.

Posttest

I. Questions

1. The opening paragraph of an accounting textbook says, "’Managers

need accounting information and need to know how to use it. Critically
evaluate this statement.

2. The owner of a small software company felt his accounting system

was useless. He stated, "Accounting systems only generate historical
costs. Historical costs are useless in my business because everything
changes so rapidly."

a. Are historical costs useless in rapidly changing environments?

b. Should accounting systems be limited to historical costs?

3. A finance professor and a marketing professor were recently

comparing notes on their perceptions of corporations. The finance
professor claimed the goal of a corporation should be to maximize the
value to the shareholders. The marketing professor claimed that the
goal of a corporation should be to satisfy customers.

What are the similarities and differences in these two goals?

4. "Planning is really more vital than control." Do you agree? Why?

5. The controller is both a line and a staff executive.” Do you agree?

6. Distinguish among line, staff and functional authorities.

7. How is cost accounting related to the concept of controllership?

8. Prepare an organization chart (highlighting the accounting functions)

of Bettina Company, which has the following positions:

a m General ledger
. VP - Sales . bookkeeper
b
. Internal audit manager n. Performance analyst
c Treasurer o. Tax manager
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.
d Cost accounting
. Payroll clerk p. manager
e General accounting
. manager q. Cost clerk
Accounts receivable
f. clerk r. Billing clerk
g Budget and standard
. cost analyst s. VP - Finance
h Systems and EDP
. Controller t. Manager
i. Cost systems analyst u. VP - Production
j. Special studies manager v. Assistant manager
k w
. Assistant controller . President
l. Accounts payable

9. How do management accountants support strategic decisions?

10. What roles do management accountants perform?

11. What guidelines do management accountants use?

12. Where does the management accounting function fit into an

13. What are the ethical responsibilities of management

accountants?

14. How does a controller help “control'’ a company?

15. Discuss the basic features of financial and managerial

accounting.

16. The competitive environment for both manufacturing and

service companies has become far more challenging and demanding
in the last 25 years. Discuss the changes in competition and in the
nature and type of the new requirements for management accounting
information.

17. Discuss the potential behavior implications of management

accounting.

II. Exercises
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Exercise 1

For each of the following activities, identify whether the main role of
accounting is (1) problem solving, (2) scorekeeping, or (3) attention
directing.

a. Analyzing the impact of introducing a new product on production.

b. Comparing results between actual costs and budgeted costs for each
step of manufacturing a product.
c. Preparing a report that analyzes changes in cost resulting from
reducing the number of tubing sizes used during production from six
down to two.
d. Reporting sales by branch for the sales manager.

Exercise 2

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

a. Cost of samples mailed to promote sales of a new product,

b. Labor cost of workers in the manufacturing plant.
c. Bonus paid to person with a 90% satisfaction rating in handling
customers with complaints,
d. Transportation costs for shipping products to retail outlets.

Exercise 3

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

a. Cost of customer order forms.

b. Cost of paper used in manufacture of books.
c. Cost of paper used in packing cartons to ship books.
d. Cost of paper used in display at national trade show.
e. Depreciation of trucks used to transport books to college bookstores.
f. Cost of the wood used to manufacture paper.
g. Salary of the scientists attempting to find another source of printing
ink.
h. Cost of defining the book size so that a standard-sized box is filled to
capacity.

III. Problems

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Problem 1 (Problem Solving, Scorekeeping, and Attention
Directing)

For each of the following activities, identify die main role the accountant is
performing - problem solving, scorekeeping, or attention directing.

