Unit 1: Basic Concepts of Managerial Accounting Report

A Report Presented to
the Faculty of the College of Business
Administration – Graduate School
University of the Cordilleras

In Partial Fulfillment of the Requirements for the Degree

MASTER IN BUSINESS ADMINISTRATION

By

Norvy Abyadang Jr.

Leonaida Aslarona

Paulo Miguel Dayrit

Alyssa Passol

September 9, 2021
​Unit 1: Basic Concepts of Managerial Accounting

1. Management Advisory Services definition/scope/characteristics.

2. Professional qualifications on the practice of Management Advisory
Services
3. Certified Public Accountants (CPAs) as consultants
4. Management Advisory Services Practice Standards
5. Management Accounting and Financial Accounting Distinguished
6. Management Accounting and the Business Environment

Unit 1: Basic Concepts of Managerial Accounting

Management Advisory Services

- Is the function of providing professional advisory (consulting) services

where the primary purpose is to help the client improve the use of its
capabilities and resources to achieve its objective.

- It can also be described as an independent and objective advisory

service provided by qualified persons to clients in order to help them
identify and analyze management problems. Advisors also recommend
solutions or suggested actions with respect to these issues and may help in
their implementation.

Two types of encounters with clients by management consultants:

1. Consultation – normally consists of providing advice and information during

a short period of time, this can be provided orally during one or more
discussions with the client. The advice or information may have limitations
due to lack of first-hand observation of the problem situation.

2. Engagement – consist of that form of management advisory service in

which analytical approach and process is applied in a study or project. This
approach typically involves
 a. Ascertaining the pertinent facts and circumstances

b. Seeking and identifying objectives

c. Defining the problem or opportunity

d. Evaluating and determining possible solutions

e. Presenting findings and recommendations, and

f. Implementation the solution, if appropriate.

Why do we need Management Consultants\Advisor?

There are at least four valuable reasons in why Management Advisory

Services are needed

These are:

1. Independent viewpoint.

- an advisor is considered independent, objective and detached top

the problems of an organization. These qualifications can enable
him/her to see the true nature of the problems and distinguish between
feasible and infeasible solutions. Also because the consultant is not
involved with the internal policies of the organizations, his or her
suggestions tend to be accepted as unbiased

2. Professional advisor and counselor

-an experienced management consultant possesses special

knowledge, skills and a variety of personal attributes that make him/her
the most desirable candidate to undertake an engagement involving
his/her area of expertise. Furthermore, an experienced consultant can
introduce new ideas into the organization that were gleamed from
other engagements or experiences.

3. Temporary professional service

 - the use of consultants will be probably less expensive to the company
than hiring new managers or employees to provide professional
advisory services. Sometimes, organizations find themselves short of
critical professional resources and management consultants can in
such cases, fill in as temporary professional help.

4. Agent of Change

- A management consultant can act as a catalyst for change and

stimulating ideas in a highly structured organization that otherwise
might be resistant to change due to size, bureaucracy, and
institutionalized nature. In providing solutions to the client’s problems,
changes may have to be made to the organizational structures, to
procedures, and to job responsibilities. These changes are intended to
assist managers in the administration of organizations.

Types of MAS Engagements.

Engagements may be classified into 6 dimensions or types. These dimensions

are involved in every engagement done by the consultant. These are:

A. Nature of the problem

This can be classified according to their situation:

a. corrective problem – involves a situation in which conditions have

worsened. This usually arises suddenly and demands urgent action

Ex. Sudden drop in the productivity within a critical department.

b. Progressive problem – involves an existing situation that can be improved

Ex. A firm still continues to employs old procedures in spite of

significant growth in deployment of computer technology

c. Opportunistic problem – involves a situation in which a future opportunity

exist.

Ex. Problems in what to do with excessive cash that are not

utilized or invested.
B. Service Delivery Areas

The functions or activities in which the problem situation exists may be

classified in a number of ways an example of a classification for
instance employ the following groupings:

1.General management

2. Manufacturing

3.personnel

4. Finance and accounting

5. Marketing

6. Procurement

7. Research and dev.

8. Packaging

9. Admin

10. Internal operations

C. Application of the Analytic Process

Analytic process includes:

a. Identifying the objectives

b. Defining the problem

c. Finding out the facts

d. Developing the solution

e. Implementing the solution

D. Techniques and Methodologies Applied

 Most engagements can be aided by technical models or
methodologies. For example, capital investment planning can be
aided by a discounted cash flow model such as the present value or
the internal rate of return model. Information systems planning and
design can be aided by a structured methodology.

