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Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao

Since 1977

MANAGEMENT SERVICES TRINIDAD

MS 3601 – Overview of Management Services MAY 2024

LECTURE NOTES

Three objectives of management accounting: Three roles of management accountants

1. To provide information for costing services, • Problem-solving: comparative analysis for decision
products, and other objects of interest to
making
management.
2. To provide information for planning, controlling, • Scorekeeping: accumulating data and reporting
evaluation, and continuous improvement. reliable results
3. To provide information for decision making. • Attention directing: The function of managerial-
accounting information in pointing out to managers
issues that need their attention, thereby helping
managers properly focus their attention.

Distinctions Between Management Accounting and Financial Accounting

Management Accounting Financial Accounting

Targeted user: internal users external users

managers stockholders and creditors

Restrictions: no mandatory rules for preparing must follow GAAP when preparing
reports financial statements

Types of information: financial and nonfinancial information financial information

Time orientation: emphasizes the future (planning and historical orientation (reports what
decision making) has already occurred)

Aggregation: detailed information about product information about overall firm

line, departments, etc. performance

In general, accounting information needed by internal includes financial and nonfinancial data to help
users differs from that needed by external users in the managers with strategic planning and decision
following ways: making.
a. More flexible • Assists in directing and controlling (analyzing and
b. Does not have to comply with GAAP or other rules comparing actual performance to budgeted plans;
c. Forward looking attention-directing to highlight successful or
d. Timely problem areas).
e. Emphasizes segments, not necessarily the entire • Motivates managers to achieve the organization's
organization goals by communicating the plans, providing a
measurement of how well the plan was achieved,
The Work of Management and the Planning and and prompting an explanation of deviations from
Control Cycle. The work of managers can be usefully plans.
classified into three major categories: planning, • Measures performance not only for the entire
directing and motivating, and controlling. All of these organization, as in financial accounting, but also
activities involve making decisions. for many subunits (divisions, departments,
1. Planning consists of strategic planning and managers).
developing more detailed short-term plans. Most • Assesses the organization's competitive position in
of what we refer to below is with reference to the the rapidly changing business environment. Looks
more detailed short-term plans. at how well the firm is doing internally, in the eyes
2. Directing and motivating involves mobilizing of its customers, from the standpoint of innovation
people to implement the plan. and continuous improvement, and financially.
3. Control is concerned with ensuring that the plan
is followed. Accountants maintain the databases The Changing Business Environment
and prepare the reports that provide feedback to 1. Just-In-Time - The term JIT means that materials
managers. The feedback can be used to reward are received just in time to be used in production,
particularly successful employees, but more manufactured parts are completed just in time to
importantly the feedback can be used to identify be assembled into products, and products are
potential problems and opportunities that were not completed just in time to be shipped to customers.
anticipated in the plan. As a result, inventories are virtually eliminated in
4. Decision-making is an integral part of the other a JIT system.
three management activities.
Key Elements of JIT
HOW MANAGERIAL ACCOUNTING ADDS VALUE • Improved plant layout
• Provides managers with information (e.g., product • Reduced setup time
costs, budgets, cash flows). The information • Low defect rates

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• Flexible workforce Value Chain - The value chain is a set of value-