1. Preparing a monthly statement of Australian sales for the IBM

marketing vice president.
2. Interpreting differences between actual results and budgeted amounts
on a performance report for the Customer Warranty' Department of
General Electric.
3. Preparing a schedule of depreciation for forklift trucks in the Receiving
Department of a Hewlett-Packard plant in Scotland.
4. Analyzing, for a Mitsubishi international manufacturing manager, the
desirability of having some auto parts made in Korea.
5. Interpreting why a Birmingham distribution center did not adhere to
its delivery costs budget.
6. Explaining a Xerox Shipping Department's performance report.
7. Preparing, for the manager of production control of a U.S. steel plant,
a cost comparison of two computerized manufacturing control
systems.
8. Preparing a scrap report for the Finishing Department of a Toyota parts
plant.
9. Preparing the budget for the Maintenance Department of Mount Sinai
Hospital.
10. Analyzing, for a General Motors product designer, the impact on
product costs of some new headlight lamps.

Problem 2 (Management Accounting Information System)

The items that follow are associated with a management accounting

information system.

a. Repairing a defective part.

b. Providing information for planning and control.
c. Designing a product.
d. Measuring the cost of design.
e. A budget that shows how much should be spent on design activity.
f. Using output information to make a decision.
g. Usage of materials.
h. A report comparing the actual costs of quality with the expected costs
of quality.
i. Surveying customers to assess post purchase costs.
j. Incurrence of post purchase costs.
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k. Costing out products.
l. Assigning the cost of labor to a product.
m. Report showing the cost of a product.
n. Measuring the cost of quality.

Required:

Classify the items into one of the following categories:

1. Inputs
2. Processes
3. Outputs
4. System objectives

Problem 3 (Role of Management Accountants)

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 (5)
external reporting.

Required:

Describe each of these responsibilities of the management accountant and

identify examples of practices and techniques. (CMA Adapted)

Problem 4 (Line versus Staff)

The job responsibilities of two employees of Boots Manufacturing follow.

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
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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.

Problem 5 (Professional Ethics and End-of-Year Games)

Jane Tan is the new division controller of the snack foods division of Yummy
Foods. Yummy Foods has reported a minimum 15% growth in annual
earnings for each of the past 5 years. The snack foods division has reported
annual earnings growth of over 20% each year in this same period. During
the current year, die economy went into a recession. The corporate
controller estimates a 10% annual earnings growth rate for Yummy Foods
this year. One month before the December 31 fiscal year-end of the current
year, Tan estimates the snack foods division will report an annual earnings
growth of only 8 percent. Louie Ryan, the snack foods division president, is
less than happy, but he says with a wry smile, “Let the end-of-year games
begin.”

Tan makes some inquiries and is able to compile the following list of end-of-
ye£ games that were more-or-less accepted by the previous division
controller.

a. Deferring routine monthly maintenance in December on packaging

equipment by an independent contractor until January of next year.
b. Extending the close of the current fiscal year beyond December 31
so that some sales of next year are included in the current year.
c. Altering dates of shipping documents of next January’s sales to
record them as sales in December of the current year.
d. Giving salespeople a double bonus to exceed December sales
targets.
e. Deferring the current period’s advertising by reducing the number of
television spots run in December and running more than planned in
January of next year.
f. Deferring the current period’s reported advertising costs by having
Yummy Foods outside advertising agency delay billing December
advertisements until January of next year or having the agency alter
invoices to conceal the December date.
g. Persuading carriers to accept merchandise for shipment in December
of the current year although they normally would not have done so.

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Required:

1. Why might the snack foods division president want to play the end-
of- year games described above?
2. The division controller is deeply troubled and reads the Standards of
Ethical Conduct for Management Accountants. Classify each of the
end-of-year games (a - g) as (i) acceptable, or (ii) unacceptable
according to that document.
3. What should Tan do if Ryan suggests that end-of-year games are
played in every division of Yummy Foods and that she would greatly
harm the snack foods division if she does not play along and paint
the rosiest picture possible of the division's results?

Problem 6

You have just discovered that James Torres, a manager of Manila division has
made up fictitious revenues and booked some of them in this period and
deferred some of them to the next period. As a result, James has been able
to achieve a very large net income number for his division for this period
and more than likely the next period as well. What are the terms used for
James’ methods and are they illegal?