E. Industry or Nature of Organization

A client who is the subject of an engagement may be a privately

owned business firm, a government agency, or non-profit organization,
etc.

F. Geographical Areas

A consulting engagement may be restricted to a single location or it

may involve multiple locations such as several plants or warehouses.

Categories of Management Advisory Services

Traditional Services:

1. Managerial Accounting – involves providing assistance to

management related to planning and Controlling business operations
as well as decision making

Examples: FS analysis, Budgets and their preparation, Cost

analysis planning and control, Variance analysis, etc.

2. Design and appraisal of accounting system

This Involves:

a. Development of an accounting system for newly-organized firm.

b. Revision, partial or complete, of an existing accounting system.

c. Extension of the present accounting system to cover new business

activities
 d. accounting service in general

e. accounting machines installation.

f. Internal Control studies and installations.

3. Financial Management related services

Examples are:

a. Study of working capital requirements

b. Study of methods of financing asset acquisition

c. Credit and collection practice studies and advice

d. Analysis of capital investments proposals

e. Study of alternative methods of financing expansion

f. Survey of pension, retirement and profit sharing plans

g. preparation of feasibility studies for new projects.

h. valuation of capital stock companies for purposes of merger

or sale

4. Project Feasibility Studies.

There are other new and merging services like Global risk
management solutions, Transactions services, Financial advisory services etc.
but for our course we will focus particularly on Managerial Accounting
 Professional qualifications on the practice of Management Advisory
Services

According to Professor J. Owen Cherrington of Brigham Young

University, he enumerated the professional attributes of an
advisor/consultant, according to him one must possess the following skills;

1. Technical Skills – these include both understanding and experience in

technical discipline -such as information technology, marketing, engineering
and organizational behavior.

2. Interpersonal skills – these include attributes that make an individual

amiable among people and effective in accomplishing desirable objectives
through people.

3. Consulting process skills- These involve the ability to understand and use
the following approach in solving business problems:

a. Identify the cause of problems or inefficiencies

b. Identify alternative solutions

c. Select the most desirable alternative, and

d. Implement the chosen solution.

Let us further expound on these skills:

1. Technical skills

Education requirements

The education required to obtain the necessary technical skills

for management consulting depends on the area of specialization.
Some generalizations can be made, however , concerning the amount
of education required, the common core requirement and the
experience possessed by most consultants.

A. Technical training
 a. Length of Education

a bachelor’s degree is a prerequisite and many, if not most

people going into management consultancy today have one or
two graduate degrees. Undergraduate programs generally
teach the “how” rather than the “why”

b. Type of Education

Educational programs usually include a technical degree and a

general degree for example, a person may obtain a general
business degree at a bachelor’s degree level and specialize in
information technology after earning a master’s degree in
computer science and information management.

B. Common Core Requirement

Regardless of person’s area of specialization, the following common

core courses should be included in the educational program.

1.Communications

2. Mathematics and statistics

3. Computer data processing

2. Interpersonal Skills or Developed Attributes

In addition to education and experience, several personal attributes

are critical for the success of a management consultant. These are:

1. Intelligence or capacity for logical thinking and reasoning

-degree of mental organization and development that enables

the consultant to absorb and relate facts in a logical and orderly
fashion and to reason inductively and deductively

2. Integrity
 -pertains to attributes such as moral and ethical soundness,
fairness, equity; can distinguish right from wrong, honesty,
dependability, free from corruption, etc.

3. Objectivity

-must have the ability to grasp and represent facts, unbiased

by prejudice.

4. Understanding of people (human relations; Empathy)

- must be able to anticipate human reactions to different

situations; to establish and maintain friendly relations and
mutual confidence with people at all levels; and to recognize
and respect the rights of others.

5. Judgement

- This refers to the advisor’s ability and reasoning power to arrive

at a wise decision, a course of action or a conclusion.

6. Courage

- This refers to the consultant’s strength of mind and character

that enables him/her to encounter disagreements, difficulties,
and obstructions with firmness of spirit and determination, and to
consider them as challenges rather than something to be
avoided.

7. Ambition

- must have the desire and motivation to earn and obtain full
recognition for the attainment of professional status.

