MAC 302: Management Reporting – 2nd Semester AY24-25

Chapter 1: Management Accounting Environment Other attributes of management accounting information

• It may be quantitative or qualitative.
Management Accounting, defined • It should be free from bias.
1. as the process of identification, measurement, accumulation, analysis, preparation, interpretation, and • It is generally forward looking.
communication of information (both financial and operating) used by management to plan, evaluate and control • It should have the inherent attributes of an accounting process.
within an organization and to assure use of and accountability for its resources - Financial and Management
Accounting Committee of the International Federation of Accountants (IFAC) Management Processes
2. as 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. It also comprises the preparation of financial reports for non-
management groups such as shareholders, creditors, regulatory agencies and tax authorities – Chartered Institute
of Management Accountants (CIMA)
3. a profession that involves partnering 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 - Institute of Management Accountants (IMA)

The American Institute of Certified Public Accountants (AICPA) states that management accounting as practice
extends to the following three areas:
• Strategic Management - advancing the role of the management accountant as a strategic partner in the organization.
• Performance Management - developing the practice of business decision-making and managing the performance
of the organization.
• Risk Management - contributing to frameworks and practices for identifying, measuring, managing and reporting
risks to the achievement of the objectives of the organization.

The Institute of Certified Management Accountants (ICMA), states "A management accountant applies his or her
professional knowledge and skill in the preparation and presentation of financial and other decision-oriented
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 undertaking. Management accounting provides information for profit management.

Management Accountants therefore are seen as the "value-creators" amongst the accountants. They are much more
interested in providing information to serve as a basis for management decisions affecting the future of the
organization, than the historical recording and compliance (score keeping) aspects of the profession.

The management accounting concepts are based on the qualitative criteria of accountability, controllability, reliability,
interdependence and relevance.

Objectives of management accounting information

Management accounting supplies the informational needs of management. These information should be detailed and
forward-looking. They are presented and analyzed differently to suit the unique informational needs of management.
To meet these requirements, management accounting information should have the following purposes.
1. Profit measurement 3. Standards for controlling
2. Guide for planning 4. Basis for decision making

Attributes and principles of management accounting information

With its indispensable usefulness in the process of arriving at a rational business decision, relevant management CONTROLLERSHIP
accounting information should have the following attributes:
1. Completeness 6. Volume Managers make decisions in all levels of managerial authority and areas of managerial functions. Managerial authority
2. Accuracy 7. Timing relates to organizational structure and may be classified as upper management, middle management, and supervisory
3. Clarity 8. Channel of information management. The general functions of management applied in all levels of managerial powers are planning organizing,
4. Confidence 9. Cost staffing, directing and controlling, as follows:
5. Communication

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segmented plans are consolidated to become organizational plans. All of these plans become basic guidelines for
actions.

Plans must be expressed in monetary terms, to be objective and understandable. Plans that are expressed in terms of
money are called "budgets". Over and above, plans must be put into action to achieve results and results should be
compared with standards for control purposes. Standards are developed because budgets are revised to conform with
actual results. Budgets are estimated costs based on estimated units produced and sold. Standards, as technically used
in management accounting, are estimated costs based on certain level of units of production and sales other than the
master budget level of activity.

Data on actual and standard costs have differences. This difference is simply called a "planning gap" or technically
referred to as the "variance". A variance may be normal or exceptional. Normal variances are expected and are within
the range of defined expectations. Such variances are closely monitored and explained by the supervisory management
and explained to the middle management, and the middle management to the top management.

Exceptional variances are material, unusual, and are beyond normal expectations Such variances are of material interest
Functions of Controllership (PREGPET) to, and closely handled by, the top management This process of managing material variances conforms to the doctrine
Planning and controlling Protection of assets of "management by exception." These material, exceptional, variances need quick, precise, and strategic actions to
Reporting Economic appraisal plug their recurrence into having lasting adverse impact to organizational performance.
Evaluation Tax administration
Government relations and reporting Examples of Normal and Exceptional Variances

The planning and controlling cycle sums up the pioneering areas of management accounting. The diagram below Maximum estimate P 52.5 billions Case 1 Case 2
depicts the relationship of planning and controlling and its relevance to management. ­ + 5% Actual Sales P 510.00 B P 460.00 B
Average estimate P 50 billions Standard Sales 500.00 B 500.00 B
¯ - 5% Variances (in billions) P 10.00 F P (40.00) UF
Minimum estimate P 47.5 billions The variance is normal exceptional
Variance investigation is to be lower upper
handled by management management

In the process of completing the planning and controlling cycle, the following management accounting techniques
have been developed: variable costing, standard costing, profit planning and cost-volume-profit analysis, responsibility
accounting, short-term budgeting (i.e., operational budgeting), segment reporting, variance analysis, product pricing,
and non-routine operating decisions.