Problem 7

As a manager at the P3 Company you have just found out that the vice-
president of the company has secretly engaged in selling technical
specifications for your new, patent-pending, product VidOne, to AZ Products,
your leading competitor. What do you do?

Problem 8

If you see a coworker stealing from the petty cash fund, what are your
possible courses of action and how do you proceed?

IV. Cases

Case 1 (Financial vs. Managerial Accounting)

Athletics.com sells sporting goods and athletic apparel over the Internet. In
its first two years of business the company had relatively high sales but also
suffered large losses. The company’s income statement (filed with the
Securities and Exchange Commission, mailed to stockholders, and available
on the company’s Web site) was as follows:

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2006 2005
P5,860,3 P1,393,5
Sales 40 00
4,568.42
Cost of sales 1 1,165.25
Gross 1,291.91
profit 9 228.253
Selling, general and administrative
expenses:
Payroll and payroll taxes 945,672 654,783
Stock and option based
compensation 485,622 125,367
Occupancy and office expenses 523,160 321,456
Contract services and
professional fees 704,880 436,050
Internet servicing expenses 201,458 136,598
General and administrative
expenses 687,482 359,657
1,257,86
Advertising and promotion 3 684,571
Depreciation and amortization 19,875 12,458
4,826,01 2,730,94
2 0
P(3,534, P(2,502,
(Loss) from operations 093) 687)

Required:

a. Assume you are a senior manager for Athletics.com. What forward

looking information would you like to see in addition to the income
statement which reports prior period profit and loss?
b. For internal reporting purposes, the company has capitalized certain
costs related to employee training and advertising Management’s
view is that these costs have increased the value of an important
asset - the company’s brand name. Would this be allowed for external
reporting purposes under GAAP?
c. Is the information in the income statement sufficiently detailed for
management’s needs? Provide four examples of more detailed
information that managers would likely request.
d. Suggest three nonmonetary measures that would be useful to
managers of Athletics.com but not included in external financial
reports.

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e. Athletics.com currently reports its income statement on its Web site.
Why might management of Athletics.com be reluctant to present
nonmonetary information along with the income statement on the
company’s Web site?

Case 2 (You get what you measure!)

Each year, the president of Quark Electronics selects a single performance

measure, and offers significant financial bonuses to all key employees if the
company achieves a 10 percent improvement on the measure in
comparison to the prior year. He recently expressed the opinion that '"this
focuses many managers on a single, specific target and gets them all
working together to achieve a major objective that will increase shareholder
value.”

Pilar Hernandez is a new member of the company's board of directors, and

she has begun to question the president's approach to rewarding
performance. In particular, she is concerned that placing too much emphasis
on a single performance measure may lead managers to take actions that
increase performance in terms of the measure but decrease the value of the
firm. Is this possible?

Required:

a. What negative consequence might occur if the performance measure

is sales to new customers + total sales in the current year versus the
prior year? (Note: To receive a bonus, managers would need to
increase this ratio compared with the prior year)

b. What negative consequence might occur if the performance measure

is cost of goods sold + sales in the current year versus the prior year?
(Note: To receive a bonus, managers would need to decrease this ratio
compared with the prior year )

c. What negative consequence might occur if the performance measure

is selling and administrative' expense sales in the current year versus
the prior year? (Note: To receive a bonus, managers would need to
decrease tins ratio compared with the prior year.)