adding functions or processes that convert inputs
Benefits of JIT into products and services for the organization’s
• Inventories are reduced. customers:
• Space is freed up.
• Throughput time is reduced. 1. Research and Development—experimenting to
reduce costs or improve quality.
• Defect rates are reduced.
2. Design—developing alternative product,
service, or process designs.
2. Total Quality Management (TQM) - Total Quality
3. Supply—managing raw materials received from
Management means different things to different vendors to reduce costs and improve quality.
people. Nevertheless, most TQM programs seem to 4. Production—acquiring and assembling
share at least two common elements—a focus on the resources to produce a product or render a
customer and systematic problem-solving using service.
teams made up largely of front-line workers. 5. Marketing—promoting a product or service to
current and prospective customers.
3. Process Reengineering - involves completely 6. Distribution—delivering a product or service to
redesigning a business process from the ground up. a customer.
7. Customer Service—supporting customers after
In this respect, it can be differentiated from TQM
the sale of a product or service.
which tends to emphasize small, incremental
improvements. The process is redesigned with a Corporate governance
focus on simplification and elimination of non-value- Corporate governance is designed to compensate for
added activities. the agency problem resulting from the fact that
corporations are managed by professional
4. Theory of Constraints (TOC) - The goal in the management that may not operate them in the best
Theory of Constraints is not to eliminate all interest of the shareholders.
constraints; there is always a constraint
somewhere in the system if the goal is to make Components of Corporate governance
more money. However, constraints determine the Policies, procedures and mechanism that are
performance of the entire system, so they should established to control management. These major
be intelligently managed. controls over management include:
• compensation systems,
5. Organizational Structure o boards of directors (including major
• Centralization vs. decentralization committees),
• Line and staff relationships o external auditors, internal auditors, attorneys,
• The controller regulators, creditors, securities analysts. and
internal control systems.
6. Strategic decisions and management accounting -
key to a company’s success in creating value for Forms of Executive Compensation
customers while differentiating itself from its A key objective in setting executive compensation is to
competitors. align management's decisions and actions
• Providing a quality product or service at a lower with the long-term interests of shareholders (e.g., long-
term stock price). If managers are given too much fixed
price than competitors
compensation, they may become too complacent and not
• Providing a unique product or service at a higher take appropriate risks to increase share price. If
price than competitors managers are given too much incentive compensation
based on operating profit or short-term stock price, they
Role of Accountants and Treasurer have incentives to manage profit or take excessive risks
The chief financial officer (CFO) or controller is to maximize their compensation.
the chief accountant responsible for:
• the supervision of the accounting department Common types of management compensation
• preparation of reports a. Base salary and bonuses. Using this system,
• the interpretation of information to line managers are compensated based on performance
managers. which is typically measured by accounting profit.
Compensation systems based on accounting
The treasurer is responsible for: measures of profit are problematic because
• raising capital accounting profit can be manipulated or managed.
• safeguarding assets b. Stock options. The use of stock options as a form of
• managing investments compensation provides managers with an incentive
• insurance coverage to manage the corporation to increase the stock
• credit policy of an organization. price, which is consistent with the goal of
shareholders. A disadvantage of stock options is
Line personnel are directly involved in carrying out that managers may have an incentive to increase the
the mission of the organization (e.g., assembly stock price in the short-term at the expense of long-
workers in a factory, doctors in a hospital, term stock value, even by manipulating accounting
teachers in a school). income to increase stock price. In addition, stock
Staff personnel (accountants, lawyers, personnel options may encourage management to take on risks
directors, and other administrative positions) provide that are that are in excess of shareholders' risk
support for the organization's mission. appetite.

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c. Stock grants- Stock grants involve issuing shares of assessing risks, prioritizing risks, determining risk
stock as part of management's compensation. Two responses. and monitoring risk responses.
common types of stock grants:
(1) Restricted stock. The issuance of stock that Interrelated components of ERM
cannot be sold by the manager for a specific (1) internal environment
period of time, usually about 10 years. This form (2) objective setting
of compensation is effective because it (3) event identification
encourages managers to undertake operations (4) risk assessment
that increase the long-term value of the (5) risk response
corporation's stock price. (6) control activities
(2) Performance shares. The issuance of stock to (7) information and communication
management if certain levels of performance are (8) monitoring.
met. If the price of the corporation's stock TERMINOLOGIES
increases, the value of the manager's Benchmarking (or competitive benchmarking) - The
compensation increases. continual search for the most effective method of
d. Executive perquisites (perks). Management also accomplishing a task, by comparing existing
may get various perquisites such as retirement methods and performance levels with those of
benefits, use of corporate assets, golden parachutes, other organizations or with other subunits within
and corporate loans. the same organization.
e. The best forms of executive compensation-It is
generally believed that the best compensation Continuous improvement - The constant effort to
systems include a combination of fixed compensation eliminate waste, reduce response time, simplify
and incentive compensation that is related to long- the design of both products and processes, and
term stock price. improve quality and customer service.

