MANAGEMENT ACCOUNTING AND MANAGEMENT CONSULTANCY

ADMU – JGSOM | Managerial Accounting

Management Accounting
Management is a judicious use of means to accomplish an end. It involves the attainment of certain goals by judiciously
utilizing the company’s capabilities and resources.

There are four basic management functions, and these are comprised of:
1. Planning
2. Organizing
3. Leading
4. Controlling

Management accounting focuses on two of these four – planning and controlling.

Planning Controlling
Planning involves setting of both immediate and long- In performing this function, the manager sees to it that
range goals for the organization, predicting future operations are carried out in the best possible way, i.e.,
conditions that are expected to prevail, considering the everything is done in accordance with the plans made to
different means or strategies by which the goals set may ensure the attainment of business objectives.
be achieved, and deciding which of the strategies should
be used to attain such goals. It involves checking the performance of activities against
the plan or standards set; should there be any deviations
between actual and planned performance, deciding what
corrective actions, if any, should be taken.

Management Accounting
Typically, accounting can be divided into financial accounting and managerial accounting. This division is made primarily
on the grounds of the orientation of the reports.

Financial Accounting Management Accounting

Financial accounting refers to reports that are primarily Managerial accounting refers to reports designed to meet
prepared for external users, such as investors, creditors, the needs of internal users, particularly the managers. It
and government regulatory and taxing agencies. is defined as the application of appropriate techniques
and concepts in processing the historical and projected
It should not be construed at this point that managers economic data of an entity to assist management in
have no use for external reports. Some information establishing a plan for reasonable economic objectives
provided by these reports, like net income, earnings per and the making of rational decisions with a view towards
share, and financial ratios are all of interest to managers. achieving these objectives.

Financial Accounting Management Accounting

Users of reports Reports are primarily prepared for external Reports are prepared for internal users.
users.
Unifying Concept Built around the fundamental accounting No unifying concept or fundamental
equation, assets = liabilities + equity. equation.
Accounting Principles Accounting information is prepared in Not necessarily governed by GAAP. In
accordance with generally accepted preparing reports, the management of a
accounting principles to ensure users of company can make and enforce any rules
fairness and objectivity of financial which it finds most useful for its own
statements. purposes, without worrying about whether
these conform to some outside standard.
Preparation Financial accounting reports are Management accounting is entirely
mandatory. They must be prepared as optional. Reports are prepared as they are
required by outside interest parties, needed by management, considering their
particularly government regulatory usefulness as well as the comparison
agencies and taxing authorities. between the benefit from, and the cost of,
preparing such reports.

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 Use of Projected Data Financial accounting records the financial Management accounting includes current
history of an enterprise. Entries are figures, information representing
prepared only after transactions have estimates or plans for the future, as well as
occurred, thus demonstrating a great information about the past, particularly if
reliance on historical data. such past information can be useful in
making future estimates.
Purpose The purpose of financial accounting is to Management accounting information is
produce financial statements. Once these only a means to an end, the end being the
are prepared, the purpose has been planning and controlling activities.
accomplished.

Scope of Management Accounting

Management accounting covers a much broader scope, for it goes beyond the boundaries of traditional accounting.
Though it makes use of information that is drawn from the cost accounting data base as well as from financial accounting,
it may extend beyond the boundaries of accounting and draw upon financial economics, operations research, statistics,
mathematics, or other disciplines, as necessary.
• Cost accounting refers to the process of determining the cost of some particular product or activity.
• Cost accounting data are used for both internal and external accounting reports.
o Production costs of specific products or detailed cost information in performing specific activities are
usually shown in internal reports. In external reports, cost data are shown in aggregate like cost of sales,
selling costs, etc.

Place of Management Accounting

Although the concept of management accounting is focused on internal reporting, the following points should likewise
be borne in mind:
1. Use of nonaccounting information.
a. A manager does not rely solely on accounting information. He makes use of whatever information is
available, whether accounting or non-accounting, whether quantitative or non-quantitative, depending
on the situation at hand or the decision to be made.
2. Need for judgment
a. The decision forwarded by a management account cannot be considered as a complete answer to
management’s problems.
b. At most, it can help managers in making sound decisions.
c. In actual decision making, judgment is exercised.