Internal controls
One of the major elements of controllership is internal controls. They are the predefined values and skills of the
organization.
Goals must be established to define the purpose, directions and activities that need to be accomplished. However, goals Components Purposes
are normally expressed in general, abstract statements. The statement of goals should be translated into a more specific Structure (plan of organization) 1. Protection of assets
statement of matters to be accomplished known as "objectives". Objectives are more specific expressions of actions 2. Accuracy and reliability of accounting data
and things to be done. Policies (methods and measures) 3. Operational efficiency
4. Adherence to policies
Example of Statement of Goals and Objectives
Goals To have a 25% return on equity in 20NY Internal controls are classified as either:
Objectives Increase sales to P50 billion and expenses to P30 billion in 20NY - Administrative controls – include the design of the organization, strategies, corporate values, work ethics, policies,
and all other rules that are not directly related to accounting systems.
When objectives are set, specific “plans” are made. Plans must be SMART (specific, measurable, attainable, realistic, - Accounting controls – include those forms, records, systems and reports that relate to the processing of transactions
and time-bounded). They answer the basic questions WHY, WHAT, WHO, WHERE, WHEN, HOW and HOW and are basically concerned with the safeguarding of assets and maintaining a system that produces a reliable and
MUCH. There are plans in a department, division, unit or in whatever way the organization is segmentized. These accurate accounting information.

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There are eleven (11) cardinal principles of internal controls that should be followed for good managing. These cardinal Treasurership
principles are classified into three – general organizational controls, personnel controls, and management controls. Controllership and treasurership constitute corporate finance. Controllership deals with records, systems, and processes
to attain the objectives of internal controls and good managing.
General Organizational Controls
1. Responsibilities must be fixed. Treasurership deals with the management of the wealth of organizations. It includes mastering the sources of funds
2. Functional responsibilities must be segregated. and the exercise of prudence in using organizational resources.
3. No one person should be in complete charge of a business transaction.
4. Use of all available proof of accuracy, if possible. Three sources of funds:
Personnel Controls - Financing – Long-term funds come from the owners and long-term creditors.
5. Employees should be carefully selected and trained. - Operating – Operating funds come from customers and short-term fund providers.
6. Employees should be rotated. - Investing – Investing funds comes from the disposal of non-current assets.
7. Employees should be bonded, especially those in a position of trust.
Management Controls Functions of Treasurership
8. Operating instructions should be in writing.
9. Controlling accounts should be used. Function Area of concerns
10. The advantages of double-entry accounting should not be over emphasized. Provision for capital Financing
11. Use of mechanical and/or electronic equipment if possible. Investor relations Financing
Short-term borrowings Financing
General controls are organizational controls. These are developed during the formulation of the organizational design Credit and collection Financing
and are meant to prevent or reduce errors, inefficiencies, irregularities and illegal acts. In designing organizational Investment Strategic investment
structures, transactional responsibilities must be segregated. Insurance Risk management
5 Elements of Transactional Responsibilities Financial Accounting and Management Accounting

FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING

• Historical in nature • Based on forecasts and estimates
• Uses IFRS • Does not use IFRSs
• Reports are holistic • Reports are segmentized
• Reports are for general purpose • Reports are for management use only
• With unifying equation, A = L + E • No unifying equation
• Focuses on accounting and finance • Multi-disciplinary, also deals with other areas of
Ideally, separate personnel should be assigned in each of these functional responsibilities. Meaning, somebody must • Focuses on the process of preparing the financial knowledge and disciplines
authorize a transaction, another should execute the authorized transaction, then another to do the recording, another statements • Concerns with the usefulness of financial statements
to keep the assets and special records, and somebody to do the checking of the entire process (i.e., periodic • Precision • Timeliness
accountability). Any two of the five functions if combined would reduce the effectiveness of the internal controls. This
would result to unsafeguarded assets, unreliable and inaccurate accounting records, wrongly or misapplied policies,
Strategic Management Accounting
and operational inefficiency.
In the most recent years the systems comprising the field of business information have been strategically coordinated
Application controls
and linked. The popularity of the management information systems powered by the amazing advances in technology
Application controls relate to the details of forms, rules, regulations, standards, schedules, reports, accountabilities,
has made information processing more precise and timely. The traditional accounting information systems have been
commitments, and other operating policies to complement the general controls of an enterprise.
absorbed and made one of the components of the management information system due to a dynamic managerial craving
for reliable and useful information. Despite the redefinition of information systems, the central importance of financial
This covers the manner, timing, and level of transactional approval, the processes and procedures in executing a
data in the planning exercise is indelible. This makes management accounting information still an important input in
transaction, the technical details of forms, files, and recording process, the strength of safekeeping and security of
managing the affairs of an enterprise.
contracts, records, files, and reports, and the effectiveness and efficiencies of the internal auditing.
The stability of the demand for useful financial information makes the business of management accounting relevant
The internal controls of an organization are designed within the constraining criterion of cost/benefit relationship. If
and sustainable. However, the disrupting massive developments in information technology would incessantly bring
the costs of implementing an ideal internal control system exceed the benefits that are expected from it, the idealism
great impacts on the meaning and delivery of management accounting services.
in the internal control principles is compromised. This puts under pressure the principles of organizational
independence, interdependence, and reliability that may lead to errors, irregularities, and illegal acts.

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• Open and closed systems

Management accounting is a subsystem of a bigger enterprise system, which is also a subsystem of a much bigger
social system. The enterprise could either choose to isolate itself from the influences of its external relations (eg, closed
system) or be an active player on the ongoing changes in a bigger environment (eg, open system).

Management accounting is a system in an enterprise. An enterprise is a member of a social organization. As such, it

deals with external parties like suppliers, customers, government regulators, investors, analysts and internal parties like
employees and associations. It is also driven by changes in technology and regulations. It receives input from various
sources and gives output as well.

• Contingent factors
A contingent factor is one whose existence or application may not happen depending on the existence of another event.
Such event may relate to business environment, technology or organizational structure. The dynamism of the business
environment creates the factors of contingency in managing business organizations. If the business operates in a highly
competitive market where there is a high degree of uncertainty and intense price competition, it has to control costs
very closely. If the strategy is.on product differentiation, it has to emphasize its information systems on quality
processes. If the business strategy is to introduce new products continuously, it has to meet the sophistication of a
credible forecasting capability.

Technology is a disrupting variable affecting businesses. The application of advanced manufacturing technology, for
example, has redefined the accounting processes and the quality of its information.

Organizational structure defines the manner in which the strategy of the business is executed. It determines the
grouping of people who are tasked to accomplish an assigned organizational job. Essentially, the organizational design
and the distribution of people in an organization may be viewed social activities. It creates the environment of the
different relationships that can exist among the various parts of the organization and the people within them. As
structure changes, the motivational environment changes as well which may have direct impact on the productivity of
men and efficiency of using materials, machines and other precious resources.

• Human behaviour and management accounting

Management accounting system involves people. They receive data and provide the information. People do not
necessarily respond the same way on the same information they receive. They have different ways of handling data
and give various meaning to the data simply because they are people. People do not necessarily send information they
ought to send. All of these may result to misinformation, miscommunication and misfortune.

Information and responsibility accounting

A responsibility center is a segment of an enterprise headed by a manager who is responsible for its performance.
Responsibility accounting identifies the investment, profit, revenues and expenses assigned and controlled by a
manager in a segment to monitor and assess the performance of each organization parts.

If a manager is to be held answerable (i.e., accountable) on the performance of the segment, then such manager should
be given the right information to make decisions accordingly.

The content of the information should be correlated with the level of details, sphere of influenced and frequency of
report to be provided within the overriding, principle of cost- benefit analysis.

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