Management Advisory Services

Qualifying Exam Review 2024

Module MS01: Objective, Roles and Scope of Management Accounting; Cost Concepts and Cost
Behavior

I. OBJECTIVES, ROLES AND SCOPE OF 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
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 Accounting vs. Financial Accounting

Management Accounting Financial Accounting
Users of Report Internal users: officers and External users: stockholders,
managers creditors, concerned government
agencies
Purpose To provide internal users with To provide external users with
information that may be used by information about the
managers in carrying out the organization’s financial position
functions of planning, controlling, and results of operations.
decision-making, and
performance evaluation.
Types of Different types of reports, such Primarily financial statements
Reports as budgets, financial projections, and the accompanying notes to
cost analyses, etc., depending on such statements.
the specific needs of
management

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Basis of Reports Reports are based on a Reports are based almost
combination of historical, exclusively on historical data.
estimated, and projected data.
Standards of Presentation In preparing reports, the Reports are prepared in
management of a company can accordance with generally
set rules to produce information accepted accounting principles
most relevant to its specific and other pronouncements of
needs. authoritative accounting bodies.
Reporting Entity Focus of reports is on the Financial reports relate to the
company’s value chain, such as business as a whole.
a business segment, product-
line, supplier, or customer.
Period Covered Reports may cover any time Reports usually cover a year,
period – year, quarter, month, quarter, or month.
week, day, etc. Reports may be
required as frequently as
needed.

Management Accounting vs. Cost Accounting

Management Accounting Cost Accounting
Meaning Helps management make Revolves around cost
effective decisions about the computation, cost control and
business cost reduction
Application Prevents the business from
Offers a big picture of how
incurring costs beyond the
management should strategize
budget
Measure Quantitative and qualitative Quantitative
Subset One of the many subsets of
Vast in itself
management accounting
Basis of decision making historic and predictive
Historical information
information
Requirements Audit has no statutory Statutory audit is required for big
requirement businesses
Dependence Dependent on both cost
Not dependent on management
accounting and financial
accounting to be successfully
accounting for successful
implemented
implementation
Users Management,
Management only
shareholders, and vendors

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.

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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.

DISTINCTIONS BETWEEN CONTROLLERSHIP AND TREASURERSHIP

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

Management Advisory Services – refers to the area of accounting work concerned with providing advice
and technical assistance to help clients improve the use of their resources to achieve their goals.

Management Consultant – a person who 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 problem involving the organization, planning, direction, control and operation of the
firm.

Consulting Services – professional services that employ the practitioner’s technical skills, education,
observation, experience and knowledge of the consulting process.
 Consultations
 Advisory Services
 Implementation Services
 Transaction Services
 Staff and Other Support Services
 Product Services

Characteristics of MAS
 Services are rendered for the management rather than for third parties
 Involves problem solving
 Relates to the future
 Broad in scope
 Involves varied assignment
 Engagements are usually non-recurring
 Engagements require highly qualified staff
 Human resource plays a vital role in each engagement

Scope of MAS
 Counseling management in its analysis, planning, organizing, operating and controlling
functions
 Reviewing and suggesting improvement in policies, procedures, systems, methods and
organizational relationships
 Introducing new ideas, concepts and methods to management
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  Conducting special studies, proposing plans and programs, and providing guidance and
technical assistance in the implementation

MAS Practice Standards

General Standards Technical Standards
 Professional competence  Role of MAS practitioner
 Due Professional care  Understanding with the client
 Planning and Supervision  Client interest
 Sufficient relevant data  Communication with client
 Forecasts

Stages in MAS Engagements

 Negotiating the engagement
 Preparing for and starting the engagement
 Conducting the engagement
 Preparing and presenting the reports and recommendations
 Implementing the recommendations
 Evaluating the engagement
 Post-engagement follow-up

Concept Review:

