CHAPTER 1

MANAGEMENTACCOUNTING:
AN OVERVIEW
Management Accounting
Definition
Management Accounting involves the application of appropriate techniques and
concepts to economic data so as to assist managementin 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 communicationof 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
nonmanagement groups such as shareholders,creditors, regulatory agencies and
tax authorities.

Objective and Scope

Objective
Management accountants are concernedwith providing information to managers,
that is, people inside an organizationwho direct and control the operations.
They provide a variety of reports. Some reports focus on how well managers
and business units have performed while other reports provide timely and
frequent updates on key indicators, analysis of business situation or opportunity
and analytical reports that are needed to investigate specific problems.
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 organizationoperates as a unified whole in its long-run
intermediate and short-run best interests.
 Scqe
Managementaccounting is concemed primarily with providing information to
internal managers who are charged with planning and controlling tt'E operations
of the firm and making a variety of management decisims. Generally,
management accountants do the following tasks:
(a) Scorekeeping or data accumulation which enöies both internal and
external parties to evaluate organizational performance and position.
(b) Interpreting and reporting of informationthat helps manager to focus on
operating problems, opportunitiesas well as inefficiencies. This is
commonly associatedwith current planning and control and the analysis
and investigations of recurring routine internal accounting reports to
siY1alsituations in which management action may be required.
(c) Problem-solving or quantification of the relative merits of possible
coursesof action as well as recommendationsas to the best procedure.
This is commonly associated with non-recurring decisions.

Spcifically, the management accountant provides a system which allows

management to receive the necessary information used in performing its
adminis&ative 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 involvesthe 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. Planning involves
alternativesand selectinga course of identifying
action and specifying how the
will be implemented to further
the
action
organization's objectives.
The plan communicatesa
company'sgoals to employees
resources needed to achieve and specifies the
them. The plans of
expressedformally in budgets, management are often
Cash budgets, capital budgets,
statements of financial and projected
Åosition are examples of
contributions which
 Overview S
mentAccounti : An
Man
aooounting can make in resource planning while break-even analysis,
planning.
projected income statementsare examples of useful tools in profit

CONTROL
Control of organizations is achieved by evaluating the performance of
nunagers and the operations for which they are responsible. The distinction
between evaluating managersand evaluatingthe operations they control is
important. Managers are evaluated to determine how their performance
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
compensationand promotionopportunities,managerswork hard to ensure
that they will receive favorableevaluations.
Cost variance analysis, financial statementsanalysis, gross profit variance
analysis are some of the accountingcontrol reports used to inform managers
when activities which are part of their responsibilityare deviating from the
plan. The reports used evaluate the performance of managers and the
operations they control are referred to as performance renorts.
Although there is no generally accepted method of preparing a performance
report, such reports frequently involve a comparison of current period
performance with performancein a prior period or with planned (budgeted)
performance, Performancereports may not provide definitive answers, but
they are still extremely useful. Managerscan 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 investigatelabor, 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 exceptionwhen using performancereports. 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 evaluatedto provideinformationas 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.
 Canpany pluts often play an important role in the control process.
Managers can compare actual results with planned results and decide if
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
åought out, or changing circumstances may have made the plan out of date.
FWre 1.1 presents the major steps in the planning and control process.
a plan has been made,actions are taken to implement it. These actions
lead to results, which are comparedwith the original plan. Based on this
evaluation, managers are rewarded (e.g., given substantial bonuses or
Ftxnotd if performanceis 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
pmr). 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 productionplant), 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.

1.1. Planning and Control Process

Plan

Decisions to change Action taken to

operations or revise plans implement plan

Results

Decisions to reward or
Comparison of planned
punlJh managers
and actual results

Evaluation
 Mana ement Accountin : An Overview 7

Thus, accounting serves

managementat all stages of the management
process, from the formulation of objectives and so on up to the feedback of
performance informationwhich in turn helps in the reformulation of
objectives.

DECISION.MAKING
As indicated in Figure 1.1, decisionmaking 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 companyto produce the component? What price
shoulda firm charge for a new product? These questions indicate just a few
of the key decisionsthat confrontcompanies. And how well they make
these decisions will determine future profitability and, possibly, the survival
of the company. Recognizing the importance of making good decisions, we
will devote all of Chapter 19 to the topic.

