MANAGEMENT ADVISORY SERVICES

BASIC CONCEPTS IN MANAGEMENT ACCOUNTING;

COSTS AND COST CONCEPTS

MANAGEMENT ACCOUNTING

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

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

MANAGEMENT ACCOUNTANT - a person who provides financial data and advice to a

company for use in the organization and development of its business.

FUNCTIONS/OBJECTIVES OF MANAGEMENT ACCOUNTING:

The basic function of management accounting is to assist management in

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

MANAGEMENT FUNCTIONS AND THE NEED FOR MANAGEMENT ACCOUNTING

INFORMATION

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

2. DIRECTING AND MOTIVATING – involves overseeing the day-to-day activities, seeing

to it that the organization is functioning smoothly, and the members of the organization
are mobilized to carry out plans.

3. CONTROLLING – involves checking the performance of activities against the plan or

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

MANAGEMENT ADVISORY SERVICES – (also called management consulting services,

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

CHARACTERISTICS OF MAS
1. Services are rendered for the management rather than for third parties.
2. Involves problem solving.
3. Relates to the future.
4. Broad in scope.
5. Involves varied assignments.
6. Engagements are usually non-recurring.
7. Engagements require highly qualified staff.
8. Human relations play a vital role in each engagement.
 COST CONCEPTS AND ANALYSIS Page 2 of 7

MANAGEMENT ACCOUNTING vs. FINANCIAL ACCOUNTING

MANAGEME
FINANCIAL ACCOUNTING
NT
ACCOUNTIN
G
Internal users: officers External users: stockholders,
USERS and managers creditors, concerned
OF
REPORT
government agencies

To provide internal users To provide external users with

with information that information about the
may be used by organization’s financial
PURPOSE managers in carrying position and results of
out the functions of operations.
planning, controlling,
decision-making, and
performance
evaluation.
Different types of reports, Primarily financial statements
such as budgets, and the accompanying notes
TYPES financial projections, cost to such statements.
OF analyses, etc., depending
REPORT
S
on the specific needs of
management.

Reports are based on a Reports are based almost

BASIS combination of exclusively on historical data.
OF historical, estimated,
REPORT
and projected data.
S
In preparing reports, the Reports are prepared in
management of a accordance with generally
STANDARDS company can set rules accepted accounting
OF to produce principles and other
PRESENTATION
information most pronouncements of
relevant to its specific authoritative accounting
needs. bodies.
Focus of reports is on the Financial reports relate to the
company’s value business as a whole.
REPORTIN
G chain, such as a
ENTITY business segment,
product- line, supplier,
or customer.
Reports may cover any Reports usually cover a year,
time period – year, quarter, or month.
PERIOD quarter, month, week,
COVERE day, etc. Reports may
D
be required as
frequently as needed.
 COST CONCEPTS AND ANALYSIS Page 3 of 7

MANAGEMENT ACCOUNTING vs. COST ACCOUNTING

COST ACCOUNTING MANAGEMENT ACCOUNTING

Revolves around cot Helps management make
INHERENT computation, cost effective decisions about the
MEANING
control and cost business
reduction
Prevents the business Offers a big picture of how
APPLICATION from incurring costs management should strategize
beyond the budget

MEASURING Quantitative Quantitative and qualitative

GRID

One of the many Vast in itself

SUBSET subsets of
management
accounting
BASIS Historic information Historic and predictive
OF
information
DECISIO
N
MAKING
Statutory audit is Audit has no statutory
STATUTORY required for big requirement
REQUIREMENT
businesses

Not dependent on Dependent on both cost

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

CONTROLLER: The Chief Management Accountant

CONTROLLER – the chief management accounting executive of an organization who is
mainly responsible for the accounting aspects of management planning and control

FUNCTIONS OF THE CONTROLLER

1. PLANNING FOR CONTROL – to establish, coordinate, and administer, as an
integral part of management, an adequate plan for the control of operations.
2. REPORTING AND INTERPRETING – to compare performance with operating plans and
standards and to report and interpret results of operations to the concerned
users of such reports.
3. EVALUATING AND CONSULTING – to consult with all levels of management responsible
for policy or action concerning any phase of the operation of the business as it
relates to the attainment of objectives and effectiveness of policies,
organizational structures, and procedures.
4. TAX ADMINISTRATION – to establish and administer tax policies and procedures.
5. GOVERNMENT REPORTING – to supervise or coordinate the preparation of reports to
government agencies.
6. PROTECTION OF ASSETS – to assure protection for the assets of business through
internal control, internal auditing, and assuring proper insurance coverage.
7. ECONOMIC APPRAISAL – to continuously appraise economic and social forces and
government influences and to interpret their effect upon the business.
 COST CONCEPTS AND ANALYSIS Page 4 of 7

DISTINCTIONS BETWEEN CONTROLLERSHIP AND TREASURERSHIP

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

CERTIFICATION AVAILABLE TO MANAGEMENT ACCOUNTANTS

THE CMA PROGRAM OR CERTIFICATE IN MANAGEMENT

ACCOUNTING

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

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

Qualified management accountants earn the designation Certified Management

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

THE ORGANIZATION INVOLVED

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

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

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

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

OBJECTIVES OF THE PROGRAM

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

COSTS AND COST CONCEPTS

Cost – a measurement, in monetary terms, of the amount of resources used for some
 COST CONCEPTS AND ANALYSIS Page 5 of 7
purpose. When notified by a term that defines the purpose, cost becomes
operational, e.g., selling cost, acquisition cost, variable cost, etc.
 COST CONCEPTS AND ANALYSIS Page 6 of 7

Classifications of costs

As to Function - manufacturing; selling and administrative

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

administrative costs.

Alternative Classifications:

Business Function – Research and Development, Design of Products and

Processes, Production, Marketing, Distribution, Customer
Service.

Assignment to Cost Object – Direct Cost, Indirect Cost.

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

Costs.

Aggregate or Average – Total Cost, Unit Cost

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

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

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

Example: product, job, process

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

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

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

TYPES OF COSTS AS TO BEHAVIOR:

1. FIXED COST – in total - constant within the relevant range as activity

output changes; per unit - changes as activity level changes

2. VARIABLE COST – in total - varies in direct proportion to changes in

activity output; per unit - remains constant

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

COST BEHAVIOR ASSUMPTIONS:

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

2. Time Period Assumption

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

CORRELATION ANALYSIS
Correlation – measure of the co-variation between the dependent and independent
variables
 COST CONCEPTS AND ANALYSIS Page 7 of 7

Coefficient of Correlation (denoted by r) – measure of the extent of the linear

relationship between two variables

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

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

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

SEGREGATION OF FIXED AND VARIABLE ELEMENTS OF MIXED COSTS:

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

2. Statistical Scattergraph Method – various costs (the dependent

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

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

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

Equation 1:
∑y = na + b∑x

Equation 2: ∑xy = a∑x +

b∑x2

COST FORMULA: y = a + bx

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

VALUE CHAIN

Research Design
and of Products Production Marketing Distribution Custome
r
Development and Processes Service

- end –