8. Psychological maturity

-the ability to view situations in perspective and to take action

needed on a calm and controlled basis without being diverted
from sound, logical and ethical course by outside pressure
9. Physiological equilibrium

-needs a high level of energy to withstand pressure, endure stress

and avoid physical illness

10. Relationship Building skills like

a. ability to build rapport

b. ability to question effectively

c. ability to communicate ideas precisely

d. ability to negotiate objectives and outcomes

e. ability to effectively listen

f. ability to work effectively as a team member

g. ability to demonstrate leadership

11. Project Management Skills

a. ability to define objectives and outcomes

b. ability to develop formal plans

c. ability to sequence and prioritize task

d. ability to manage the financial resources that are to be

invested in the consulting project

e. ability to recognize the human expertise necessary to deliver

the project

f. ability to manage personal time

12. Analysis Skills

a. ability to identify what information is available in a particular

situation
 b. ability to identify what information is needed in a particular
situation

c. ability to process the information to identify the important

relationships within it

d. ability to draw meaning from that information and use it to

support decision making

e. ability to recognize the business’s profile of strengths,

weaknesses, and capabilities

f. ability to recognize the opportunities and challenges the

environment offers this business

g. ability to assess the business’s financial situation

h. ability to evaluate the business’s market and how they are

developing

i. ability to assess the business’s internal conditions

j. ability to analyze the way in which decision-making occurs

within the business

3. Consulting Process Skills

- consultants should have the ability to apply the analytical approach

and process in problem solving which consists of five areas:

a. Problem definition phase

this phase has the purpose of fully describing the underlying

problem. It begins with the initial recognition of a symptom
pointing to the problem and ends with the complete description
of the problem

b. Identification of Alternative Solutions

This is described as the fact-finding and analysis phase which

involves the gathering of facts needed to solve the problem and
 analyzing these facts in order to clarify the requirements of the
best solution.

c. Selection of the most desirable alternative

also known as the solution development phase, this involves the

selection of the optimal solution to the problem and developing
a detailed plan of action. This plan of action should include the
rationale for it’s selection; expressed in terms of benefits and
advantages.

d. Presentation

e. Implementation phase

This phase has the purpose m of putting the detailed plan into
operation and should be at the least difficult to do if previous
phases have been performed well. However there are still
unforeseen circumstances that could delay or hinder the
execution of the plan such as drastic environmental change,
logistical errors or delays etc.
 Certified Public Accountants (CPAs) as consultants

Certified Public Accountants or CPAs are designations provided by the Board

of Accountancy to CPA licensed accounting professionals. The primary duty
of a Certified Public Accountant is to aid in the enforcement of professional
standards in the accounting industry. A Certified Public Accountant is
different from an accountant, whereas anyone who performs any type of
accounting function, regardless of education, may call themselves an
accountant as their duties include everything from tax preparation, to
financial statements, financial planning, forensic accounting, internal
auditing, income tax, and more, all of which are necessary elements that
help a business thrive. While all CPAs are accountants, not all accountants
are CPAs.

Certified Public Accountant Designation Requirements

A certified public accountant (CPA), one who has earned a professional

designation through a combination of education, experience and licensing.
In obtaining the Certified Public Accountant designation, a bachelor’s
degree in either business administration, finance, or accounting is required.
Additionally, individuals are required to have 150 hours of education and a
minimum of 2 years of public accountant experience. To receive the
Certified Public Accountant designation, the candidate must pass the
Uniform CPA Examination. Grading and development of examinations are
performed by Institutions of CPAs, licensing however, is done by Board of
Accountancy. After licensing, they may use the designation to present
themselves as a Certified Public Accountant.

Duties of a Certified Public Accountant

The designation of Certified Public Accountants engages in a number of
advisory functions for their clients which include:

Financial auditing and review. The primary function of CPAs is to audit their
client’s books. If a client’s financial statements meet the CPA’s evaluation
criteria, an auditor's opinion concerning the financial statements that
accompany the statements when they are issued to third parties is issued. An
auditor’s opinion is a formal statement made by an auditor concerning a
client’s financial statements, they may either be an unqualified opinion,
qualified opinion, or an adverse opinion. The unqualified opinion states that
the financial statements fairly reflect the client’s financial results and financial
position. The qualified opinion indicates any limitations on the scope of the
audit and may describe certain information that could not be verified. The
adverse opinion indicates significant problems with the client’s financial
statements. Another possible outcome is the disclaimer, where the auditor
states that no opinion can be given regarding the financial statements due
to such factors as the absence of financial records or a lack of cooperation
by the client’s management team. A lesser form of auditing may also be
performed, which is known as a financial review, wherein the CPAobtains
limited assurance that there are no material modifications that need to be
made to a business’ financial statements for them to be in conformity with
the applicable financial reporting framework. A review does not require the
CPA to obtain an understanding of internal control, or to assess fraud risk, or
other types of audit procedures. Consequently, a review does not provide
the accountant with assurance that he has become aware of all the
significant matters that would normally have been discovered and disclosed
in an audit. A review is usually preferred by clients as this incurs less cost
compared to a financial audit.