In summary, the management accountant develops cost management

information for the Chief FinancialOfficer,other managers and employee
teams to use to managethe firm and make the firm more competitive and
successful.

Comparison of Financial Accounting and Management Accounting

Financial accounting involves the systematic recording of business transactions,

governed by a body of international financial reporting standards (IFRS) leading
to the preparation of financial statements for the use of various interested parties,
internal as well as external.

Management accounting is concernedwith providing financial information to

persons within the organization to enable them to make informed judgments and
effective decisions which further the organization's goals.
differences between Financial Accounting
Figure 1.2 summarizes the significant
These differences are discussed in the following
and Management Accounting.
paragraphs.
8
differences between Financial Accounting (FA) and Management
Accounting(MA) are•as follows:
l. As to objective
FA: To provide data for both internal (management) and external
users (e.g. creditors, owners, government, etc.).
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 include 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 International Financial Reporting Standards

(IFRS)
FA: Financial data should be recorded and presented in accordance
with IFRS.
MA: Reports need not be presented in conformity with IFRS 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 international
financial reporting standards (IFRS). Even companies that are not
under the jurisdiction of the SEC prepare financial accounting
information in accordance with IFRS 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 IFRS will provide more useful information to
internal managers, IFRS 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.
 Mana ementAccountin : An Overview 9
Financial accounting is primarily concerned with presenting the
results of past transactions. Managerialaccounting, 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.

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 reports 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
revenue and expense). But, managerialaccounting reports can also
contain a substantial amount of nonmonetary information. The
quantity of material consumedin production,the number of hours
worked by the office staff, and the number of product defects are
examples of important nonmonetarydata 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 importantthan precision to managers.
Prompt submission of the report is necessary to preserve its
usefulness and good estimates may be enough to make good
decisions.
 to C
6. As reporting requirementsof an organization as
concernedwith reporting for the company
FA: This is primarily
a whole.
segments (i.e., product
MA: This focuses reporting on the parts or
of the company,
line, sales, territories, divisions, departments)

7. As to requirementfor compliance with law

the report
FA: This is required by law as exemplified by
entities.
requirementsof the BIR, SEC and other governmental
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 overemphasized, Financial
accounting reports are aimed primarily at external users, and managerial
wcounting reportsare aimedprimarily at internal users. However, managers
also make significant use of financial accounting reports, and external users
occasionally request financial information that is generally considered
appropriatefor internal users. For example, creditors may ask management to
providethem with detailedcash'flow projections. A comparison of financial and
management accounting is shown in Figure 1.2.

Relationship between Management Accounting and Cost Accounting

Cost accozmtingis a systematicset of proceduresfor recording and
reporting
measurementsof the cost of manufacturinggoods and performing
services
in the
aggregateand in detail. It includes methods for
recognizing, classifying,
allocating, aggegating and reporting such costs
and comparing them with
standard costs.

Mmagemenl accounting is a newer interest of

cost accounting. Its purpose
provide managerswith informationwhich is to
aids decision. There are no
acceptedprinciples which specify how generally
managementaccounting
be reponed, While systems such information is to
as direct costing and standard
managementaccounting, each costing exist in
accounting report should be
of the decision and the decision tailored to the needs
maker. The most effective
the manager-decision systems result when
maker and the accountant
accountantunderstandsthe work together until the
decision to be made and
source of information that the manager understands
the accountant will the
report.
 Mana ement Accountin : An Overview 11
Figure 1.2. Financial
Accounting and Management Accounting Compared
Accounting

Recording
• Organizing Financialand
Summarizing Operational Data
Reporting

Financial Management
Accounting Accounting
Reports to various interested Reports to managers within the
patties (external and internal): organizationfor:
Owners Planning
Lenders Directing and motivating
external
Tax authorities Controlling
Regulators Performance evaluation
Managers --...-...> internal

Emphasis is on summaries of Emphasis is on future-oriented

financial consequences of past data needed in decision-making.
activities.

• Objectivity and verifiability of data Relevance is emphasized.

are emphasized.
• Timeliness of information is
• Precision of information is
required.
required.

the Detailed segment reports about

Only summarized data for
prepared. departments, products,
entire organization are
customers, and employees are
prepared.

