Our Lady of the Pillar College - San Manuel, Inc.

DISTRICT 3, SAN MANUEL, ISABELA, PHILIPPINES

E-mail: [email protected]

ACC 10 – Integrated Course in Management Advisory Services

Management Accounting

Management – the process of planning, organizing, and controlling tasks to realize the objectives
of the organization.
Basic Functions of management
Planning involves:
PLANNING -setting immediate and long-term objectives.
-deciding which alternative is best suited to attain the set objectives.

Organizing involves:
ORGANIZING -deciding how to utilize available resources as plans are carried out.
-tackling activities necessary to achieve objectives such as staffing,
subordinating, directing, and motivating.

Controlling involves:
CONTROLLING -comparing actual performance with set plans or standards.
-deciding what corrective actions to take should there be any
deviation (variance) between actual and planned performance
NOTE: decision-making is an inherent function of management; all management functions would
require certain amount of decision-making.

MANAGEMENT BY OBJECTIVES vs. MANAGEMENT BY EXCEPTION

Management by Objectives – is a procedure in which a subordinate and a supervisor agree on

goals and the methods of achieving them and develop a plan in accordance with that agreement.
The subordinate is then evaluated with reference to the agreed plan at the end of the period.
Management by Exception – is a technique of highlighting those which vary significantly from
plans and standards in line with the management principle that executive time should be spent on
items that are non-routine and are identified as top priority.
Management Accounting – an application of appropriate techniques and concepts in processing
historical and projected economic data of an entity to assist management in establishing plan to
meet economic objectives and in making rational decisions with a view toward achieving the
objectives.
MANAGEMENT ACCOUNTING vs. FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING
1. User of information External users Internal users
2. Guiding principles GAAP Management wants and needs
3. Optional/Mandatory Mandatory Discretionary/Optional
4. Type of information Monetary Monetary and nonmonetary
5. Emphasis of reports Reliability Relevance
6. Purpose/End result Financial reporting and compliance Decision making
7. Source of data Internal sources Internal and external sources
8. Amount of detail Compressed and simplified Extensive and detailed
9. Focus of information Focus mainly on business as a whole Focus on segments and business as a whole
10. Frequency Periodic As frequent as need arises
11. Time orientation Historical data Future-oriented using current and past data
12. Unifying model Assets = Liabilities + Equity No unifying model or equation
Controllership – the practice of the established science of control, which the process by which
the management assures itself that company resources are in line with the company’s set
objectives.

Controller – an officer of an organization who has responsibility for the accounting aspect of
management control. It is a title given to a person holding the position of a chief management
accounting executive of a business enterprise. In many accounting texts and business literatures,
the controller is often referred to as the chief accountant.

LINE FUNCTION vs. STAFF FUNCTION

Line Function – the authority to give command or orders to subordinates; it exercises direct
downward authority over line departments. (e.g., VP for operations over operations manager).

Staff Function – the authority to advise but not to command others – the function of providing
line and staff managers with specialized service and technical advice for support; it is exercised
laterally or upward.

The controller primarily exercises a staff function as the controller’s office gives advice and service
to other departments and to entire organization as a whole; however, in an accounting department
that is headed by the controller, the controller has a line authority over subordinates.

CONTROLLER vs TREASURER
To avoid incompatible duties being assigned to a single officer, a controller (recording
function) must not hold at the same time the position of a treasurer (custody function).
CONTROLLER TREASURER
Planning and control Provision of capital
Reporting and interpreting Investor relations
Evaluating and consulting Short-term financing
Tax administration Banking and custody
Government reporting Credit and collections
Protection of assets Investments
Economic appraisal Insurance