Consulting Services. CPA’s engage in a number of consulting services, such

as advising on the adequacy of a system of controls, describing possible
strategic options, or assisting in the installation of information systems.

Taxation Services. CPA’s engage in advisory services regarding the tax

strategies of clients as well as their preparations in regards to tax returns.
Forensic Accounting. Some CPA’s specialize in an area of accounting called
forensic accounting that identifies whether a firm engages in financial
reporting misconduct. In this area, CPA’s apply a range of skills and methods
to determine whether there has been financial reporting misconduct.
Forensic accounting takes into account several categories of misconduct
such as: economic damages calculations, whether suffered through tort or
breach of contract; post-acquisition disputes such as earnouts or breaches of
warranties; bankruptcy, insolvency, and reorganization; securities and tax
fraud; and money laundering. CPA’s also reconstruct destroyed financial
records and investigate whether fraudulent activities have occurred.

Financial Planning. CPA’s engage in advisory roles towards clients regarding

financial planning. This includes a comprehensive evaluation of the client’s
current pay and future financial state by using current known variables to
predict future income, asset values and withdrawal plans. Here, budgets are
formulated which organizes an individual's finances and sometimes includes
a series of steps or specific goals for spending and saving in the future. CPA’s
develop a plan that allocates future income to various types of expenses,
such as rent or utilities, and also reserves some income for short-term and
long-term savings. This area also expands to estate planning that prepares
tasks that serve to manage an individual's asset base in the event of their
incapacitation or death. The planning includes the bequest of assets to heirs
and the settlement of estate taxes.

Litigation Services. CPA’s also engage in the provision of detailed analysis

required by attorneys to present in court in cases such as divorce settlements,
disputes between businesses, and bankruptcy proceedings. CPA’s may also
provide testimonies in court as an expert witness.
Loss of Licensure
Certified Public Accountants are subject to a code of ethics which requires
all CPA designation holders adhere to the Code of Professional Conduct,
which lays out the ethical standards CPAs must adhere to. A CPA license
may be suspended or revoked for various reasons. Common reasons include:
● Allowing the license to lapse without renewing in a timely manner.
 ● Performing attestation services under an unlicensed/unregistered CPA
firm or under a CPA firm permit which has expired.
● Continuing to hold out as an active CPA on an expired license, which
includes continued use of the CPA title on business cards, letterhead,
office signage, correspondence, etc. after the license has expired.
● Using fraud or deceit in obtaining or renewing the CPA license, the
most common occurrence being misrepresenting or falsifying
compliance with or completion of the continuing education
requirements as a condition for renewal.
● Being suspended or barred from practicing before another regulatory
body such as the SEC or the IRS.
● "Discreditable acts", which can include 1) failure to follow applicable
standards 2)violation of felony or serious misdemeanor criminal laws.

Management Advisory Services Practice Standards

General standards for management advisory services apply to MAS

engagements and consultations. These standards are stated in rule 201 of the
AICPA Rules of Conduct, and apply to all services performed in the practice
of public accounting. These include their code of conduct, representing their
attitude, principles and approaches for satisfactory and equitable client
relationships. The principles stated in the code of ethics for management
consultants are classified into four areas: Basic Responsibilities, Practice
Standards, Fee arrangements, and Business conduct.

I. Basic Responsibilities

Integrity and Objectivity. In performing Management Advisory Services in

adherence to integrity and objectivity, the following basic responsibilities
must be complied to:
 ● Facts must never be misinterpreted and judgement be subordinated to
others.
● The interest of clients is placed ahead of personal interests.
● Clients must be informed about special relationships, circumstances, or
interests that may impair judgment and or objectivity.
● Do not assume the role of management or take any
positions that might impair objectivity.

Independence. In performing Management Advisory Services in adherence

to independence, the following basic responsibilities must be complied to:
● Take an independent position with the client, making certain that
advice to a client is based on impartial considerations of all pertinent
facts and responsible opinions.
● Do not serve an enterprise without independence with respect to that
enterprise.
● Do not serve a client under terms or conditions that might
impair objectivity, independence, or integrity. Reserve the right to
withdraw if conditions develop that interfere with the successful
conduct of the assignment.
● Do not serve two or more competing clients in areas of vital
interest without informing each client.