Case 3 (The Roles of Managers and Management Accountants)

Listed below are a number of terms that relate to organizations, the work of
management, and the role of managerial accounting:
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Budgets Line Directing and Planni
motivating ng
Chief Financial Managerial Feedback Precisi
Officer accounting on
Controller Nonmonetary Financial Staff
data accounting
Decentralization Performance ‘
report

Choose the term or terms above that most appropriately complete the
following statements:

1. _______ is concerned with providing information for the use of those

who are inside the organization, whereas ______ is concerned with
providing information for the use of those who are outside the
organization.
2. _____ consists of identifying alternatives, selecting from among the
alternatives the one that is best for the organization, and specifying
what actions will be taken to implement the chosen alternative.
3. When ______, managers oversee day-to-day activities and keep the
organization functioning smoothly.
4. The accounting and other reports coming to management that are
used in controlling the organization are called ______.
5. The delegation of decision-making authority throughout an
organization by allowing managers at various operating levels to make
key decisions relating to their area of responsibility is called _____.

6. A position on the organization chart that is directly related to

achieving the basic objectives of an organization is called a _____
position.
7. A _____ position provides service or assistance to other parts of the
organization and docs not directly achieve the basic objectives of the
organization.
8. The manager in charge of the accounting department is generally
known as the _____.
9. The plans of management are expressed formally in _____.
10. A detailed report to management comparing budgeted data to
actual data for a specific time period is called a _____. .
11. The _____ is the member of the top management team who is
responsible for providing timely and relevant data to support planning
and control activities and for preparing financial statements for
external users.

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12. Managerial accounting places less emphasis on _____ and more
emphasis on _____ than financial accounting.

Case 4 (Ethics in Business)

Maria Reyes was hired by a popular fast-food restaurant as an order-taker

and cashier. Shortly after taking the job, she was shocked to overhear an
employee bragging to a friend about shortchanging customers. She
confronted the employee who then snapped back: ‘‘Mind your own business.
Besides, everyone does it and the customers never miss the money.” Maria
didn’t know how to respond to this aggressive stance.

Required:

What would be the practical consequences on the fast-food industry and on

consumers if cashiers generally shortchanged customers at every
opportunity?

Case 5 (Ethics and the Manager)

Happyville, Inc. operates a chain of department stores located in the

northwest. The first store began operations in 1965, and the company has
steadily grown to its present size of 44 stores. Two years ago, the board of
directors of Happyville approved a large-scale remodeling of its stores to
attract a more upscale clientele.

Before finalizing these plans, two stores were remodeled as a test. Lisa
Perez, assistant controller, was asked to oversee the financial reporting for
these test stores, and she and other management personnel were offered
bonuses based on the sales growth and profitability of these stores. While
completing the financial reports, Perez discovered a sizable inventory of
outdated goods that should have been discounted for sale or returned to the
manufacturer. She discussed the situation with her management colleagues;
the consensus was to ignore reporting this inventory as obsolete, since
reporting it would diminish the financial results and their bonuses.

Required:

1. According to the Standards of Ethical Conduct for Practitioners of

Management Accounting and Financial Management, would it be
ethical for Perez not to report the inventory as obsolete?
2. Would it be easy for Perez to take the ethical action in this situation?

Case 6 (Preparing an Organization Chart)

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Verona University is a large private school located in Mountain Province. The
university is headed by a president who has five vice presidents reporting to
him. These vice presidents are responsible for auxiliary services, admissions
and records, academics, financial services (controller), and physical plant.

In addition, the university has managers who report to these vice

presidents. These include managers for central purchasing, the university
press, and the university bookstore, all of whom report to the vice president
for auxiliary services; managers for computer services and for accounting
and finance, who report to the vice president for financial services; and
managers for grounds and custodial services and for plant and
maintenance, who report to the vice president for physical plant.

The university has four colleges - business, humanities, fine arts and
engineering and quantitative methods - and a law school. Each of these
units has a dean who is responsible to the academic vice president. Each
college has several departments.

Required:

1. Prepare an organization chart for Verona University.

2. Which of the positions on your chart would be line positions? Why
would they be line positions? Which would be staff positions? Why?
3. Which of the positions on your chart would have need for accounting
information? Explain.