STANDARDS OF ETHICAL CONDUCT FOR MANAGEMENT ACCOUNTANTS

According to the Standards of Ethical Conduct set by Institute of Management Accountants (IMA),
management accountants have a responsibility to:
1 Maintain an appropriate level of professional competence by
ongoing development of their knowledge and skills.
Perform their professional duties in accordance with relevant laws,
COMPETENCE
regulations, and technical standards.
Prepare complete and clear reports and recommendations after
appropriate analyses of relevant and reliable information
2 Refrain from disclosing confidential information acquired in the
course of their work, except when authorized and/or unless legally
obligated to do so.
Inform subordinates as appropriate regarding the confidentiality
of information acquired in the course of their work and monitor CONFIDENTIALITY
their activities to assure the maintenance of their confidentiality.
Refrain from using or appearing to use confidential information
acquired in the course of their work for unethical or illegal
advantage either personally or through third parties.
3 Refrain from engaging in any activity that would prejudice their
ability to carry out their duties ethically.
Avoid actual or apparent conflict of interest and advise all
INTEGRITY
appropriate parties of any potential conflict.
Refuse any gift, favor or hospitality that would influence or appear
to influence their activities.
4 Communicate information fairly and objectively and disclose fully
OBJECTIVITY
all relevant information relative to user’s need.
Management Advisory Services (MAS) – refers to the consulting services performed by CPAs
and other financial advisors to improve client’s use of its capabilities and resources to achieve
business objectives. Within CPA firms, MAS departments are kept independent from other
departments like audit and tax. Typical examples of MAS engagements include financial planning,
computer installation and wealth management.

CHARACTERISTICS OF MAS ENGAGEMENTS

 Broad in scope
 Involves problem solving
 Involves varied assignments
 Engagements are usually non-recurring
 Relates to the future (forward looking)
 Engagements usually require highly qualified staff
 Human relations play a vital role in each engagement
 Services are rendered for the management that is usually a third-party client

BROAD STAGES IN MAS ENGAGEMENTS

1. ANALYSIS STAGE – involves determining facts and circumstances, identifying
objectives, and defining the problem or opportunity for improvement.
2. DESIGN STAGE – involves evaluating possible solutions, communicating findings, and
presenting recommendations.
3. IMPLEMENTATION STAGE – involves scheduling actions and providing technical
assistance in the implementation of the recommendations. (NOTE: to maintain
independence, the business advisor shall NOT implement the recommendations but
provide technical assistance only in the implementation.

SPECIFIC STAGES IN MAS ENGAGEMENT

1. Negotiating the engagement
2. Preparing for and starting the engagement
3. Conducting the engagement
4. Preparing and presenting the reports and recommendations
5. Implementing the recommendations
6. Evaluating the engagement
7. Post engagement follow-up

MANAGEMENT CONSULTANT – refers to a person who is qualified by education, experience,

technical expertise to advise and assist businessmen on a professional basis in identifying and
solving specific management problems regarding business operations.

REASONS FOR HIRING MANAGEMENT CONSULTANTS

 A consultant is considered independent, objective and detached to the problems of the
organization.
 A consultant possesses special knowledge and skills that are not normally available from
company personnel.
 A consultant serves as a catalyst for much needed changes that are not normally perceived
by company personnel.
 In certain business situations, hiring consultants are less expensive than hiring full-time
managers.

FACTORS FOR THE EMERGENCE & GROWTH OF MANAGEMENT CONSULTANCY

 Lack of competent staff
 Trend towards industrialization
 Growth in size and complexities of business firm
 Complexities in managing and conducting a business
 Emergence of new management solutions and techniques
 Need for adequate and timely information for management decision-making
DOCUMENTS USED TO FORMALIZE MANAGEMENTCONSULTANCIES & MAS
ENGAGEMENTS
 CONTRACT - a legal document often prepared by the client, incorporating a proposal
letter or engagement letter prepared by the business advisor.
 PROPOSAL LETTER – an offer of service which, if accepted and approved by the client,
becomes a contractual agreement.
 ENGAGEMENT LETTER – contractual agreement used when the client has already
agreed that the business advisor will conduct the engagement.
 CONFIRMATION LETTER – a brief and concise statement of agreement previously
reached with a client.

MANAGEMENT ADVISORY SERVICES by CPAs

Management consultancy is not limited to CPAs. However, CPAs have distinct advantages over
other business advisors as they are already familiar with the client and its business, and they enjoy
the client’s confidence. CPAs are members of a profession with recognized standing and equipped
with technical know-how in accounting and taxation.

