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MANAGEMENT ADVISORY SERVICES TRINIDAD/ALENTON

MAS 3101 – Overview of Management Advisory Services OCTOBER 2021

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

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• Throughput time is reduced. 1. Research and Development—experimenting to

• Defect rates are reduced. reduce costs or improve quality.
2. Design—developing alternative product,
2. Total Quality Management (TQM) - Total Quality service, or process designs.
Management means different things to different 3. Supply—managing raw materials received from
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.
In this respect, it can be differentiated from TQM 7. Customer Service—supporting customers after
which tends to emphasize small, incremental the sale of a product or service.
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-
price than competitors term stock price). If managers are given too much fixed
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.
c. Stock grants-Stock grants involve issuing shares of
Value Chain - The value chain is a set of value- stock as part of management's compensation. Two
adding functions or processes that convert inputs common types of stock grants:
into products and services for the organization’s (1) Restricted stock. The issuance of stock that
customers: cannot be sold by the manager for a specific
period of time, usually about 10 years. This form
of compensation is effective because it

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encourages managers to undertake operations (5) risk response

that increase the long-term value of the (6) control activities
corporation's stock price. (7) information and communication
(2) Performance shares. The issuance of stock to (8) monitoring.
management if certain levels of performance are TERMINOLOGIES
met. If the price of the corporation's stock Benchmarking (or competitive benchmarking) -
increases, the value of the manager's The continual search for the most effective
compensation increases. method of accomplishing a task, by comparing
d. Executive perquisites (perks). Management also existing methods and performance levels with
may get various perquisites such as retirement those of other organizations or with other subunits
benefits, use of corporate assets, golden parachutes, within the same organization.
and corporate loans.
e. The best forms of executive compensation-It is Continuous improvement - The constant effort to
generally believed that the best compensation eliminate waste, reduce response time, simplify
systems include a combination of fixed compensation the design of both products and processes, and
and incentive compensation that is related to long- improve quality and customer service.
term stock price.
Empowerment - The concept of encouraging and
Audit committee - a "committee established by and authorizing workers to take the initiative to
amongst the board of directors of an issuer for the improve operations, reduce costs, and improve
purpose of overseeing the accounting and financial product quality and customer service.
reporting processes of the issuer, and audits of the
financial statements of the issuer." A major Line position - Position held by managers who are
responsibility of the audit committee is the appointment, directly involved in providing the goods or services
compensation and oversight of the corporation's external that constitute an organization's primary goals.
auditor, including the resolution of any disagreements
between management and the external auditor Non-value-added costs - The costs of activities that
can be eliminated without deterioration of product
Other important characteristics of an audit quality, performance, or perceived value.
committee
(a) At least one member should be a "financial expert." Reengineering - The complete redesign of a process,
The names of the financial experts must be with an emphasis on finding creative new ways to
disclosed. A financial expert is one that possesses all accomplish an objective.
of the following attributes:
1] An understanding of generally accepted Total quality management (TQM) - The broad set of
accounting principles and financial statements; management and control processes designed to
2] Experience in preparing, auditing, analyzing, or focus an entire organization and all of its
evaluating financial statements of the breadth employees on providing products or services that
and complexity expected to be encountered with do the best possible job of satisfying the customer.
the company;
3] An understanding of internal controls and Treasurer - An accountant in a staff position who is
procedures for financial reporting: and responsible for managing an organization's
4] An understanding of audit committee functions. relationships with investors and creditors and
maintaining custody of the organization's cash,
Enterprise risk management: Enterprise risk investments, and other assets.
management is a process, effected by an entity's board
of directors, management and other personnel, applied Theory of constraints - A management approach that
in a strategy-setting and across the enterprise, designed focuses on identifying and relaxing the constraints
to identify potential events that may affect the entity, that limit an organization's ability to reach a
and manage risk to be within its risk appetite, to provide higher level of goal attainment.
reasonable assurance regarding the achievement of
entity objectives. Type of Cost
ERM helps align the risk appetite of the organization with Out-of-pocket costs require a cash outlay.
its strategy, enhances risk response decisions, reduces Opportunity costs are the benefits you give up when
operational surprises and losses, identifies and manages you choose one alternative over another.
cross-enterprise risks, provides integrated responses to
Direct costs can be directly and conveniently traced
multiple risks, helps the organization seize opportunities,
to a specific cost object.
and improves the deployment of capital.
A key aspect of ERM is the identification and Indirect costs either cannot be traced to a specific
management of events that have a negative impact, cost object or are not worth the effort of tracing.
positive impact, or both. Events with negative impact Variable costs change, in total, in direct proportion to
represent risks. Events with positive impact may offset changes in activity.
negative impacts or represent opportunities. The risk Fixed costs remain the same, in total, regardless of
management process involves (1) identifying risks, activity.
assessing risks, prioritizing risks, determining risk Manufacturing costs are associated with making a
responses. and monitoring risk responses. physical product. They can be classified as direct
materials, direct labor, or manufacturing
Interrelated components of ERM overhead.
(1) internal environment
Nonmanufacturing costs are associated with selling a
(2) objective setting
product or service or running the overall
(3) event identification
business.
(4) risk assessment