• Need not follow FRS.

• FRS.
reports. Not mandatory.
external
• Mandatory for
 12 I
of Management Accountants
Managers of line functions are concernedwith the primary operating activities of
die organization—manufacturing(or buying) and selling a physical productor
performinga service, A staff manager manages a department that serves other
deparünents. For example, financial managers obtain the cash to keep
operations running smoothly. The manager of the legal department advises other
rnanagersregarding the legal ramifications of actions.

Accounting is a staff function, with management accountants providing

to other managers. Information can relate to financial statements,
ux problems, dealings with governmentalauthorities, and other matters. The
managementaccountant, like other staff managers, often recommends courses of
Etion to those using the information. But neither the management accountant,
nor any other staff manager, can impose recommendationson line managers.
-Nevertheless,because of their expertise, staff managers can influence decisions.
Staff managers, like all managers, also manage their own departments.

Management accountants discharge their responsibilities and achieve their

objectives by organizing and implementingactivities in the'following categories:

l. 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 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
informationand perspective necessary
for them to make decisions in a goal-
congruentmanner, 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
governmentalregulatory
agencies and tax authorities.
 Management Accounting: An Overview 13

3. Controlling Management
accountantsinterpretall forms of internal and
external informationpertinentto the varioussegmentsof the organization
and communicatethe implicationsof the informationbeing 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. Evaluatingincludes translating data into
trends and relationships. Management accountants must communicate
effectively and promptlythe conclusionsderived 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 intendedcourse. Managementaccountants provide
information to executivesoperatingin functionalareas who can make use of
it to achieve desirable performance.

4. Resource Management —This involves implementing a system of reporting

that is aligned with organizationalresponsibilities.This reporting system
will contribute to the effective use of resources and of
management performance. The transmissionof management's goals and
objectives throughout the organization in the form of assigwd
responsibilities is a basis for identifying accountability. Management
accountants must provide an accounting and reporting system will
accumulate and report appropriate revenues, expenses, assets, liabilities, and
related quantitative information to managers. Managers then will have better
control over these elements. Managementaccountants must establish
systems which facilitate planning and control of the organization's resources
to ensure that their use is consistentwith establishedpolicies. These systems
also should meet the needs of management,investors,creditors, and other
interested parties. Some of these needs are:
Custody and managementof working capital, including credit and
collections and inventory management
Creating and maintaining the most appropriate debt and equity
capital structure
Developing and implementinga system to control plant, property,
• and •equipment
Administering a pension or similar plan
Tax planning and compliance
 14 1

• Insurance management
• Creating and operating 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 information 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 executivemight 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
ofåe overall management information system implies:
• Determining the output required by users
• Specifying the data inputs needed to obtain the required output
• Developingthe requirementsfor a processing system that converts
input to output
• Managing and securing the data bases

6. Technological Implementation —Modern equipment

and techniques should
be employed to facilitate the selection, accumulation,
and safeguarding of information. Management transmission, analysis,
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 optimizingasset
utilization and resource allocation
• Network and communications
systems
Computers usually record
are responsiblefor transactions in journals and
supervising the gathering ledgers. Accountants
system, making sure of data and for monitoring the
it functions as
Regular,periodic intended and is used
reporting is the heart appropriately•
many organizations. of management accountants'
One of the challenges work in
here is ensuring that other
 Mana ement Accountin : An Overview IS
managers receive
relevant information and are not overwhelmed by
irrelevant information.
For some years, many people believed that managers
should receive all of
the informationthat could possiblybe relevant. This
view no longer
prevails; managers' time is too valuable to spend sifting
through material until they
find what they need.
7. Verification —
Managementaccountantsassure the accuracy and reliability
of information derived from
the accountingsystem 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 developmentand maintenance of

an effective and efficient management accounting organization. This
organization addresses and resolves issues relevant to the accounting and
financial structure such as:
Assignment of management accounting responsibilities
Interface between accounting and other operations
Delegation of authority and determinationsrelevant to centralization
or decentralization
Recruiting, training, and developingpersonnelin 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
managementprogram
• A cost-effective records
the requirementsof tax laws, other laws
• Records adequate to meet
and independent auditors
and regulatory agencies,
 16 I