Confidential Information. In performing Management Advisory Services in

adherence to confidential information, the following basic responsibilities
must be complied to:
● Guard as confidential all information concerning the affairs of a
client that is gathered during the course of a professional assignment.
● Do not take advantage of material or inside information resulting
from a professional relationship with a client.
● Do not disclose any confidential information obtained in the
course of a professional engagement except with the client's
consent.

II. Practice Standards

Personal Characteristics. In performing Management Advisory Services, a
practitioner must act with integrity and objectivity and be independent in
mental attitude.

Professional Competence. Engagements are to be performed by a

practitioner having competence in the analytical approach and process,
and in the technical subject matter under consideration.

Due Care. Due professional care is to be exercised in the performance of a

Management Advisory Services engagement.

Client Benefit. Before accepting an engagement, a practitioner is to

notify the client of any reservations he has regarding anticipated benefits.

Understanding with Client. Before undertaking an engagement, a

practitioner is to inform his client of all significant matters related to the
engagement.

Planning, Supervision and Control. Engagements are to be adequately

planned, supervised, and controlled

Sufficient Relevant Data. Sufficient relevant data is to be obtained,

documented and evaluated in developing conclusions and
recommendations.

Communication of Results. All significant matters relating to the result

of the engagement are to be communicated to the client.

III. Fee Arrangements

Reasonable fees must be charged. Fees that are equivalent to the nature of
services performed and responsibility assumed. Reasonableness is based
on services performed, time required, experience, ability, reputation,
responsibility assumed, and benefits that accrue to the clients.
Do not offer or render professional services under an agreement.
Whereby no fee will be charged unless a specified finding or result is
obtained, or whereby the fee is otherwise contingent on the findings or
results of the services.

Cash Advance. If feasible, agree with the client in advance on the fee or fee
basis.

Do not pay a fee or commission to obtain a client or franchise or a business

practice. Do not accept a commission, fee, or other valuable consideration
for recommending products or services.

IV. Business Conduct

● Strive continuously to advance and protect the standards of the

consulting profession.
● Contribute to the development and understanding of better
ways to manage corporations, governmental organizations, and
other institutions in our society
● Share methods and techniques used in serving clients.
● Avoid not only professional improprieties but also the appearance
of improprieties, and never commit an act discreditable to the
profession.
● Do not advertise services in a manner that is false, misleading,
deceptive, self-laudatory, or in any other manner derogatory to the
dignity of the profession.
● Do not concurrently engage in any business or occupation that would
create a conflict of interest in rendering professional services.
● Do not accept an assignment for a client while another management
consultant is serving that client unless satisfied that any conflict
between the two engagements are recognized by, and have the
consent of the client.
● Do not make offers of employment to consultants on the staff of
another consulting firm without first informing the other firm.
 ● Do not solicit employees of clients, for the purpose of employing
them, except with the client’s consent.
● Do not associate, in a responsible capacity respecting client work,
with any consultant who does not adhere to the code of professional
ethics.

Each consultant must have the responsibility to enforce and adhere to this
code of ethics to pursue advisory functions with integrity and towards the
interests of their clients.

References:
What is a CPA? What does a Certified Public Accountant Do?. (n.d.).
Retrieved From:
https://www.franklin.edu/blog/what-is-a-cpa-exactly-what-does-a-certified-p
ublic-accountant-do

What does a CPA do?. (2021). Retrieved From:

https://www.accountingtools.com/articles/what-does-a-cpa-do.html

Redondo, M. E. (2017). MAS Practice Standards. KUPDF. Retrieved From:

https://kupdf.net/download/mas-practice-standards_59ae26d5dc0d60e85b5
68ee2_pdf

​Management Accounting and Financial Accounting Distinguished

Accounting refers to the process of recording, classifying, and

summarizing in monetary terms, the business transactions and events and
interpreting the results. It is used by entities to keep track of their financial
transactions. Financial Accounting and Management Accounting are two
branches of accounting. Financial Accounting stresses on giving a true and a
fair view of the financial position of the company to various parties. On the
contrary, management accounting aims at providing both qualitative and
quantitative information to the managers, to assist them in decision making
and thus maximizing the profit.
Financial Accounting

Financial Accounting is an accounting system which is concerned with

the preparation of financial statements for the outside parties like creditors,
shareholders, investors, suppliers, lenders, customers, etc. It is the purest form
of accounting in which proper record keeping and reporting of financial
data are done, to provide relevant and material information to its users.

Financial Accounting is based on various assumptions, principles and

conventions like going concern, materiality, matching, realisation,
conservatism, consistency, accrual, historical cost, etc. The financial
statement consists of a Balance Sheet, Income Statement and Cash flow
statement which are prepared as per the guidelines provided by the relevant
statute.