Case 7 (Ethics in Business)

Pedro Santos is the controller of a corporation whose stock is not listed on a

national stock exchange. The company has just received a patent on a
product that is expected to yield substantial profits in a year or two. At the
moment, however, the company is experiencing financial difficulties; and
because of inadequate working capital, it is on the verge of defaulting on a
note held by its bank.

At the end of the most recent fiscal year, the company's president
instructed Santos not to record several invoices as accounts payable. Santos
objected since the invoices represented bona fide liabilities. However, the
president insisted that the invoices not be recorded until after year-end, at
which time it was expected that additional financing could be obtained. After
several very strenuous objections - expressed to both the president and
other members of senior management - Santos finally complied with the
president's instructions.
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Required:

1. Did Santos act in an ethical manner? Explain fully.

2. If the new product fails to yield substantial profits and the company
becomes insolvent, can Santos' actions be justified by the fact that
he was following orders from a superior? Explain.

Case 8 (Ethics in Business)

Andres Romero was recently hired as assistant controller of PhilChem, Inc.,

which processes chemicals for use in fertilizers. Romero was selected for
this position because of his past experience in chemical processing. During
his first month on the job, Romero made a point of getting to know the
people responsible for the plant operations and learning how things are
done at PhilChem.

During a conversation with the plant supervisor, Romero asked about the
company procedures for handling toxic waste materials. The plant
supervisor replied that he was not involved with the disposal of wastes and
suggested that Romero might be wise to ignore this issue. This response
strengthened Romero's determination to probe this area further to be sure
that the company was not vulnerable to litigation.

Upon further investigation, Romero discovered evidence that PhilChem was

using a nearby residential landfill to dump toxic wastes. It appeared that
some members of PhilChem's management team were aware of this
situation and may have been involved in arranging for this dumping;
however, Romero was unable to determine whether his superior, the
controller, was involved.

Uncertain how he should proceed, Romero began to consider his options by

outlining the following three alternative courses of action:

 Seek the advice of his superior, the controller

 Anonymously release the information to the local newspaper
 Discuss the situation with an outside member of the board of directors
with whom he is acquainted

Required:

1. Discuss why Andres Romero has an ethical responsibility to take some

action in the matter of PhilChem, Inc., and the dumping of toxic
wastes. Refer to the specific standard (competence, confidentiality,

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integrity, and/or objectivity) in the Standards of Ethical Conduct for
Management Accountants to support your answer.

2. For each of the three alternative courses of action that Andres Romero
has outlined, explain whether or not the action is appropriate
according to the Standards of Ethical Conduct for Management
Accountants.

3. Assume that Andres Romero sought the advice of his superior, the
controller, and discovered that he controller was involved in the
dumping of toxic wastes. Describe the steps that Romero should take
to resolve this situation.

V. Multiple Choice Questions

1. Which of the following statements is true?

a. Management accounting information focuses on external reporting.

b. The balance sheet, income statement and statement of cash flows are
used for financial accounting but not for management accounting.
c. Financial accounting is broader in scope than management
accounting.
d. Modern cost accounting plays a significant role in management
decision making.

2. Which of the following statements is false?

a. Cost accounting measures and reports short-term, long-term financial

and nonfinancial information.
b. Cost management provides information that helps increase value for
customers.
c. All strategies should be evaluated regarding the resources and
capabilities of the company.
d. A good cost accounting system is narrowly focused cm a continuous
reduction of costs.

3. Which of the following statements is correct?

a. The best-designed strategies are valuable whether or not they are

effectively implemented.
b. To take advantage of changing market opportunities, the annual
budget should be strictly enforced.
c. Linking rewards to performance is a major deterrent to good
management performance.

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d. An important strategic decision is making the correct investments in
productive assets.

4. All of the following statements are true except

a. A budget is a tool used to plan and express strategy.

b. Financial accounting reports financial and nonfinancial information
that helps managers implement company strategies.
c. Feedback links planning and control.
d. Control includes deciding what feedback to provide that will help with
future decision making.