Procese
The operation processes åat are inherent throughout the range of activities
include:
l. Identification —recognition and evaluation of business transactions and
other events for appropriate accounting action.
2. Measurement quantification, including estimates, of business
transactions or other economic events that have occurred or forecasts of
frose that may occur.
3. Accumulation —disciplined and consistent approaches to recording and
classifring appropriate business transactions and other economic events.
4. Analysis —determinationof the reasons for the reported activity and its
relationship with other economic events and circumstances.
5. Preparation and Interpretation meaningful coordination of
æcounting and/or planning data to provide information, presented
logically, and including, if appropriate, the conclusions drawn from
åose data.
6. Communication — reporting pertinent information to management and
others for internal and external uses.

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
managementaccountant in such a fashion as to meet the objectives of the
organizationas perceived by him or her. A major function of the management
accountantis 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 controllership, treasury, financial analysis,
planning, and budgeting,
cost accounting, internal audit, systems, and general
accounting. Management
accountantsthus may have titles as controller,
treasurer, budget analyst, cost
analyst, and accountant, among others.
 Mana ementAccountin : An Overview IT
Line and Staff Relationship

Line authority is the

authority to give orders to subordinde.
Line managers are directly commandaction or
responsible for attaining the objectives of
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 managersgive support, advice
and service to line departments.
Examplesof staff authority are found in
personnel, purchasing, engineering and finance.

The accounting function is usually "staff', with responsibilityfor providing line

managers and also other staff managers,with specializedservices. 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 generallyfills the staff role in his company as
contrasted with the line roles of sales and productionexecutives. Theoretically,
the controller transmits the best accountingproceduresto be followed by the line
people to the president who will communicatesuch 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 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 responsiblefor overseeingthe financial operations of
of the CFO vary among organizations, but
an organization. The responsibilities
areas:
they usually include the following
Controllership -- includes providingfinancial informationfor reports to
managers and reports to shareholders and overseeing the overall
operations of the accountingsystem.
and short- and long-term financing,
Treasury — includes banking
of cash.
investments, and management
managingthe financial risk of interest-rate
Risk management includes
changes and derivåtives management.
and exchange-rate
18 C
tax
• Taxation —includes income taxes, sales taxes, and international
planning.
• Internal audit — includes reviewing and analyzing financial and other
records to attestto the integrity of the organization's financial reports
and to adherenceto 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 the chief accounting officer) is the financial
executive primarily responsible for management accounting and financial
accounting. This book focuses on the controller as the chief management
accountingexecutive. Modern controllers do not do any controlling in terms of
line authority except over their own departments. Yet, the modern concept of
controllershipmaintainsthat the controller does control in a special sense. That
is, by reporting and interpreting relevant data (problem-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 illustrativeorganizationchart of the CFO and the corporate

controller of an apparel company.

Figure 1.3.Reporting Relationships for the CFO and the Corporate

Controller

Chairman
Chief Executive Officer (CEO) Board of Directors

President
Chief Operating Officer (COO)

Chief Financial Officer (CFO)

Controller
Treasurer
 Overview 19
Mana ementAccounting: An

Controllership
Definition

Controllership is the practice of the establishedscience of control which is the

process by which management assures itself that the resources are 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 managerialaccountingposition is held by the

controller. The controller provides reports for planning and evaluating company
activities (e.g., budgets and performance reports) 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 responsibilityfor 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 simplifiedillustrationof the organizationchart for the controller's office is

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

The controller is an integralpart of the top managementteam. If one wants a

high-level career in managementaccounting,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 for 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.
20 c 1
basically staff authority in that the controller's
The oonmllet's authority is departments. However, in his own
offce gives advice and service to othermodern concept of controllership, it is
&parment, he has line authority. In the in a special sense. That is, by
maintaind that the controller does control
controller exerts a force or
influence
the
reportingand interpretingrelevant data, consistent with objectives.
management toward logical decisions

Organization Clyrt Showing the Functions of the

Figure 1.4. A Typical
Controller

Controller

Budgeting and Financial Analysis and Cost Management

Reoring Performance Special Studies
Rernrtinn

Systems Taxation Reporting

Development

Basic 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
performanceand provide guidance and assistance to other members Of
managementin 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.
 21
ManagementAccountin : An Overview
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.
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; 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 the 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 ofan 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:

l. An excellent technical foundationin accountingand finance with an
understanding and thorough knowledge of accounting principles.
2. An understanding of the principlesof p!anning, 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 communicatewith all levels of management and a basic
understanding of the other functional problems related to engineering,
production, procurement, industrial relations, and marketing.
22 &ptr 1
6. The ability to express ideas clearly in writing or in making informative
presentations.
7. The ability to motivateothersto achieve positive action and results.