1. The actions that follow are associated with a firm’s accounting information system. Classify the above
actions as belonging either to management accounting or financial accounting.
 Preparing a report that details profit by customer
 Preparing an income statement that complies with generally accepted accounting
 Principles
 Preparing a monthly cash budget
 Voluntarily reporting safety costs to potential and existing investors
 Research to determine how to report an uninsured facility destroyed by flood
 Reporting on the trends in defect rates to the plant manager
 Determining the cost of dropping a product
 Determining the cost of producing a new product
 Determining the cost of bad debts for the balance sheet
 Assessing post purchase costs
 A report that shows a trend in warranty costs
 Reporting the value of marketable securities
 Determining how to consolidate the financial reports of two subsidiaries
 A report comparing the activity-based product costs with traditional product costs

2. Classify the following functions as belonging either to a controller or a treasurer:

 Planning and control

 Provision of capital
 Credit and collections
 Tax administration
 Short-term financing
 Government reporting
 Investor relations
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  Protection of assets
 Reporting and interpreting

Multiple Choices
1. Which of the following statement is false?
a. Managerial accounting need not mostly conform to PFRS
b. Financial accounting reports focus on subunits of the organization
c. Managerial accounting is not required
d. Managerial accounting focuses on the needs of internal users.

2. For internal users, managers are more concerned with receiving information that is:
a. Completely objective and verifiable
b. Completely accurate and precise
c. Relevant, flexible and immediately available
d. Relevant, completely accurate and precise

3. Which consideration influences the frequency of an internal report?

a. The wishes of the managers receiving the report
b. The frequency with which decisions that require the information are made.
c. The cost of preparing the reports
d. All of the given choices.

4. In determining whether planned goals are being met, a manager is performing the function of:
a. Planning
b. Controlling
c. Motivating
d. Follow-up

5. Which management position is responsible for raising capital?

a. Internal auditor
b. Treasurer
c. Controller
d. External Auditor

6. Which of the following is (are) true regarding financial and managerial accounting?
I. Both are mandatory
II. Both rely on the same underlying financial data
III. Both emphasize the segments of an organization as a whole
IV. Both are geared to the future rather than to the past

a. I, II, III and IV b. Only II, III and IV

c. Only II and III d. Only II

7. The treasurer function is usually not concerned with

a. investor relations
b. financial reports
c. short-term financing
d. credit extension and collection of bad debts

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8. What is the proper sequence of events in the planning and control process?
a. Set goals, set objectives, develop plans, implement plans, and evaluate plans
b. Establish a master budget, set standards costs, and develop variance analysis
c. Develop engineered costs, develop pricing targets, and calculate contribution margins
d. Identify variable costs, identify fixed costs, project the sales mix, and determine breakeven

9. Management accountants would not

a. Assist in budget planning
b. Prepare reports primarily for external users
c. Determine cost behaviour
d. Be concerned with the impact of cost and volume on profits

10. Internal reports must be communicated

a. daily
b. monthly
c. annually
d. as needed

11. If a distinction is made between cost accounting and managerial accounting, managerial accounting is
more oriented toward
a. Valuation of inventory
b. Analysis of variance including spoilage
c. Financial reporting to third party
d. The planning and controlling aspects of the managerial process

II. COSTS AND COST CONCEPTS

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

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 basis for
cost allocation; any factor or activity that has a direct cause-effect relationship

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

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

TYPES OF COSTS AS TO BEHAVIOR:

 FIXED COST – in total: constant within the relevant range as activity output changes; per
unit: changes as activity level changes
 VARIABLE COST – in total: varies in direct proportion to changes in activity output; per unit:
remains constant
 MIXED COST – has both fixed and variable components.

COST BEHAVIOR ASSUMPTIONS:

 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.
 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 graphical &
mathematical spurious variables - mere coincidence hence, ignored.

Coefficient of Correlation (denoted by r) – measure of the extent of the linear relationship between two
variables
2
Coefficient of Determination (denoted by r ) 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.
2
A very high r 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:

 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.
 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.
 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
2
Equation 2: ∑xy = a∑x + b∑x
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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.