ESSENTIAL ATTRIBUTES THAT MAKE A CPA QUALIFIED TO RENDER MAS

 Technical competence
 Professional independence, objectivity, and integrity.
 Analytical ability and experience in solving business problems.
 Familiarity with the client’s finance, control systems and business problems.

SCOPE OF MAS BY CPAs

MAS engagements are usually connected with the services rendered by CPAs in the areas
of auditing, tax, and accounting and may involve activities such as:
 Introducing new ideas, concepts, and methods to management.
 Counseling management in its analysis, planning, organizing, operating, and controlling
functions.
 Reviewing and suggesting improvement of policies, procedures, systems, methods, and
organizational relationships.
 Conducting special studies, proposing plans and programs, and providing guidance and
technical assistance in their implementation.
TYPES OF CLIENTS SERVED BY CPAs IN MAS ENGAGEMENTS
 Private-owned business firms
 Professional associations or organizations
 Governmental agencies and organizations
 Not-for-profit nongovernmental organizations
 Other organizations like labor unions and religious groups.

VARIOUS TYPES OF MANAGEMENT ADVISORY SERVICES BY CPAs

 Management Accounting Related Services – This involves providing assistance to
management related to planning and controlling business operations as well as decision
making. (e.g., cost reduction studies, cost accounting systems, financial statement analysis,
budgeting, variance analysis, and responsibility accounting).
 Financial Management Related Services – This involves the study of the working capital
and long-term capital requirements as well as analysis and study of capital investment
proposals. (e.g., capital budgeting, working capital management, study on cost of capital
and optimal capital structure).
 Design and Appraisal of Accounting System – This involves development of accounting
systems for a newly organized firm or the revision, partial or complete, of an existing
accounting system. (e.g., systems engagement and accounting software selection and
implementation).
  Global Risk Management Solutions – This involves managing the totality of risks –
financial, operational and systems – and overall strategy to improve financial and business
performance. (e.g., financial risk management, strategic risk management, systems risk
management, compliance risk management and internal audit services).
 Transaction Services – This involves related to mergers, acquisition, divestitures, joint
ventures, and strategic alliances. (e.g., due diligence services to uncover potential financial
and strategic risks and rewards).
 Other services – Project feasibility studies, Financial advisory services, Operations
research (quantitative methods), Industrial engineering, Project finance and privatization,
Valuation services, Business recovery services, Dispute analysis and investigations,
Computer risk management, Organization and personnel, General management, and
Market consultation.

MAS PRACTICE STANDARDS

CPAs performing management consulting and other advisory services are considered in the
practice of accountancy and are bound by the Code of Ethics for Professional Accountants.
Consider the following MAS Practice Standards:

1. Personal Characteristics – in performing MAS, a practitioner must act with integrity

and objectivity and be independent in mental attitude.
2. Competence – engagements are to be performed by a practitioner having competence
in the analytical approach and process, and in the technical subject matter under
consideration.
3. Client Benefit – a practitioner should notify the client, before accepting the
engagement, of any reservations he may have, concerning the realization of the
anticipated benefits.
4. Due Professional Care – the MAS practitioner shall exercise due professional care by
observing rules and regulations applicable to specific MAS engagements.
5. Understanding with Client – before undertaking the engagement, a practitioner is to
inform his client of all significant matters related to the engagement.
6. Planning & Supervision – the MAS practitioner shall adequately plan and supervise an
engagement in a manner that provides reasonable assurance that the work is conducted
in accordance with the professional standards and rules of conduct.
7. Sufficient Relevant Data – sufficient relevant data are to be obtained, documented, and
evaluated in developing conclusions and recommendations.
8. Communication of results – all significant matters relating to the result of the
engagement (e.g., principal findings, major facts and assumptions used) are to be
communicated to the client.

EXPANDING ROLE OF MANAGEMENT ACCOUNTING

The business environment in recent years has been characterized by increasing competition and
relentless drive for continuous improvement. As business turned global and product lines
expanded, operations have become more complex, forward-looking, companies saw a tremendous
need for management-oriented data that was separate from financial-oriented data.

Major improvement tools/programs or approaches used by modern managers:

Total Quality Management – is management approach of an organization, centered on quality-

based on the participation of all members and aiming a long-term success through customer
satisfaction and benefits to all members of the organization and to society.