Normally, the statements based on the financial accounting are

prepared for one accounting year, to enable the user to make comparisons
regarding the financial position, profitability and performance of the
company in a specific period. Not only external parties but internal
management also gets information for forecasting, planning, and decision
making.

Management Accounting

Management Accounting, also known as Managerial Accounting is

the accounting for managers which helps the management of the
organisation to formulate policies and forecasting, planning and controlling
the day to day business operations of the organisation. Both the quantitative
and qualitative information are captured and analysed by the management
accounting.

The functional area of management accounting is not limited to

providing financial or cost information only. Instead, it extracts the relevant
and material information from financial and cost accounting to assist the
management in budgeting, setting goals, decision making, etc. The
accounting can be done as per the requirement of the management, i.e.
weekly, monthly, quarterly, etc. and there is no format set on the basis of
which it is to be reported.

Key Differences Between Financial Accounting and Management

Accounting

The following points explain the major differences between financial

accounting and managerial accounting:

1. Financial Accounting is the branch of accounting which keeps track of

all the financial information of the entity. Management Accounting is
that branch of accounting which records and reports both the
financial and nonfinancial information of an entity.
2. Users of financial accounting are both the internal management of the
company and the external parties while the users of the management
accounting are only the internal management.
3. Financial accounting is to be publicly reported whereas the
Management Accounting is for the use of the organisation and hence
it is very confidential.
4. Only monetary information is contained in financial accounting. As
against this, management accounting contains both monetary and
non-monetary information such as the number of workers, the quantity
of raw material used and sold, etc.
5. Financial Accounting is done in the prescribed format, whereas there is
no prescribed format for the Management Accounting.
6. Financial Accounting focuses on providing information about the
functioning of the entity’s business to its users, whereas Management
Accounting focuses on providing information to help them in
evaluating the performance and devising plans for the future.
7. Financial Accounting is mainly done for a specific period, which is
usually one year. On the other hand, the management accounting is
done as per the needs of the management say quarterly, half yearly,
etc.
 8. Financial accounting is a must for any company for auditing purposes.
On the contrary, management accounting is voluntary, as no editing is
done.
9. Financial accounting information is required to be published and
audited by statutory auditors. Unlike, management accounting, which
does not require information to be published and audited, as they are
for internal use only.

Similarities

● Used by the Internal Management.

● Evaluation of Performance.
● Branch of Accounting.
● Presents the position of the entity.

Conclusion

Financial Accounting and Management Accounting are of great

significance, in fact, they help the organisation in various ways. As financial
accounting is helpful in the proper record keeping of innumerous transactions
and comparison of the performance of two periods of an entity or between
the two entities, while the management accounting is helpful in analysing the
performance, making a strategy, taking an effective judgement and
preparation of policies for the future.

Reference:

Differences Between Financial Accounting and Managerial Accounting 2018,

Key Differences, accessed 6 September 2021, keydifferences.com

Management Accounting and Business Environment

The business environment in recent years has been characterized by

increasing competition and a relentless drive for continuous improvement.
From the previous years or decades, the period of tremendous foment and
change in the business environment. Competition in many industries has
become worldwide in scope, and the pace of innovation in products and
services has accelerated. This has been good news, higher quality, and more
choices. But these changes also result in major changes in terms of
management and how work gets done.

Several approaches have been developed to assist organizations in

meeting these challenges—including just-in-time (JIT), total quality
management (TQM), process reengineering, and the theory of constraints
(TOC).

When properly implemented, these improvement programs can

enhance quality, reduce cost, increase output, eliminate delays in
responding to customers, and ultimately increase profits.

Just-in-time (JIT)
When companies use the just-in-time production and inventory control
system, they purchase materials and produce units only as needed to meet
actual customer demand. In the JIT system, inventories are reduced to the
minimum and in some cases are zero.

3 of the successful companies that practice the JIT system are

TOYOTA, APPLE and MacDonald’s. Toyota’s production strategy sees
the raw materials are not brought to the production floor until the order
is received from the customer and the product is ready to build. During
the production process, no parts are included in the next node or
station unless they are required to. This keeps the amount of inventory
to a minimum which as a result, lowers costs. This also allows Toyota to
adapt quickly to customer’s demands, significantly reducing risk of
having excessive inventory at its disposal.

“JIT emphasizes the importance of reducing inventories to the barest

minimum possible. This reduces working capital requirements, frees up space,
reduces throughput time, reduces defects, and eliminates waste.”