The conü•ollermay have the !echnical capability and be able to lay out the
assigned tasks as well as superviseand direct his personnel,but he must also
have integrity and the ability to communicateif 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.

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.

The Chief Financial Officer and the Treasurer

Although organizationalstructuresvary from firm of firm, the role of finance

is
assigmedto the Chief of Financial Officer (CFO) or the Vice
President-Finance
who reports to the President.

The financial vice-president's key subordinates are the

Treasurer and the
Controller. This book has extensively dealt with the role of the
Controller in the
previous section.

Treasurership

Treasurership is concerned with the acquisition,

financing and management of
assets of a business concern to maximize the
wealth of the firms for its owners.
In most firms the treasurer has the
following responsibilities:
l. Funds Procurement
This involves raising of funds
in
capital structure.This responsibilityaccordance with the firms planned
may require negotiating for loans,
short-termor long-term, issuing
equity of debt instruments at the best
terms and conditions possible.
2. Banking and Custody
of Funds
This involves direct
management of cash and cash equivalents and
maintenance of good relations
with banks and other non-bank institution.
 23
Mana ement Accountin : An Overview
3. Investment of Funds
This involves management of the company's placements and securities
or purchase of debt or equity instruments such as ordinary or preference
shares in other corporate entities. This responsibility also includes
analysis of decisions related to investment in property, plant and
equipment.
4. Operating Responsibilities related to
(a) Credit and Collection
(b) Inventory Management
(c) Corporate pension and retirement fund
(d) Investor Relations
(e) Insurance
(f) Compliance with legal and regulatory provisions relating to funds
procurement,use and distributionas well as coordinationof the
finance function with accounting function.

Professional Ethics

In recent years, many concerns have been raised regarding ethical behavior in
business and in public life. Allegationsand scandalsof unethical conduct have
been directed toward managersin virtuallyall segmentsof society, including
government, business, charitable organizations, and even religion. Although
these allegations and scandalshave receiveda 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 importantto have an appreciationof 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 Standardsof Ethical Conductfor Practitioners of
Management Accounting and Financial Management. Even though the
standards were specifically developedfor managementaccountants, 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
provides general guidelinesfor ethical behavior.
to the standards. The first part
 24 C terl
in four
In a nubhell, the managementaccountanthas ethical responsibilities
areas namely
l. to maintain a high level of professional competence,
2. to treat sensitive matters with confidentiålity,
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 managementaccountants to 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:
l. Suppose employees could not be trusted with confidential information.
Top managers would therefore be reluctant to distribute confidential
informationwithin 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. Then contracts would
tend to go to suppliers who pay the highest bribe rather than to the most
competentsuppliers. Would you like to fly in an @irplanewhose wings
were made by the subcontractor who was willing to pay the highest bribe
to a purchasing agent?
3. Suppose the CEOs or presidentsof companies routinely lied in their
annual reports to shareholders and grossly distorted financial statements.
If the basic integrity of the company's financial statementcould 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
 25
ManagementAccounting: An Overview
to
might be unableto raise any funds at all. This ultimately,would lead
slower economic growth, fewer goods and services, and higher prices.
As these examples suggest, if ethical standardswere not generally adhered to,
there would be undesirable consequencesfor 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.

Figure 1.5.Standards of Ethical Conductfor Practitioners of Management

Accounting and Financial Management

Practitioners of management accounting and financial management have an obligation to the

public, their profession, the organization they serve, and themselves, to maintain the highest
standards of ethical conduct. In recognitionof this obligation, the Institute of Management
Accountants has promulgatedthe 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. Practitionersof managementaccountingand 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 clear reports and recommendationsafter appropriate analysis of
relevant and reliable information.