5. All of the following statements are false except

a. Attention-directing activities should focus on cost-reduction

opportunities, and not on value-adding opportunities.
b. For strategic decisions, scorekeeping is the most prominent role
played by management accounting.
c. A budget may be used as a planning tool, but not as a control tool.
d. Management accountants often are simultaneously doing problem-
solving, scorekeeping, and attention-directing activities.

6. Management accounting

a. focuses on estimating future revenues, costs, and other measures to

forecast activities and their results.
b. provides information about the company as a whole.
c. reports information that has occurred in the past that is verifiable and
reliable.
d. provides information that is generally available only on a quarterly or
annual basis.

7. Financial accounting

a. focuses on the future and includes activities such as preparing next

year’s operating budget.
b. must comply with GAAP (generally accepted accounting principles).
c. reports include detailed information on the various operating
segments of the business such as product lines or departments.
d. is prepared for the use of department heads and other employees.

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8. The person MOST likely to use management accounting information is
a(n)

a. banker evaluating a credit application.

b. shareholder evaluating a stock investment.
c. governmental taxing authority.
d. assembly department supervisor.

9. Which of the following descriptors refers to management accounting

information?

a. It is verifiable and reliable.

b. It is driven by rules.
c. It is prepared for shareholders.
d. It provides reasonable and timely estimates.

10. Which of the following groups would be LEAST likely to receive

detailed management accounting reports?

a. Stockholders
b. Sales representatives
c. Production supervisors
d. Managers

11. Management accounting information includes

a. tabulated results of customer satisfaction surveys

b. the cost of producing a product
c. the percentage of units produced that are defective
d. all of the above

12. Which of the following types of information are used in

management accounting?

a. Financial information
b. Nonfinancial information
c. Information focused on the long term
d. All of the above

13. Management accounting includes

a. implementing strategies
b. developing budgets
c. preparing special studies and forecasts
d. all of the above

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14. Financial accounting is concerned PRIMARILY with

a. external reporting to investors, creditors, and government authorities

b. cost planning and cost controls
c. profitability analysis
d. providing information for strategic and tactical decisions

15. Financial accounting provides a historical perspective, whereas

management accounting emphasizes

a. the future
b. past transactions
c. a current perspective
d. reports to shareholders

16. Strategy specifies

a. how an organization matches its own capabilities with the

opportunities in the marketplace
b. standard procedures to ensure quality products
c. incremental changes for improved performance
d. the demand created for products and services

17. Control includes

a. implementing planning decisions.

b. evaluating performance.
c. providing feedback to help with future decision making.
d. all of the above.

18. Linking rewards to performance

a. helps to motivate managers.

b. allows companies to charge premium prices.
c. should only be based on financial information.
d. does all of the above.

19. Control measures should

a. be set and not changed until the next budget cycle.

b. be flexible to allow for employees who are slackers.
c. be kept confidential from employees so that competitors don’t have
an opportunity to gain a competitive advantage.

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d. be linked by feedback to planning.

20. For control decisions, emphasis is placed on the _____.

a. role(s) of management accounting.

b. problem-solving
c. scorekeeping
d. attention-directing
e. both (b) and (c)

21. _____ means reporting and interpreting information that helps

managers to focus on operating problems, imperfections,
inefficiencies, and opportunities.

a. Scorekeeping
b. Attention directing
c. Problem solving
d. None of the above

22. Management accounting is considered successful when it

a. helps creditors evaluate the company’s performance.

b. helps managers improve their decisions.
c. is accurate.
d. is relevant and reported annually.

23. The Institute of Management Accountants (IMA)

a. is a professional organization of management accountants.

b. is a professional organization of financial accountants.
c. issues standards for management accounting.
d. issues standards for financial accounting.

24. Line management includes

a. manufacturing managers.
b. human-resource managers.
c. information-technology managers.
d. management-accounting managers.

25. Staff management includes

a. manufacturing managers.
b. human-resource managers.