Total Quality Management (TQM)

 The most popular approach to continuous improvement is known as
total quality management. There are two major characteristics of TQM: 1) a
focus on serving customers and 2) systematic problem-solving using teams
made up of front-line workers. A variety of specific tools are available to aid
teams in their problem solving. One of these tools, benchmarking, involves
studying organizations that are among the best in the world at performing a
particular task.

Plan-Do-Check-Act Cycle (PDCA)

Perhaps the most important and pervasive TQM problem-solving tool is
the PDCA cycle, which is also referred to as the Deming Wheel. The PDCA
cycle is a systematic, fact-based approach to continuous improvement. The
PDCA cycle applies the scientific method to problem solving.
In the Plan phase, the problem-solving team analyzes data to identify
possible causes for the problem and then proposes a solution. In the Do
phase, an experiment is conducted. In the Check phase, the results of the
experiment are analyzed. And in the Act phase, if the results of the
experiment are favorable, the plan is implemented. If the results of the
experiment are not favorable, the team goes back to original data and starts
all over again.

Going back to our example Toyota, Toyota implemented the

Kanban System to make its assembly line more efficient. Kanban
system is a Japanese manufacturing system in which the supply of
components is regulated through the use of an instruction card sent
along the production line. The company decided to keep just enough
inventories to fulfill customer orders as they were generated.

“TQM involves focusing on the customer, and it employs systematic

problem-solving using teams made up of front-line workers. Specific TQM tools
include benchmarking and the plan-do-check-act (PDCA) cycle. By
emphasizing teamwork, a focus on the customer, and facts, TQM can avoid
the organizational infighting that might otherwise block improvement.”

Process Reengineering (BPR)

 Process reengineering is a more radical approach to improvement
than TQM. Instead of tweaking the existing system in a series of incremental
improvements, in process reengineering a business process is diagrammed in
detail, questioned, and then completely redesigned in order to eliminate
unnecessary steps, to reduce opportunities for errors, and to reduce costs. A
business process is any series of steps that are followed to carry out some
tasks in a business. While process reengineering is similar in some aspects to
TQM, its proponents view it as a more sweeping approach to change. One
difference is that the whole TQM emphasizes a team approach involving
people who work directly in the processes, process reengineering is more
likely to be imposed from above and to use outside consultants.

Process reengineering focuses on simplification and elimination of

wasted effort. A central idea of process reengineering is that all activities that
do not add value to a product or service should be eliminated. Activities that
do not add value to a product or service that customers are willing to pay for
are known as non-value-added activities. For example, moving large
batches of work in process from one workstation to another is a
non-value-added activity that can be eliminated by redesigning the factory
layout as discussed earlier in the section on JIT. To some degree, JIT involves
process reengineering as does TQM.

Process reengineering is also known as Business Process

reengineering or BPR. This is usually applied when “A core business
process is broken, dysfunctional, or underperforming”, “Leadership
seeks dramatic change (reengineering) as a solution. In today’s time
especially during the pandemic there are tons of BPR applied by the
establishments.

“Process engineering involves completely redesigning a business process in

order to eliminate non-value-added activities and to reduce opportunities for
errors. Process reengineering relies more on outside specialists than TQM and
is more likely to be imposed by top management.”

Theory of Constraint (TOC)

 A constraint is anything that prevents you from getting more of what
you want. Every individual and every organization face at least one
constraint, so it is not difficult to find examples of constraints. You may not
have enough time to study thoroughly because you need to work on the
weekend or go out with your friends, so time is your constraint. Since a
constraint prevents you from getting more of what you want, the theory of
constraints maintains that effectively managing the constraint is a key to
success.

TOC is a limiting factor, for example a company that produces

tennis rackets, suppose the company can sell 2,000 tennis rackets each
week. All of the workstations except frame assembly and stringing are
capable of producing these many rackets in a week. The capacity in
stringing is 1,900 rackets per week, but since the capacity in frame
assembly is only 1,500 rackets per week, no more than 1,500 complete
tennis rackets can be processed per week. The capacity of frame
assembly is the constraint, or bottleneck. The capacity of the entire
operation can be no more than the capacity of the bottleneck, which
is 1,500 rackets per week. Therefore, if the company wants to increase
its output, it must increase the capacity of this particular workstation.

“The theory of constraints emphasizes the importance of managing the

organization's constraints. Since the constraint is whatever is holding back the
organization, improvement efforts usually must be focused on the constraint
in order to be really effective.”