Audit committee - a "committee established by and Empowerment - The concept of encouraging and
amongst the board of directors of an issuer for the authorizing workers to take the initiative to
purpose of overseeing the accounting and financial improve operations, reduce costs, and improve
reporting processes of the issuer, and audits of the product quality and customer service.
financial statements of the issuer." A major
responsibility of the audit committee is the appointment, Line position - Position held by managers who are
compensation and oversight of the corporation's external directly involved in providing the goods or services
auditor, including the resolution of any disagreements that constitute an organization's primary goals.
between management and the external auditor
Non-value-added costs - The costs of activities that
Other important characteristics of an audit can be eliminated without deterioration of product
committee quality, performance, or perceived value.
(a) At least one member should be a "financial expert."
The names of the financial experts must be Reengineering - The complete redesign of a process,
disclosed. A financial expert is one that possesses all with an emphasis on finding creative new ways to
of the following attributes: accomplish an objective.
1] An understanding of generally accepted
accounting principles and financial statements; Total quality management (TQM) - The broad set of
2] Experience in preparing, auditing, analyzing, or management and control processes designed to
evaluating financial statements of the breadth focus an entire organization and all of its
and complexity expected to be encountered with employees on providing products or services that
the company; do the best possible job of satisfying the customer.
3] An understanding of internal controls and
procedures for financial reporting: and Treasurer - An accountant in a staff position who is
4] An understanding of audit committee functions. responsible for managing an organization's
relationships with investors and creditors and
Enterprise risk management: Enterprise risk maintaining custody of the organization's cash,
management is a process, effected by an entity's board investments, and other assets.
of directors, management and other personnel, applied
in a strategy-setting and across the enterprise, designed Theory of constraints - A management approach that
to identify potential events that may affect the entity, focuses on identifying and relaxing the constraints
and manage risk to be within its risk appetite, to provide that limit an organization's ability to reach a
reasonable assurance regarding the achievement of higher level of goal attainment.
entity objectives.
ERM helps align the risk appetite of the organization with Type of Cost
its strategy, enhances risk response decisions, reduces Out-of-pocket costs require a cash outlay.
operational surprises and losses, identifies and manages Opportunity costs are the benefits you give up when
cross-enterprise risks, provides integrated responses to you choose one alternative over another.
multiple risks, helps the organization seize opportunities,
Direct costs can be directly and conveniently traced
and improves the deployment of capital.
to a specific cost object.
A key aspect of ERM is the identification and
management of events that have a negative impact, Indirect costs either cannot be traced to a specific
positive impact, or both. Events with negative impact cost object or are not worth the effort of tracing.
represent risks. Events with positive impact may offset Variable costs change, in total, in direct proportion to
negative impacts or represent opportunities. The risk changes in activity.
management process involves (1) identifying risks, Fixed costs remain the same, in total, regardless of
activity.

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Manufacturing costs are associated with making a opinions.