Just-in-time – a philosophy when to do something, then when is “a needed” and the something is
a production, purchasing or delivery activity.

Flexible Manufacturing System – a production system in which as single factory manufactures

numerous variations of product through the use of computer-controlled robots.
Theory of Constraints – a method of analyzing the bottlenecks (constraints) that keep a system
from achieving higher performance; it states that production cannot take place at a rate faster than
the slowest machine or person in the process.

Maintains that effectively managing the constraint is a key to success. The steps are:
1. Identify the weakest link, which is the constraint.
2. Don’t place a greater strain on the system than weakest link can handle – if you do the
chain will break.
3. Concentrate improvement efforts on strengthening the weakest link.
4. If the improvement effort is successful, eventually the weakest will improve to the point
where it is no longer the weakest link. At this point, a new weakest link must be identified.

Life Cycle Costing – the accumulation of costs for activities that occur over the entire life cycle
of a product from inception to abandonment by the manufacturer and the consumer.

Activity Based Costing – a process using multiple cost drivers to predict and allocate costs to
products and services; an accounting system collecting financial and operational data on the basis
of the underlying nature and extent of business activities.

Target Costing – a method in determining what the cost of a product should be based on the
product’s estimated selling price less desired profit.

Value Engineering – a disciplined search for various feasible combination of resources and
methods that will increase product functionality and reduce costs.

Process Reengineering – is a more radical approach to improvement than TQM. Instead of

tweaking the existing system in a series of incremental improvements, in Process Reengineering,
a business process is diagrammed in detail, questioned and then completely redesigned to eliminate
unnecessary steps, to reduce opportunities for errors to reduce costs.

MULTIPLE CHOICE QUESTIONS

1. The discipline of accounting concerned with providing information to management in
making decisions about business operations.
A. Cost accounting
B. Financial accounting
C. Government accounting
D. Management accounting
2. The primary purpose of management accounting is to provide information to:
A. Internal users
B. External users
C. Both internal and external users
D. Management and government
3. Which of these information characteristics is deemed most important to management
accounting?
A. Verifiability and accuracy
B. Comparability and full disclosure
C. Relevance, flexibility and timeliness
D. Conservatism and substance over form
4. Management accounting is similar to financial accounting in that
A. Both classify reported information in the same way
B. Both concentrate with historical costs
C. Both deal with economic events
D. Both are governed by GAAP
5. Management accounting
A. Is discretionary rather than mandatory
B. Is concerned only with monetary information
C. Is governed by Generally Accepted Accounting Principles (GAAP)
D. Is focused on business as a whole rather than on segments of the business
6. Which of the following statements is true?
A. Financial accounting is a subset of cost accounting
B. Management accounting is a subset of cost accounting
C. Cost accounting is a subset of both management and financial accounting
D. Management accounting is a subset of cost and financial accounting
7. Which of the following statements is true regarding managerial accounting?
A. It may use estimates and forecasts
B. It complies with external reportorial requirements
C. It is concerned with reporting to external decision makers
D. It includes branches like job order costing, process costing, standard costing, and
activity-based costing (ABC).
8. Which of the following is not included in the basic management process?
A. Planning C. Rationalizing
B. Controlling D. Subordinating
9. What is the function of management that compares planned results against actual results?
A. Planning C. Organizing
B. Controlling D. Decision Making
10. The management control process contains the following four sequential steps, including
I. Implementing a program of corrective action
II. Comparing actual performance with standards
III. Establishing standards of performance
IV. Measuring actual performance

What is the proper sequence of these activities?