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c. purchasing managers.
d. distribution managers.

26. Responsibility of a CFO include all EXCEPT

a. providing financial reports to shareholders.

b. managing short-term and long-term financing.
c. investing in new equipment.
d. preparing tax returns.

27. The Standards of Ethical Conduct for management accountants

include concepts related to

a. competence, performance, integrity, and reporting.

b. competence, confidentiality, integrity and objectivity.
c. experience, integrity, reporting, and objectivity.
d. none of the above as ethical issues do not affect management
accountants.

28. Ethical challenges for management accountants include

a. whether to accept gifts from suppliers, knowing it is an effort to

indirectly influence decisions.
b. whether to report unfavorable department information that may result
in unfavorable consequences for a friend.
c. whether to file a tax return this year.
d. both (a) and (b).

29. If a financial manager/management accountant has a problem in

identifying unethical behavior or resolving an ethical conflict, the first
action (s)he should normally take is to

a. consult the board of directors.

b. discuss the problem with his/her immediate superior.
c. notify the appropriate law enforcement.
d. resign from the company.

30. Katrina is a financial manager who has discovered that her

company is violating environmental regulations if her immediate
superior is involved, her appropriate action is to

a. do nothing since she has a duty of loyalty to the organization

b. consult the audit committee.

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c. present the matter to the next higher managerial level.
d. confront her immediate superior.

31. If financial manager/management accountant discovers

unethical conduct in his/her organization and fails to act (s) he will be
in violation of which ethical standard(s)?

a. "Actively or passively subvert the attainment of the organization's

legitimate and ethical objectives." b "Communicate unfavorable as
well as favorable information."
b. "Condone the commission of such acts by others within their
organizations.’’
c. All of the answers are correct.

32. Corporate social responsibility is

a. effectively enforced through the controls envisioned by classical

economics.
b. the obligation to shareholders to earn a profit.
c. the duty to embrace service to the public interest.
d. the obligation to serve long-term, organizational interests.

33. A common argument against corporate involvement in socially

responsible behavior is that

a. it encourages government intrusion m decision making.

b. as a legal person, a corporation, is accountable for its conduct.
c. it creates goodwill.
d. in a competitive market, such behavior incurs costs that place the
company at a disadvantage.

34. Integrity is an ethical requirement for all financial

managers/management accountants. One aspect of integrity requires

a. performance of professional duties in accordance with applicable laws.

b. avoidance of conflict of interest.
c. refraining from improper use of inside information.
d. maintenance of an appropriate level of professional competence.

35. A financial manager/management accountant discovers a

problem that could mislead users of the firm’s financial data and has
informed his/her immediate superior. (S)he should report the
circumstances to the audit committee and/or the board of directors
only if

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a. the immediate superior, who reports to the chief executive officer,
knows about the situation but refuses to correct it.
b. the immediate superior assures the financial manager/management
accountant that the problem will be resolved.
c. the immediate superior reports the situation to his/her superior.
d. the immediate superior, the firm’s chief executive officer, knows about
the situation but refuses to correct it.

36. In which situation is a financial manager/management

accountant permitted to communicate confidential information to
individuals or authorities outside the firm?

a. There is an ethical conflict and the board has refused to take action.
b. Such communication is legally prescribed.
c. The financial manager/management accountant knowingly
communicates the information indirectly through a subordinate.
d. An officer at the financial manager/management accountant’s bank
has requested information on a transaction that could influence the
firm’s stock price.