physical product. They can be classified as direct • Refrain from engaging in or supporting any activity
materials, direct labor, or manufacturing
that would discredit the profession.
overhead.
Nonmanufacturing costs are associated with selling a
product or service or running the overall 4 Objectivity
business. • Communicate information fairly and
objectively.
Product costs are assigned to a product as it is being
• Disclose full all relevant information that could
produced; they accumulate in inventory accounts
reasonably be expected to influence an
until the product is sold.
intended user’s understanding of the reports,
Period costs are reported as expenses as they are
comments, and recommendations presented.
incurred.
Relevant costs are future oriented costs that differ Resolution of Ethical Conflict
among decision alternatives. In applying the standards of ethical conduct,
Irrelevant costs are those that remain the same management accountants may encounter problems in
regardless of the alternatives and thus will not identifying unethical behavior or in resolving an ethical
affect the decision. conflict. When faced with significant ethical issues,
management accountants should follow the
IMA Standards of Ethical Conduct for Management established polies of the organization bearing on the
Accountants resolution of such conflict. If these polies do no
1. Competence resolve the ethical conflict, management accountants
• Maintain an appropriate level of professional should consider the following courses of actions:
• Discuss such problems with the immediate
competence by ongoing development of their
superior except when it appears that the
knowledge and skills. superior is involved, in which case the problem
• Perform their professional duties in accordance should be presented initially to the next higher
with relevant laws, regulations, and technical management level. If satisfactory resolution
standards. cannot be achieved when the problem is
initially presented, submit the issues to the
• Prepare complete and clear reports and
next higher managerial level.
recommendations after appropriate analyses of • If the immediate superior is the chief executive
relevant and reliable information. officer, or equivalent, the acceptable reviewing
authority may be a group such as the audit
2. Confidentiality committee, executive committee, board of
• Refrain from disclosing confidential information directors, board of trustees or owners.
Contact with levels above the immediate
acquired in the course of their work except when
superior should be initiated only with the
authorized unless legally obligated to do so. superior’s knowledge, assuming the superior is
• Inform subordinates as appropriate regarding the not involved.
confidentiality of information acquired in the • Clarify relevant concepts by confidential
course of their work and monitor their activities to discussion with an objective advisor to obtain
an understanding of possible courses of action.
assure the maintenance of that confidentiality.
• If the ethical conflict still exists after
• Refrain from using or appearing to use confidential exhausting all levels of internal review, the
information acquired in the course of their work for management accountant may have no other
unethical or illegal advantage either personally or recourse on significant matters that to resign
through third parties. from the organization and to submit an
informative memorandum to an appropriate
representative of the organization.
3 Integrity Except where legally prescribed, communication of
• Avoid actual or apparent conflicts of interest and such problems to authorities or individuals not
advise all appropriate parties of any potential employed or engaged by the organization is not
conflict. considered appropriate.
• Refrain from engaging in any activity that would
Exercise No. 1
prejudice their ability to carry out their duties
Indicate whether each of the following pertains to
ethically. financial accounting or managerial accounting.
• Refuse any gift, favor, or hospitality that would 1. The report is verifiable and reliable.
influence or would appear to influence their 2. It provides reasonable and timely estimates.
actions. 3. The reports are generally delayed and
historical.
• Refrain from either actively or passively subverting
4. The scope tends to be highly aggregated.
the attainment of the organization/s legitimate and 5. Reliance on the criterion of usefulness rather
ethical objectives. than formal guidelines or restrictions for
• Recognize and communicate professional gathering and reporting information.
limitations or other constraints that would preclude 6. Contribution approach income statement.
7. The audience tends to be stockholders,
responsible judgment or successful performance of
creditors, and tax authorities.
an activity. 8. External users of financial report.
• Communicate unfavorable as well as favorable
information and professional judgments or

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9. Focuses on estimating future revenues, costs, A. Stockholders C. Production supervisors

and other measures to forecast activities and B. Sales representatives D. Managers
their results
10. Emphasizes relevance and flexibility rather 7. Which of the following does not relate to
than precision. management services by CPAs?
11. Complies with Securities and Exchange A. Design and/or installation of accounting systems.
Commission rules and regulations. B. Financial analysis for project feasibility studies.
12. Uses cost-benefit analysis to determine the C. Cost analysis of major investment decisions.
amount of detail presented. D. None of the above.