Concept Review:

1. Depreciation computed using the straight-line method is classified as

a. variable cost b. fixed cost
c. relevant cost d. opportunity cost

2. This type of fixed cost usually arises from periodic decisions by management to spend in certain fixed
cost area. They may be changed by the management from period to period or even within the period of
circumstances demand such change.
a. period cost b. committed fixed cost
c. variable costs d. discretionary fixed cost

3. Manifest Co. conducted a regression analysis of its factory overhead costs. The analysis yielded the
following cost relationship:
Total factory overhead cost = P50,000 per month + P5 per RH

*RH = number of direct labor hours (regular hours), the selected cost driver for the overhead costs.

Each unit of product requires 6 direct labor hours. The company’s normal production is 20,000 units of
product per year. The total predetermined factory overhead rate per hour for a month’s production of
2,000 units is
a. P5.00 b. P7.50
c. P10.00 d. P35.00

4. Ateco Co. is preparing a flexible budget for next year and requires a breakdown of the factory
maintenance cost into the fixed and variable elements. The maintenance costs and machine hours (cost
driver) for the past six months are as follows:
Maintenance Cost Machine Hours

January P 15,500 1,800

February 10,720 1,230
March 15,100 1,740
April 15,840 2,190
May 14,800 1,602
June 10,600 1,590
Using high-low method, what is the average rate per hour at a level of 1,500 machine hours?
a. P5.33 b. P8.11
c. P7.23 d. P5.46

4. A cost pool is
a. all costs that relate to a product or product line
b. all costs of a particular department
c. all costs that have the same cost driver
d. all costs in a group such as variable costs and discretionary fixed costs
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5. Costs that arise from periodic budgeting decisions that have no strong input-output relationship are
commonly called
a. committed costs
b. opportunity costs
c. discretionary costs
d. differential costs

6. A cost is variable if it varies with the

a. number of units sold
b. number of units manufactured
c. level of some activity
d. selling price of the product

7. Which of the following pertains to relevant range?

a. The normal range of output
b. It may change from period to period
c. The range of output where costs relationship are valid
d. All of the above

Item 8 to 9
Laro ng Lahi Amusements incurred the following costs and machine hours during the last three months of
the current year. Assume that the driver for all costs is machine hours.

Type of Cost October November December

Electricity ₱ 20,000.00 ₱ 15,000.00 ₱ 18,000.00
Depreciation 15,000.00 15,000.00 15,000.00
Factory Supplies 9,600.00 5,600.00 7,600.00
Property Tax 12,000.00 12,000.00 12,000.00
Machine Hours 1,200 700 950

8. Determine the total cost if Laro ng Lahi expects to incur 1,600 machines in January?
a. ₱ 56,600.00
b. ₱ 52,600.00
c. ₱ 63,800.00
d. ₱ 72,400.00

9. If Laro ng Lahi had total costs in January of ₱ 53,000, how many machine hours did they incur during
January?
a. 900
b. 1,100
c. 1,000
d. 1,150

10. Teachers Ed. Company analysed three months of its cost of operations:
Sum of the hours 60 hours
Sum of the costs ₱ 420.00
Sum of the hours x costs 17,600
Sum of the hours squared 2,800

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How much is the estimated variable cost if the Company incurs 400 hours?
a. ₱ 2,040.00
b. ₱ 2,100.00
c. ₱ 2,300.00
d. ₱ 2,500.00

Exercises

Mr. B. Cog, an online seller of native kakanin, has decided to estimate the fixed and variable components
of his company’s shipping costs. He has collected the following data for the past seven months:
Month Packages Shipped Shipping Costs
July 10 ₱ 800
August 20 1,100
September 15 1,300
October 12 900
November 2 80
December 25 1,250
January 18 1,050

 State the cost function using the high and low points method.
 Using the cost function developed in (a), what is the estimated total shipping cost if 13
packages are shipped?
 Determine the cost function using the method of least squares.

- END OF MODULE 1 -

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