What is Management Accounting?

●​ The Institute of Cost and Management Accountants, London, has defined Management
Accounting as: "The application of professional knowledge and skill in the preparation of
accounting information in such a way as to assist management in the formulation of
policies and in the planning and control of the operation of the undertakings."

●​ "Similarly, according to American Accounting Association: "It includes the methods and
concepts necessary for effective planning for choosing among alternative business
actions and for control through the evaluation and interpretation of performances."

●​ According to the Chartered Institute of Management Accountants (CIMA), Management

Accounting is "the process of identification, measurement, accumulation, analysis,
preparation, interpretation and communication of information used by management to
plan, evaluate and control within an entity and to assure appropriate use of and
accountability for its resources.

Definitions of Management Accounting

• Atkinson, Banker and Kaplan

●​ "Management Accounting is a value adding continuous improvement process of

planning,, designing, measuring, and operating nonfinancial and financial information
systems that guides management action, motivates behavior, and supports and creates
cultural values necessary to achieve the organization's strategic, tactical and operating
objectives.

IMA's Definition of Management Accounting: a Focus on Strategy

●​ Management accounting is a profession that involves partnering in management

decision making, devising planning and performance management systems, and
providing expertise in financial reporting and control to assist management in the
formulation and implementation of an organization's strategy.

Focus of Cost and Management Accounting

Cost and Management Accounting Information

●​ consists of financial and operating data about an organization's activities, processes,

operating units, products, services and customers.

●​ consists of financial and nonfinancial information that is developed and used to

implement the organization's strategy.
Cost management is the development and use of cost management information by the
management accountant.

Information Value Chain

Business Events - Stage 1

Data - Stage 2

Information - Stage 3

Knowledge - Stage 4

Decisions - Stage 5

Functions of Management

1.​ Strategic Management

-​ Most important of the management functions
-​ Involves identifying and implementing goals and action plans to maintain a competitive
advantage
-​ Most important questions are who are our important customers, what substitute products
exist in the market place and how they differ in our products.
2.​ Planning and Decision Making
-​ Setting up of objectives, alternative purpose of action, directing and motivating,
overseeing day to day activities.
-​ Information is needed to support recurring decisions such as scheduling production,
pricing, repairing and replacing equipment.
3.​ Management and Operational Control
-​ Checking the performance or the organization
-​ Information is needed to identify inefficient operations and reward effective management
practices.
4.​ Preparation of Financial Statements
-​ Information is needed to guarantee compliance with regulatory reporting requirements.

The Strategic Emphasis

●​ The focus of cost management is on working with management to achieve the

organization's goals, through understanding the organization's competitive environment
and implementing the organization's strategy to succeed in this environment.
-​ This often means using all of the organization's resources to identify and satisfy the
customers' needs.
-​ The strategic emphasis often requires creative and integrative thinking from a
cross-functional viewpoint.
 Changes in the Contemporary Business Environment

1. Shift to a global business environment

-​ Economic interdependence and increased competition

-​ Recent trend to economic nationalism

2. Lean Manufacturing

-​ Just-in-time (JIT) inventory methods, inventory reduction and quality control

-​ Flexible manufacturing systems

-​ Emphasis on speed-to-market (i.e., time-based competition)

3. Importance of information technology

-​ Increased use of the internet has reduced processing time, increased access to
important information, and facilitated information exchange

4. Focus on the customer

-​ Consumers expect functionality, quality, and innovation.

-​ Shorter product life-cycles have intensified competition.

5. Shifts in management organization

-​ Shift from financial to customer-based measures.

-​ The focus has shifted from financial measures and hierarchal command-and-control
organizations to nonfinancial measures and flexible organizational structures.

6. Social, political, and cultural considerations

-​ Changes include a more diverse workforce, changes in regulatory requirements, and a

renewed sense of ethical responsibility.
 VARIABLE COSTING

2 General approach for costing products for the purpose of valuing inventories and cost
of goods sold

1.​ Absorption costing generally used for external financial reports product cost which
consist direct materials, direct labor and factory overhead which is mandated by GAAP.
2.​ Variable Costing for internal decision making and this is used when the contribution
format of the financial statement is prepared.
 Learning Objective 2

Prepare income statements using both variable and absorption costing.

Income Comparison of Absorption and Variable Costing

Let's assume the following additional information for Hyla Company.

• 20,000 units were sold during the year at a price of P30 each.

• There is no beginning inventory.

Now, let's compute net operating income using both absorption and variable costing.
 Learning Objective 3

Reconcile variable costing and absorption costing net operating incomes and explain
why the two amounts differ.
How do the Changes in The Contemporary Business Environment Affect Cost
Management?
 Contemporary Management Techniques

1. The Balanced Scorecard and Strategy Map

2. The Value Chain

3. Activity Based Costing and Management

4. Business Analytics

5. Target Costing

6. Life-Cycle Costing

7. Benchmarking

8. Business Process Improvement

9. Total Quality Management

10. Lean Accounting

11. The Theory of Constraints

12. Sustainability
13. Enterprise Risk Management

Note: 1-6 focus on strategy implementation

7-13 help to achieve strategy implementation through a focus on process improvement

Contemporary Management Techniques

1. The Balanced Scorecard and the Strategy Map

The Balanced Scorecard (BSC)

-​ An accounting report that addresses an organization's performance in four perspectives:
financial, customer, internal processes, and learning and growth

The Strategy Map

-​ The strategy map is a method, based on the balanced scorecard, that links the four
perspectives in a cause-and- effect diagram.
2. The Value Chain
-​ An analysis tool used to identify the specific steps required to provide a competitive
product or service to the customer.
-​ Helps identify steps that can be eliminated, improved, or outsourced.

3. Activity-Based Costing and Management

-​ Activity-Based Costing (ABC) improves the tracing of costs to individual products,
services or customers.
-​ Activity-Based Management (ABM) is used to improve operational and management
control.

4. Business Analytics (Chapter 8)

-​ an approach to strategy implementation in which the management accountant uses data
to understand and analyze business performance.

5. Target Costing

-​ A method that has resulted from intensely competitive markets

-​ Target Cost = Market-determined price - Desired Profit

6. Life-Cycle Costing (Chapter 13)

Costs should be monitored throughout a product's entire life cycle from research and
development to sales and service

7. Benchmarking
Process by which a firm identifies its CSFs, studies the best practices of other firms in achieving
these CSFs, and institutes change based on the assessment results