Exercise No. 2 8. Which of the following managerial functions involves

Classify each of the following as either line manager or a detailed financial and operational description of
staff manager. anticipated operations?
1. Chief financial officer (CFO). a. Decision making.
2. Vice-president for government relations b. Planning.
3. Controller c. Directing operational activities.
4. Manager of food and beverage services d. Controlling.
5. Flight attendant
9. Trio Company has set various goals, and
Exercise No. 3 management is now taking appropriate action to
MULTIPLE CHOICE QUESTIONS ensure that the firm achieves these goals. One such
1. Which of the following is not an objective of action is to reduce outlays for overhead, which have
managerial accounting? exceeded budgeted amounts. Which of the following
a. Providing information for decision making and functions best describes this process?
planning. a. Decision making.
b. Assisting in directing and controlling b. Planning.
operations. c. Coordinating.
c. Maximizing profits and minimizing costs. d. Controlling.
d. Measuring the performance of managers and
subunits. 10. Which of the following functions is best described as
e. All of the above are objectives of managerial choosing among available alternatives?
accounting a. Decision making.
b. Planning.
2. Which statement about the degree of detail in a c. Directing operational activities.
report is true? d. Controlling.
a. It depends on the level of the manager
receiving the report. 11. Which of the functions of management involves
b. It may depend on the frequency of the report. overseeing day-to-day activities?
c. It depends on the type of manager receiving a. Planning
the report. b. Directing and motivating
d. All of the above. c. Controlling
d. Decision making
3. The unit of measurement used in management
accounting is 12. The professional certification most relevant for
a. primarily the historical peso. managerial accountants is the
b. usually current replacement cost. a. CMA c. CSA
c. any measurement unit that is useful in a b. CPA d. MAS
particular situation.
d. the measurement unit used by competing 13. Who is the manager in charge of raising cash for
companies. operations and managing cash and near-cash
assets?
4. The following characteristics refer to Financial a. Chief financial officer.
Accounting, except b. Controller.
a. Provides information to external users c. Treasurer.
b. Emphasizes on objective data d. Internal auditor.
c. Has no externally imposed standards
d. Generates general purpose financial statement 14. The functions of planning for control, evaluating and
consulting, and governmental reporting are typically
5. Which of the following characteristics does not assumed within organizations by:
relate to management accounting? a. the company treasurer
A. Accounting reports may include non-monetary b. the company controller
information c. the company vice-president of marketing
B. It is subject to restrictions imposed by GAAP. d. external auditors
C. Reports are often based on estimates and are
seldom useful for anything other than the 15. The linked set of activities that increases the
purpose for which they are prepared. usefulness (or value) of the products or services of
D. It provides data for internal users within the an organization is the
business organization. a. direct chain c. value chain
b. indirect chain d. variable chain
6. Which of the following groups would be LEAST likely
to receive detailed management accounting
reports?