A. III, IV, I, II
B. IV, III, II, I
C. IV, II, III, I
D. III, IV, II, I
11. The controller primarily
A. Occupies a line position
B. Occupies a staff position
C. Occupies a non-supervisory rank-and-file position
D. Has no or very little influence in the decision-making process
12. A staff position:
A. Is more often superior in authority to a line position
B. Is exercised downward in doing the command function
C. Is directly involved n carrying out the basic company objectives
D. Is supportive in nature, providing services and assistance to other company segments
13. Which of the following statements is true?
A. The controller performs primarily a line function
B. The treasurer performs primarily a line function
C. The primary functions of a controller are basically the same as those of a treasurer
D. Managers with staff functions are directly involved in the provision of goods and
services
14. Which of the following is most likely a line position?
A. VP for Research of a conglomerate firm
B. Store manager of a retail convenience outlet
C. Chief financial officer of a merchandising company
D. Human resources manager for an educational institution
15. Which of the following is not addressed by the Standards of Ethical Conduct for
Management Accountants?
A. Integrity
B. Objectivity
C. Competence
D. Independence
16. What is the primary purpose of Management Advisory Services?
A. To help clients identify their problems
B. To help clients maximize their resources
C. To reach and service more potential clients by the CPA Firm
D. To improve the client’s use of its capabilities and resources to achieve business
objectives.
17. Which of the following is not a characteristic of Management Advisory Services?
A. MAS is broad in scope
B. Beneficiary of service is management
C. MAS is repetitive as far as the same client is concerned
D. MAS involves problem solving affecting future operations of the client.
18. These involve services related to mergers, acquisitions, divestitures, joint venture, spin-off
and strategic alliance.
A. Strategic risk management
B. Due diligence audit
C. Compliance risk management
D. Financial risk management
19. It is an offer of service which, if accepted and approved by the client, becomes a contractual
agreement.
A. Contract
B. Confirmation Letter
C. Engagement Letter
D. Proposal Letter
20. Which of the following statements is not acceptable?
A. A CPA provides consulting services to an existing audit client
B. A CPA offers and provides consulting services to two major competing clients
C. A CPA shares with a new client substantial information regarding another client
belonging to same industry.
D. A CPA represents three major players in rationalizing the industry’s incentives before
the government public hearings
21. The just-in-time manufacturing (JIT) system is also called the:
A. Job in training system
B. Job in training system
C. Zero cost system
D. Zero inventories system
22. Which of the following is a characteristic of just-in-time (JIT) Inventory management
systems?
A. JIT users determine the optimal level of safety stocks
B. JIT is applicable only to large companies
C. JIT does not really increase overall economic efficiency because it merely shifts
inventory levels further up the supply chain
D. JIT relies heavily on good quality materials
23. All of the following are potential financial benefits of JIT, except:
A. Reducing the risk of obsolescence
B. Reducing manufacturing lead time
C. Lower investments in inventories
D. Lower investments in plant space for inventories
24. Which of the following is at the core of the definition of total quality management (TQM)?
A. Customer surveys
B. Continuous improvement
C. Employee satisfaction
D. Supplier inspections
25. The primary reason for adopting TQM is to achieve
A. Greater customer satisfaction
B. Reduced delivery time
C. Reduced delivery charges
D. Greater employee participation
26. Under a total quality management (TQM) approach,
 A. Measurement occurs throughout the process and errors are caught and corrected at the
source
B. Quality control is performed by highly trained inspectors at the end of the production
process
C. Upper management assumes the primary responsibility for the quality of the products
and services
D. A large number of suppliers are used in order to obtain the lowest possible prices
27. Which of the following statement(s) about just-in-time (JIT) inventory management is (are)
true?
I. The emphasis of JIT is on “pull” manufacturing
II. Raw materials are purchased just in time to be used in production
III. JIT is an inventory technique that focuses on reduction of both inventory and related
inventory costs.
A. I only
B. II only
C. II and III
D. I, II and III
28. Assume that a managerial accountant regularly communicates with business associates to
avoid conflicts of interest and advises relevant parties of potential conflicts. In so doing,
the accountant will have applied the ethical standard of?
A. Objectivity
B. Confidentiality
C. Integrity
D. Credibility
29. In order to achieve a sustainable competitive advantage, it must perform value chain
activities:
A. At the same quality level as competitors, at the same cost.
B. At the same quality level as competitors, but at a lower cost
C. At a higher quality level than competitors, but at no greater cost
D. At either the same quality level as competitors, but at a lower cost, or at a higher quality
level than competitors, but at no greater cost
30. The role of managerial accounting information in assisting management is a(n):
A. Financial-directing role
B. Attention-directing role
C. Planning and controlling role
D. Organizational role