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Product costs are assigned to a product as it is being • Communicate information fairly and
produced; they accumulate in inventory accounts objectively.
until the product is sold. • Disclose full all relevant information that could
Period costs are reported as expenses as they are reasonably be expected to influence an
incurred. intended user’s understanding of the reports,
Relevant costs are future oriented costs that differ comments, and recommendations presented.
among decision alternatives.
Irrelevant costs are those that remain the same Resolution of Ethical Conflict
regardless of the alternatives and thus will not In applying the standards of ethical conduct,
affect the decision. management accountants may encounter problems in
identifying unethical behavior or in resolving an ethical
IMA Standards of Ethical Conduct for Management conflict. When faced with significant ethical issues,
management accountants should follow the
Accountants
established polies of the organization bearing on the
1. Competence resolution of such conflict. If these polies do no
• Maintain an appropriate level of professional resolve the ethical conflict, management accountants
competence by ongoing development of their should consider the following courses of actions:
knowledge and skills. • Discuss such problems with the immediate
superior except when it appears that the
• Perform their professional duties in accordance
superior is involved, in which case the
with relevant laws, regulations, and technical problem should be presented initially to the
standards. next higher management level. If satisfactory
• Prepare complete and clear reports and resolution cannot be achieved when the
recommendations after appropriate analyses of problem is initially presented, submit the
relevant and reliable information. issues to the next higher managerial level.
• If the immediate superior is the chief executive
officer, or equivalent, the acceptable reviewing
2. Confidentiality authority may be a group such as the audit
• Refrain from disclosing confidential information committee, executive committee, board of
acquired in the course of their work except when directors, board of trustees or owners.
authorized unless legally obligated to do so. Contact with levels above the immediate
superior should be initiated only with the
• Inform subordinates as appropriate regarding the
superior’s knowledge, assuming the superior is
confidentiality of information acquired in the not involved.
course of their work and monitor their activities to • Clarify relevant concepts by confidential
assure the maintenance of that confidentiality. discussion with an objective advisor to obtain
• Refrain from using or appearing to use confidential an understanding of possible courses of action.
• If the ethical conflict still exists after
information acquired in the course of their work for
exhausting all levels of internal review, the
unethical or illegal advantage either personally or management accountant may have no other
through third parties. recourse on significant matters that to resign
from the organization and to submit an
3 Integrity informative memorandum to an appropriate
• Avoid actual or apparent conflicts of interest and representative of the organization.
Except where legally prescribed, communication of
advise all appropriate parties of any potential such problems to authorities or individuals not
conflict. employed or engaged by the organization is not
• Refrain from engaging in any activity that would considered appropriate.
prejudice their ability to carry out their duties
ethically . Exercise No. 1
Indicate whether each of the following pertains to
• Refuse any gift, favor, or hospitality that would
financial accounting or managerial accounting.
influence or would appear to influence their 1. An internal report used by management
actions. 2. An external report used by investors
• Refrain from either actively or passively subverting 3. A report prepared periodically (monthly,
the attainment of the organization/s legitimate and quarterly, annually)
4. Information is subjective, relevant, future-
ethical objectives.
oriented
• Recognize and communicate professional 5. Reports are prepared as needed
limitations or other constraints that would preclude 6. Information is reported at the decision-making
responsible judgment or successful performance of level
an activity. 7. Information is reported for the company as a
whole
• Communicate unfavorable as well as favorable
8. Information is objective, reliable and historical
information and professional judgments or 9. There are no regulations governing the
opinions. reports.
• Refrain from engaging in or supporting any activity 10. A focus on a segment of the business entity.
that would discredit the profession. 11. A report prepared according to GAAP
12. It is driven by rules.
13. It is prepared for shareholders.
4 Objectivity
14. Reporting of historical information.