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16. Which of the following reflects the correct order in a 24. An advantage of downsizing is
value-chain? a. decreased costs in the long run.
a. Research & Development, Design, Production b. layoffs.
b. Distribution, Customer Service, Marketing c. one-time losses.
c. Design, Research & Development, Production d. reduced communication.
d. Distribution, Marketing, Research &
Development 25. Which of the following are two generic strategies
that a company can use?
17. A just-in-time manufacturer is more likely than a a. growth and product differentiation
conventional manufacturer to b. price recovery and growth
a. receive more frequent deliveries of materials c. product differentiation and cost leadership
b. spend less money on advertising d. cost leadership and price recovery
c. need workers with fewer skills
d. all of the above 26. Which item is not an IMA Standard for Ethical
Conduct?
18. A conventional manufacturer is more likely than a a. Integrity c. Loyalty
just-in-time manufacturer to b. Competence d. Objectivity
a. have a short production cycle
b. produce goods in small batches 27. A managerial accountant who prepares clear reports
c. hold large inventories to serve as buffers and recommendations after analyzing relevant facts
d. none of the above is exercising which of the following standards?
a. Objectivity c. Competence
19. After careful planning, Jammu Manufacturing b. Integrity d. Confidentiality
Corporation has decided to switch to a just-in-time
inventory system. At the beginning of this switch, 28. This principle imposes the obligation on all
Jammu has 30 units of product in inventory. Jammu professional accountants to be fair, intellectually
has 2,000 labor hours available in the first month of honest, and free of conflicts and interests.
this switch. These hours could produce 500 units of a. Integrity
product. Customer demand for this first month is b. Objectivity
400 units. If just-in-time principles are correctly c. Maturity
followed, how many units should Jammu plan to d. Independence in mental attitude
produce in the first month of the switch?
a. 370 c. 430 29. Which ethical standard is violated when an
b. 400 d. 470 accountant uses information from a financial
statements he is preparing to advise a relative of a
20. A company has a bottleneck operation that slows stock purchase?
production. Which of the following tools or a. Competence c. Integrity
approaches could the firm use to determine the b. Confidentiality d. Credibility
most cost-effective ways to eliminate this problem?
a. Linear programming. 30. Which of the following statements relating to
b. Theory of constraints. Standards of Ethical Conduct for Management
c. Decision-tree diagrams. Accountants is correct?
d. Strategic path analysis (SPA). a. A management accountant should refuse all
gifts and hospitality offered by one of the
21. Benchmarking allows managers to: company’s suppliers.
a. determine who in the industry performs similar b. A management accountant should inform his
processes most effectively. superiors regarding the confidentiality of
b. determine the processes that have high value- information acquired in the course of their
to-cost relationships. work and monitor their activities to assure the
c. compare certain internal processes, services maintenance of that confidentiality.
and activities to those of other companies in c. A management accountant should prepare
order to identify strengths and weaknesses. complete and clear reports and
d. reproduce another company’s product design recommendations before appropriate analyses
and manufacturing processes to eliminate of relevant and reliable information.
competitive advantage. d. Management accountants have a responsibility
to disclose fully all relevant information that
22. An approach to developing new ways to perform could reasonably be expected to influence an
existing activities is called intended user’s understanding of the reports,
a. process value analysis comments, and recommendations presented.
b. re-engineering
c. caveat analysis 31. The Standards of Ethical Conduct for Management
d. benchmarking Accountants developed by the Institute of
Management Accountants state that when faced
23. Process Reengineering includes all of the following with significant ethical issues, management
steps except: accountants should first:
a. constructing a diagram flowcharting the a. discuss such problems with the immediate
current process. superior except when it appears that the
b. redesigning the process. superior is involved.
c. elimination of non-value-added activities. b. clarify relevant concepts by confidential
d. elimination of all constraints. discussion with an objective advisor to obtain
an understanding of possible courses of action.

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c. follow the established policies of the Accountants' Standards of Ethical Conduct, what
organization bearing on the resolution of such should Samantha do upon discovering this
conflict. evidence?
d. submit an informative memorandum describing a. notify the controller.
the ethical issue to an appropriate b. notify the marketing managers involved.
representative of the organization and resign if c. notify the president of the corporation.
no action is taken as a result of the d. ignore the evidence because she is not part of
memorandum. the Marketing Department.

32. The Standards of Ethical Conduct for Management 34. The performance measurement tool generally
Accountants developed by the Institute of associated with the display of information
Management Accountants states that significant evaluating multiple dimensions of business
ethical issues should be discussed with an outcomes is referred to as the:
immediate superior unless the superior is involved. a. Balanced scorecard. c. Kaizen.
If satisfactory resolution cannot be achieved when b. Return on Investment. d. Market value added
the problem is initially presented, then the issues
should be: 35. Which of the following best identifies the reason
a. submitted to the next higher managerial level. that effective corporate governance is important?
b. submitted to the chief executive officer. a. The separation of ownership from management.
c. submitted to the audit committee, executive b. The goal of profit maximization.
committee, board of directors, or owners. c. Excess management compensation.
d. submitted to outside legal counsel. d. Lack of oversight by boards of directors.

33. Samantha Galloway is a managerial accountant in

the accounting department of Mustang Industries,
Inc. Samantha has just discovered evidence that
some of the corporation's marketing managers have
been wrongfully inflating their expense reports in
order to obtain higher reimbursements from the
firm. According to the Institute of Management

“There is only one difference between dream and aim. Dream requires soundless sleep to see whereas aim
requires sleepless effort to achieve.” - Anonymous

– end -

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