Confidentiality. Practitioners of managementaccounting and financial management have a

responsibility to:

• Refrain from disclosing confidentialinformationacquired in the course of their work except

when authorized, unless legally obligated to do so.

• Inform subordinates as appropriate regarding the confidentialityof information acquired in

the course of their work and monitortheir activities to assure the maintenance of that
confidentiality.
 26 1

• Wain fm wing or appearing to use confidentialinformationacquired in the course

for unethbal or illegal advantage either personally or through third parties

IMegrtty Pracüners of management accounting and financial management have a

responsibflfty to:
Avdd ætuaf or apparentconflictsof interestand advise all approprfateparties of any
potenüal 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

• Refrain from either actively or passively subverting the attainment of the organization's
bgitjmate and ethical objectives,
Recognize and communicate professional limitations or other constraints that would
preclude responsibility judgment or successful performance of an activity.
• Cmmunicate unfavorable as well as favorable informationand professional judgments or
opinions.

• Refrain from engaging in or supporting any activity that would discredit the profession.

ObJectMty. Practitioners of management accounting and financial management have a

responsibility to:
Communicate information fairly and objectively.

• Disclose fully all relevant informationthat could reasonably be expected to influence an

intended users 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 organizationbearing on the resolutionof such conflict. If these
policies do not resolve the ethical conflict, such practitionershould 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.
 Overview 27
ManagementAccounting: An

acceptable
• If the immediatesuperior is the chief executive officer, or equivalent, the
committee,
reviewing authority may be a group such as the audit committee, executive
immediate
board of directors, board of trustees, or owners. Contact with levels above the
superior is
superior should be initiated only with the superior's knowledge, assuming the
to
not involved. Except where legally prescribed, communicationof such problems
authorities or individuals not employedor engaged by the organization is not considered
appropriate.
• Clarify relevant ethical issues by confidentialdiscussion with an objective advisor (e.g., IMA
Ethics Counseling Service) to obtain a betterunderstandingof possible courses of action.
• Consult your own attorney as to legal obligations and rights conceming 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 informativememorandumto an appropriaterepresentativeof the organization. After
resignation, depending on the nature of the ethical conflict, it may also be appropriate to
notify other 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.

Company Code 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 organizationsthat deal honestly and fairly
with them. If the business communityis to function effectively, all of
the players need to act ethically."

It is unfortunate though, that some companies place so much emphasis on short-

term profits that may make it seem like the only way to get ahead is to act
unethically.
nose who engage in unethical behavior often justify their actions with one or
more of the following reasons:
(l) the organization expects unethical behavior,
(2) everyone else is unethical, and/or
(3) behaving unethically is the only way to get ahead.
To couner the first justification for unethical behavior, many cömpanies have
adopted formal ethical codes of conduct. These codes are generally broad-based
statementsof a company's responsibilitiesto its employees, its customers, its
suppliers and the community in which the company operates. Codes give broad
guidelines rather than that spell out specific do's and don'ts or suggest proper
behaviorin a specificsituation. Companieswith 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. Companies in business for the long
term find that it pays to treat all of their constituents honestly and loyally.

Typical Ethical Challenges

Effical issues can confront managementaccountants in many ways. Here are
two examples:
• Case A. Roger Cruz, a management accountant, knows that reporting a
loss for a softwaredivisionwill 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 divisioh
and wants to avoid a
personal confrontation with the division manager.
• Case B: A packagingsupplier, bidding
for a new contract, offers the
management accountant of the purchasing
weekend to the Boracay Resort. The company an all-expense paid
supplier does not mention the new
contract when giving the invitation.
friend of the supplier. He knows
The accountant is not a personal
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.
 29
Management Accounting: An Overview
In both cases, the managementaccountantis faced with an ethical dilemma.
Case A involves competence,objectivity,and integrity. The management
accountant should requestthat the divisionmanagerprovide credible evidence
that the new prqduct is commerciallyviable. If the managerdoes not provide
such evidence, expensing R&D costs in the 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 intentionof raising issues associated with
the bid. However, the appearanceof 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 [MA's guidanceon "Resolution of Ethical
Conflict." The accountant in Case B should discuss the invitation with his
immediatesupervisor. If the visit is approved,the suppliershould be informed
that the invitation has been officiallyapprovedsubjectto his following corporate
policy (which includes the confidentiality of information).