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15. Providing information for decision making and 9. Which of the following statements represents a
planning similarity between financial and managerial
accounting?
Exercise No. 2 a. Both are useful in providing information for
MULTIPLE CHOICE QUESTIONS external users.
1. The primary purpose of management advisory b. Both are governed by GAAP.
services is c. Both draw upon data from an organization's
a. to achieve the objectives of the MAS firm. accounting system.
b. to help the client maximize its resources. d. Both rely heavily on published financial
c. to improve the client's use of its capabilities statements.
and resources to achieve the objectives of such
client's organization. 10. Which activity is NOT normally performed by
d. to help the client identify its problems. managerial accountants?
a. Assisting managers to interpret data in
2. Which of the following is a characteristic of managerial accounting reports.
management advisory services? b. Designing systems to provide information for
a. Services rendered are for third parties. internal and external reports.
b. Engagements are usually recurring. c. Gathering data from sources other than the
c. Human relations do not play a vital role in each accounting system.
engagement. d. Deciding the best level of inventory to be
d. It involves problem solving. maintained.

3. Management accounting: 11. The person MOST likely to use management

a. focuses on estimating future revenues, costs, accounting information is a(n):
and other measures to forecast activities and a. banker evaluating a credit application
their results b. shareholder evaluating a stock investment
b. provides information about the company as a c. governmental taxing authority
whole d. assembly department supervisor
c. reports information that has occurred in the
past that is verifiable and reliable 12. Who is the manager in charge of raising cash for
d. provides information that is generally available operations and managing cash and near-cash
only on a quarterly or annual basis assets?
a. Chief financial officer.
4. Management accounting is considered successful b. Controller.
when it: c. Treasurer.
a. helps creditors evaluate the company's d. Internal auditor.
performance
b. helps managers improve their decisions 13. ________ management exists to provide advice
c. is accurate and assistance to those responsible for attaining
d. is relevant and reported annually the objectives of the organization.
a. Line
5. The function of management that compares b. Functional
planned results to actual results is known as: c. Staff
a. planning. d. Risk
b. directing and motivating.
c. controlling. 14. The person(s) directly responsible for the
d. decision making. attainment of organizational objectives is/are
a. the treasurer.
6. The process of establishing objectives or goals for b. line management.
the firm and determining the means by which they c. the controller.
will be met is: d. the chief financial officer.
a. controlling.
b. analyzing profitability. 15. An approach to developing new ways to perform
c. planning. existing activities is called
d. assigning responsibility. a. process value analysis
b. re-engineering
7. Which of the following functions is best described c. caveat analysis
as choosing among available alternatives? d. benchmarking
a. Decision making.
b. Planning. 16. Which of the following best describes the term
c. Directing operational activities. “benchmarking?”
d. Controlling. a. producing a particular product at the lowest
possible cost.
8. Which of the functions of management involves b. designing the highest quality product in a
overseeing day-to-day activities? given market.
a. Planning c. developing the best selling product
b. Directing and motivating d. improvement gained through measuring one’s
c. Controlling products against the best products.
d. Decision making
17. What modern production methodology emphasizes
strengthening the weakest link of the company to