Management Consultancy
Organizations, whether profit-oriented or not, and regardless of their structure, are established for the attainment of
certain goals. Systems and procedures are designed and installed so that the organization’s resources may be properly
utilized to achieve the organization’s objectives.

Management Consultancy
For certain reasons, a company might not be in a good position to review its systems, procedures, and other
operational activities. Hence, an individual, or a service provider, is requested to provide such service. This individual
is referred to as a management consultant. A management consultant is qualified by education, experience, technical
ability, and temperament to advise or assist businessmen on a professional basis in identifying, defining, and solving
specific management problems involving the organization, planning, direction, control, and operation of a firm.
• A management consultant outsourced by a company can effectively serve his purpose since he is objective and
impartial.
• However, a company may also hire its own management consultant, providing such service of advising the
company on technical matters pertaining to its systems, procedures, and operational activities, but the concept
of impartiality may not be exactly present considering the in-house consultant is at the direction of the company
itself.

Any professional may practice management consultancy as long as he has the required competence, experience, and
technical ability to solve business problems. The practice and the practitioners are not licensed nor regulated by law,
and there are neither admission requirements nor a board which certifies practitioners.

Reasons for Hiring Management Consultants

In most cases, businesses hire management consultants to:
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 • Help define specific problems and develop solutions;
• Provide specialized skills and experience;
• Provide confidential service in which the identity of the client is concealed;
• Train client personnel;
• Provide temporary personnel;
• Help improve intra-company communications; and
• Refer and independent opinion;

Management Consulting Engagement

Conducting the engagement involves various activities, but generally, these may be classified as (a) gathering of
information and (b) analysis and evaluation of information gathered.

1. Information Gathering

This involves gathering of facts that seem to bear upon the problem. This includes:
a. Determining the nature and extent of information to be collected;
b. Locating the sources of the needed information; and
c. Recording the information and documenting the process.

2. Information Analysis

Analysis or evaluation of information is a logical, systematic process that includes tasks such as:
a. Classifying the information gathered;
b. Determining causal relationships;
c. Identifying key variables;
d. Discovering problem or opportunities
e. Developing and evaluating various courses of action
f. Recommending a course of action

Use of Work Papers

One of the activities involved in information gathering is recording the information and documenting the process. This
can be accomplished with the use of engagement working papers, which are considered very useful in the sense that:
a. They provide documentation of the engagement. The practitioner may refer to these papers in case he has to
support his position when questions are raised by the client, or when there is a need for him to give further
advice when there is a change in the situation.
b. They provide a historical record of the services to the client. These records make future new engagements with
the same client economically feasible, since the practitioner can just refer to them to review the background or
whatever prior knowledge is recorded about the client.
c. They serve as a source of ideas and research material for future engagements. In case the practitioner is
engaged by another client who is in the same line of business, and the problem is similar in nature to that of
previous clients, he can refer to these materials to facilitate planning, as well as execution of the engagement.

Interim Communications
In the course of practitioner’s conduct of the engagement, it is advisable that he continuously confer or communicate
with the client. Though the information to be communicated varies depending on the circumstances of the
engagement, this typically involves the steps completed as compared against the plan or program, the interim benefits
or conclusions developed, the next course of action to be taken, and the required assistance or approval for the next
course of action.

Presenting the Report

After the practitioner has evaluated the information, has come up with the different alternative courses of action and/or
solution, has weighed the different alternatives, and has come up with the best alternatives, i.e. the solution to the
case, he can now issue his final report which contains his finding analyses, conclusions, and recommendations.
• Presentation of the report on alternatives can be made through oral presentations and/or written reports.

Implementation or Installation of Recommendations

When the scope of the engagement covers the consultant’s assistance in implementing the recommendations, the
practitioner should undertake this activity without impairing his independence bearing in mind his appropriate role as
a mere adviser of consultant.
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