Codes of Conduct on the International Level

In July 1990, the InternationalFederationof Accountants(IFAC) in which the
Philippines through the PICPA is a member, issuedthe "Guidelines on Ethics for
Professional Accountants" which governs the activities of all professional
accountants throughout the world; regardlessof whether they are practicing as
independent CPAs, employed in governmentservice or employed as internal
accountants. In addition to outlining ethical requirements in matters dealing
with competence, objectivity, independence,and confidentiality, the IFAC's
code also outlines the accountant's ethical responsibilitiesin matters relating to
taxes, fees and commissions,advertisingand solicitation,the handling of monies
and cross-border activities. Where cross-border activities are involved, the IF AC
ethical requirements must be followed if these requirementsare 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 Revised Code of Ethics for Professional Accountants
in the Philippines effective January l, 2016.

NTERNATIONALCERTIFICATIONS
The three certifications available to managementaccountantsare as follows:
Certificate of Management Accounting (CMA)
• Certificate in Public Accounting(CPA)
30 Cha ter 1

• Certificate in Internal Auditing (CIA)

rigorous
Management Accountant is one who has passed the
CMA. A Certified requirement, and participates in
qualifying examination,has met an experience
CMA Certificate is granted by the Institute
continuing educations. The
Management Accountants (IMA).
Public Accountant is one who has met the pre-qualification
CPA. A Certified licensure examinations given by the
educationalrequirements, passed the CPA
Regulatory Board of Accountancy and has satisfied all other legal
Professional accountant. The CPAs main
and regulatory requirements of a public the reliability of the
responsibility is to provide asSurance concerning
informationcontain in the firm's financial statements.
Auditor an individual must pass a
CIA. To attain the status of Certified Internal competence and have
comprehensiveexaminationdesigned to ensure technical
the requires number of years of work experience.

Institute of Management Accountants (IMA)

Managementaccountantshave gained status in recent years as they now spend
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 instituteda program to provide certifications for management
accountants and financial managers. The Certified Management Accountant
(CMA)examinationwas first given in 1972. A listing of the required subject
areas in the CMA examination indicates the breadth of knowledge expected of
the professional management accountant. The examination consists of the
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
FinancialManagement(CFM) examination was first given in 1996. The CFM
examinationis similar to the CMA examination with one major difference: the
Financial Accounting and Reporting section is replaced with
Corporate Financial
Management. The IMA also promulgateda code of ethics
accountants,
for management
with is discussed in the previous section.
The Institute of ManagementAccounting
(IMA) is a professional organizati0n
that publishes the monthly magazine
Strategic Finance. Since 1973, the IMA
has conducted a comprehensive
examination to test the knowledge a
 Management Accounting: An Overview 31

management accountant must have to be successfulin a complex and fast-

changing business world. More than 3,000 individuals take the exam each year.
Those who pass the exam are issueda Certificatein ManagementAccounting
and are proud to indicate the designationCMA on resumes and business cards.
For details on student and professionalmembershipsin the IMA and for
information on the CMA examination, visit the IMA Web site.
One of contributionsof the IMA is the developmentof standardsof ethical
conduct and maintenanceof an ethics hotlinethat memberscan 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
(NAA) Philippine Chapter, Inc. It is affiliatedwith NAA in New York. It was
founded primarily to provide its memberswith 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 leadingspeakersfrom the government,
private and educational sectors. The open forum provides the nerve for the
exchange of ideas and experiencesamong the participantsand the speakers.
Publication of technical materials is also part of the Association's efforts to
service its members.

To propagate and professionalizeManagementAccounting in the Philippines,

PAMA conducts the Certificate in ManagementAccounting(CMA) Program
through its continuing education arm, the Philippine Institute of Management
Accounting (PIMA). Basic objectives of the program are:
I. To establish managementaccounting as a recognized profession by
identifying the role of the managementaccountantand 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.
3. To assist employees, educators and students by establishing an objective
measure of an individuals' knowledgeand competencein the field of
managementaccounting.