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improve operations to become more efficient and 24. Which ethical standard has been violated if an
effective? accountant fails to prepare financial statements
a. Weakest link theory according to industry standards?
b. Just-in-time a. Competence c. Integrity
c. Total quality b. Confidentiality d. Credibility
d. Theory of constraints.
25. Which ethical standard is violated when an
18. Osorio Corporation recently implemented a just-in- accountant uses information from a financial
time (JIT) production system along with a series of statements he is preparing to advise a relative of a
continuous improvement programs. If the firm is stock purchase?
now considering adopting a total quality a. Competence c. Integrity
management (TQM) program, it would likely find b. Confidentiality d. Credibility
that TQM is:
a. consistent with both JIT and continuous 26. Which of the following is not an element of
improvement. competency?
b. consistent with JIT but inconsistent with a. To develop appropriate knowledge about a
continuous improvement. particular subject.
c. consistent with continuous improvement but b. To perform duties in accordance with relevant
inconsistent with JIT. laws.
d. inconsistent with both JIT and continuous c. To perform duties in accordance with relevant
improvement. technical standards.
d. To refrain from engaging in an activity that
19. Ideally, how many units should be produced in a would discredit the accounting profession.
just-in-time manufacturing system?
a. budgeted customer demand for the current 27. The Standards of Ethical Conduct for Management
week. Accountants developed by the Institute of
b. budgeted customer demand for the following Management Accountants state that when faced
week. with significant ethical issues, management
c. actual customer demand for the current week. accountants should first:
d. maximum production capacity for the current a. discuss such problems with the immediate
week. superior except when it appears that the
superior is involved.
20. Process Reengineering includes all of the following b. clarify relevant concepts by confidential
steps except: discussion with an objective advisor to obtain
a. constructing a diagram flowcharting the an understanding of possible courses of action.
current process. c. follow the established policies of the
b. redesigning the process. organization bearing on the resolution of such
c. elimination of non-value-added activities. conflict.
d. elimination of all constraints. d. submit an informative memorandum describing
the ethical issue to an appropriate
21. Which item is not an IMA Standard for Ethical representative of the organization and resign if
Conduct? no action is taken as a result of the
a. Integrity c. Loyalty memorandum.
b. Competence d. Objectivity
28. The Standards of Ethical Conduct for Management
22. Which of the following statements relating to Accountants developed by the Institute of
Standards of Ethical Conduct for Management Management Accountants states that significant
Accountants is correct? ethical issues should be discussed with an
a. A management accountant should refuse all immediate superior unless the superior is involved.
gifts and hospitality offered by one of the If satisfactory resolution cannot be achieved when
company’s suppliers. the problem is initially presented, then the issues
b. A management accountant should inform his should be:
superiors regarding the confidentiality of a. submitted to the next higher managerial level.
information acquired in the course of their b. submitted to the chief executive officer.
work and monitor their activities to assure the c. submitted to the audit committee, executive
maintenance of that confidentiality. committee, board of directors, or owners.
c. A management accountant should prepare d. submitted to outside legal counsel.
complete and clear reports and
recommendations before appropriate analyses 29. An advantage of downsizing is
of relevant and reliable information. a. decreased costs in the long run.
d. Management accountants have a responsibility b. layoffs.
to disclose fully all relevant information that c. one-time losses.
could reasonably be expected to influence an d. reduced communication.
intended user’s understanding of the reports,
comments, and recommendations presented. 30. The question "How much information is enough?"
for managerial purposes should be answered on
23. This principle imposes the obligation on all a. a cost/benefit basis.
professional accountants to be fair, intellectually b. a cost, but not benefit, basis.
honest, and free of conflicts and interests. c. a benefit, but not cost, basis.
a. Integrity c. Maturity d. neither costs nor benefits, but some other
b. Objectivity d. Independence in mental criteria.
attitude – end -

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