37. Which ethical standard is most clearly violated if a financial

manager/management accountant knows of a problem that could
mislead users but does nothing about it?

a. Competence
b. Legality
c. Objectivity
d. Confidentiality

38. _____ produces information that helps workers, managers, and

executives in organizations make better decisions.

a. Governmental accounting
b. Management accounting
c. Auditing
d. Financial accounting

39. _____ is the recognition and evaluation of business transactions

and other economic events for appropriate accounting action.

a. Identification
b. Analysis
c. Communication
d. Evaluating

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40. _____ is the quantification of business transactions or other
economic events that have occurred or forecasts of those that may
occur.

a. Accumulation
b. External reporting
c. Measurement
d. Internal reporting

41. _____ is a determination of the reasons for the reported activity

and its relationship with other economic events and circumstances.

a. Analysis
b. Measurement
c. Evaluation
d. Accumulation

42. _____ includes strategic, tactical and operating aspects.

a. Controlling
b. Communication
c. Planning
d. Evaluating

43. _____ judges implications of historical and expected events and

helps to choose the optimum course of action.

a. Controlling
b. Communication
c. Planning
d. Evaluating

44. Which of the following is a basic feature of a financial

accounting system?

a. Internal audience
b. Historical data
c. Subjective information
d. Disaggregate information

45. Which of the following is NOT a basic feature of a financial

accounting system?

a. objective information
b. reports on past performance

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c. future oriented reports
d. highly aggregated data

46. Which of the following is a basic feature of a managerial

accounting system?

a. external audience
b. reports are current and future oriented
c. objective data only
d. reports on the entire organization

47. Which of the following is NOT a basic feature of a managerial

accounting system?

a. financial measures only

b. subjective information
c. internal audience
d. informs local decision and actions

48. Which of the following is a basic feature of a managerial

accounting system?

a. The scope tends to be highly aggregate.

b. There are no regulations governing the reports.
c. The reports are generally delayed and historical.
d. The audience tends to be stockholders, creditors and tax authorities.

49. Which of the following groups would be LEAST likely to receive

detailed management accounting reports?

a. management accountants
b. scientists and engineers
c. stockholders
d. managers

50. _____ indicate whether the organization is creating long-term

value and profitability.

a. Strategic information
b. ROl
c. Net income
d. Critical success factors

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51. _____ is when a firm compares itself with the best practice of
competitors or other comparable organizations.

a. Process improvement
b. Benchmarking
c. Employee empowerment
d. Total quality philosophy

52. Which of the following is NOT a function of a management

accounting system?

a. operating control
b. product and customer costing
c. management control
d. financial reporting

53. Which of the following functions provides feedback information

about the efficiency of tasks performed?

a. operating control
b. product and customer costing
c. management control
d. financial reporting

54. Which of the following functions provides information on the

performance of managers and operating units?

a. operating control
b. product and customer costing
c. management control
d. financial reporting

55. Which of the following is NOT a role of management accounting

information in operating control?

a. to provide feedback information about quality

b. to provide feedback information about timeliness
c. to provide feedback information about the efficiency of tasks
performed
d. to provide performance measures for decentralized organizational
units

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56. Which of the following is NOT a role of management accounting
information in product and customer costing?

a. to measure the cost of resources used to produce a service

b. to assess the profitability of the organization’s services by-linking
resources generated
c. to provide feedback information about the quality, timeliness, and
efficiency of tasks performed
d. to assess customer profitability for a particular segment

57. An organization develops a code of ethics because

a. it is required by law.
b. the Chief Executive Officer demands it.
c. it wishes to reduce ethical conflicts by avoiding ambiguity or
misunderstandings.
d. it wishes to punish those whose ethical standards are different from its
own.

58. If an individual faces a conflict between the organization’s

stated and practiced values experts recommend that

a. the individual resign immediately and call the media.

b. the individual call the media.
c. delay action and work with respected leaders in the organization.
d. delay action and hope the problem goes away.

59. The elements of an ethical control system include the following

EXCEPT

a. a reward system for turning in those who violate the ethical code.
b. a statement of the organization’s values and code of ethics.
c. an ongoing internal audit of the ethical control system,
d. a statement of the employee’s ethical responsibilities.

60. Certified Management Accountants are required to adhere to the

following ethical standards, EXCEPT

a. competence.
b. ingenuity.
c. integrity.
d. objectivity.

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