Reference:
Managerial Accounting and the Business Environment 2013, Management
Accounting, accessed 6 September 2021, studocu.com
 Management Accounting and Business Environment

The Role of Management Accounting in Business

Managerial accounting is an integral part of the management process, and
managerial accountants are important strategic partners in an organization’s
management team. An organization’s management team seeks to create
value for the organization by managing resources, activities, and people to
achieve the organization’s goals effectively and efficiently and managerial
accounting provides tools and perspectives that help managers accomplish
this.
Therefore, managerial accounting plays major roles in the four basic
management activities, namely;
a. Decision-making
b. Planning
c. Directing Operational Activities
d. Controlling

Objectives of Managerial Accounting Activity

Managerial accounting activity comprises a set of tools, systems and
perspectives that add value to an organization by supporting five major
objectives:
1. Providing information for decision making and planning.
-Virtually for all major decisions, management teams would rely heavily on
managerial accounting information. Plans are influenced by estimates of
costs and maintenance, budgets detailing the projected revenues and
others that would affect plans for operations of which details are provided by
Managerial Accounting.

2. Assisting managers in directing and controlling operational activities.

-Data provided by managerial accounting, such as customer food-service
demand patterns as an example, would support the management team in
directing operational activities. Such data would help them ensure
appropriate staffing and projecting. In controlling operations, management
can compare actual costs incurred with those specified in the budget and
will be able to ensure that the organization operated in intended manner
and achieve its goals.
-Managerial accounting information often assists management through its
attention-directing function. Managerial accounting reports rarely solve a
decision problem. However, managerial accounting information often directs
managers’ attention to an issue that requires their skills.

To illustrate, suppose Disney’s Animal Kingdom incurred electricity costs that

significantly exceeded the budget. This fact does not explain why the budget
was exceeded, nor does it tell management what action to take, but it does
direct management’s attention to the situation.

3. Motivating managers and other employees toward the organization’s

goals.
-Organizations have goals. However, organizations also are made up of
people who have goals of their own. The goals of individuals are diverse, and
they do not always match those of the organization. A key purpose of
managerial accounting is to motivate managers and other employees to
direct their efforts toward achieving the organization’s goals. One means of
achieving this purpose is through budgeting. In establishing a budget, top
management indicates how resources are to be allocated and what
activities are to be emphasized. When actual operations do not conform to
the budget, the managerial accounting system will highlight the deviation
from plan, and managerial accounting tools will help managers to analyze
and explain the reasons for the deviation.

4. Measuring the performance of activities, subunits, managers, and other

employees within the organization.
-One means of motivating people toward the organization’s goals is to
measure their performance in achieving those goals. Such measurements
then can be used as the basis for rewarding performance through positive
feedback, promotions, and pay raises.
For example, most large corporations compensate their executives, in part,
on the basis of the profit achieved by the subunits they manage. In other
organizations, managers are rewarded on the basis of operational measures,
such as product quality, sales, or on-time delivery. At Disney’s Animal
Kingdom, for example, management could be rewarded, in part, on the
basis of growth in attendance at the theme park
-In addition to measuring the performance of people, the managerial
accounting system measures the performance of an organization’s subunits,
such as divisions, product lines, geographical territories, and departments.
These measurements help the subunits’ managers obtain the highest possible
performance level in their units. Such measurements also help top
management decide whether a particular subunit is a viable economic
investment.
For example, it may turn out that a particular attraction at Disney’s Animal
Kingdom is too costly an activity to continue, despite the efforts of a skilled
management team
5. Assessing the Organization’s Competitive Position, and Working with
Other Managers to Ensure the Organization’s Long-Run Competitiveness in Its
Industry
-The business environment often changes very rapidly. These changes result
from global competition, rapidly advancing technology, and improved
communication systems, such as social media. The activities that make an
enterprise successful today may no longer be sufficient next year. A crucial
role of managerial accounting is to continually assess how an organization
stacks up against the competition, with an eye toward continuously
improving. Among the questions asked in assessing an organization’s
competitive position are the following:
• How well is the organization doing in its internal operations and business
processes?
• How well is the organization doing in the eyes of its customers? Are their
needs being served as well as possible?
• How well is the organization doing from the standpoint of innovation,
learning, and continuously improving operations? Is the organization a
trendsetter that embraces new products, new services, and new
technology? Or is it falling behind?
• How well is the organization doing financially? Is the enterprise viable
as a continuing entity?
Reference:
Hilton, R.W., Platt, D.E. (2017). Managerial Accounting: Creating Value in a
Dynamic Business Environment (Eleventh Edition). McGraw-Hill Education