Module 1: Introduction to Management Accounting

What are the differences between financial and management accounting?

Accounting information addresses three different functions like (1) providing information to external
parties for investment and credit decisions (2) estimating the cost of products produced and services
provided by the organization; and (3) providing information useful to internal managers who are
responsible for planning, controlling, decision making, and evaluating performance.

Financial accounting is designed to meet external information needs and to comply with generally
accepted accounting principles.  Financial accounting information is typically historical, quantitative,
monetary, and verifiable and usually reflects the activities of the whole organization.

Management accounting attempts to satisfy internal information needs and to provide product costing
information for external financial statements. It comprises the financial and nonfinancial information
needed by internal users.  Management accounting information is not required to adhere to GAAP and
thus can provide both historical and forward-looking information to managers. This information
commonly addresses individual or divisional concerns rather than those of the firm as a whole.

What are the sources of ethical standards for management accountants?

Certified Management Accountants (CMA) must adhere to the standards of ethical conduct published
in the Statement of Ethical Professional Practice issued by the Institute of Management Accountants
(IMA). The IMA’s Code of Ethics has four standards: Competence, Confidentiality, Integrity and
Credibility.

What are the basic management functions and concepts?

        Basic Management Function

·        PLANNING requires management to look ahead and to establish objectives and strategies to meet
the mission and vision of the company.

·        ORGANIZING involves the determination of activities that need to be done in order to reach the
company goals, assigning these activities to the proper personnel, and delegating the necessary authority
to carry out these activities in a coordinated and cohesive manner.

·        STAFFING involves the process of recruiting, training, developing, compensating and evaluating

employees and maintaining this workforce with proper incentives and motivations.

·        DIRECTING involves articulating a vision, energizing employees, inspiring and motivating people
using vision, influence, persuasion, and effective communication skills.

·        CONTROLLING is the process of keeping the activities on track. It means comparing the actual
results to the budget and making corrective actions to the when goals are not met.

What are the basic management concepts and what the roles and activities of controller and
treasurer?
The organizational mission and strategy are important to management accountants because such
statements help to:

·        indicate appropriate measures of accomplishment.

·        define the development, implementation, and monitoring
·        processes for the organizational information systems.

Organizational strategy may be constrained by

·        monetary capital, intellectual capital, and/or technology.

·        external cultural, fiscal, legal/regulatory, or political situations.
·        competitive market structures.

An organization is composed of people, resources other than people, and commitments that are acquired
and arranged to achieve organizational strategy and goals. Organizational structure reflects the way in
which authority and responsibility for making decisions are distributed in an
organization. Authority refers to the right (usually by virtue of position or rank) to use resources to
accomplish a task or achieve an objective. Responsibility is the obligation to accomplish a task or
achieve an objective.

Work in organizations is directed by line personnel who work directly toward attaining organizational
goals, and staff personnel who give assistance and advice to line managers.

a.      The treasurer is generally responsible for achieving short- and long-term financing, investing, and
cash management goals.

b.      The controller is responsible for delivering to management financial reports in conformity with

GAAP.

Management style, the way managers interact with the entity’s stakeholders, especially employees,
impacts the organization’s decision-making processes, risk taking, willingness to encourage change, and
employee development.

Organizational culture refers to the basic manner in which the organization interacts with its business
environment, the way in which employees interact with each other and with management, and the
underlying beliefs and attitudes held by employees about the organization.

The value chain is a set of value-adding functions or processes that convert inputs into products and
services for the organization’s customers. It includes Research and Development, Design, Supply,
Production, Marketing, Distribution, Customer Service

The balanced scorecard (BSC) is a framework that restates an organization’s strategy into clear and
objective performance measures focused on customers, internal business processes, employees, and
shareholders. The BSC includes long-term and short-term, internal and external, financial and
nonfinancial measures to balance management’s view and execution of strategy. The balanced scorecard
has four perspectives: learning and growth, internal business perspective, customer value perspective,
financial perspective.
International certification in management accounting.

IMA® (Institute of Management Accountants) is the worldwide association of accountants and

financial professionals in business. Founded in 1919, we are one of the largest and most respected
associations focused exclusively on advancing the management accounting profession.

Module 2: Relevant Costing

Relevant costing is an approach that focuses managerial attention on a decision’s relevant information.

What factors determine the relevance of information to decision making?

Relevant information is logically related and pertinent to a given decision. Relevant information may be
both quantitative and qualitative. Variable costs are generally relevant to a decision; they are irrelevant
only when they cannot be avoided under any possible alternative or when they do not differ across
alternatives. Direct avoidable fixed costs are also relevant to decision making.

Relevant costing compares the incremental revenues and/or costs associated with alternative decisions.
Managers use relevant costing to determine the incremental benefits of decision alternatives. One
decision is established as a base line against which the alternatives are compared. In many decisions the
alternative of “change nothing” is the obvious base line case.

For information to be relevant, it must possess three characteristics:

a. Be associated with the decision under consideration;

I. Incremental revenue (or differential revenue) is the amount of revenue that
differs across decision choices.
II. Incremental cost (or differential cost) is the amount of cost that varies across
decision choices. Incremental costs can be either variable or fixed. Most variable
costs are relevant while most fixed costs are not relevant.
III. An opportunity cost represents the potential benefit foregone because one
course of action is chosen over another.
b. Be important to the decision maker;
c. Have a connection to, or bearing on some future endeavor.
I. Information can be based on past or present data, but it can only be relevant if it
pertains to a future decision.
II. Future costs are the only costs that can be avoided

What are the examples of costs that are not relevant in making decisions?

Sometimes costs give the illusion of being relevant when they actually are not. Examples of such
irrelevant costs include sunk costs, arbitrarily allocated common costs, and nonincremental fixed and
variable costs.
A sunk cost is a cost incurred in the past to acquire an asset or resource that is not relevant to any future
courses of action. Sunk costs cannot be changed no matter what future course of action is taken
because historical transactions cannot be reversed currently. A common analytical tendency is to
include the historical cost of the old system but this cost does not differ between the decision
alternatives.

Lesson 3

3. What are the common situations in which relevant costing techniques are applied?

Common situations in which relevant costing techniques are applied include asset replacements,
outsourcing decisions, scarce resource allocations, special price determinations, sales mix distributions,
and retention or elimination of product lines. The following points are important to remember:

a. Asset Replacement decision

The relevant factors for making the keep-or-replace decision include:

I. Cost of the new system;

II. Current resale value of the original system; and
III. Annual operating savings associated with the new system.

In an asset replacement decision, costs paid in the past are not relevant to decisions being made
currently; these are sunk costs and should be ignored.

b. Outsourcing Decision

Outsourcing refers to having work performed by an off-site nonaffiliated supplier; it allows the company
to buy a product (or service) from an outside supplier rather than making the product or performing the
service in-house.

Relevant costs, regardless of whether they are variable or fixed, are avoidable because one decision
alternative was chosen over another. In an outsourcing decision, variable production costs are relevant.
Fixed production costs are relevant only if they can be avoided if production is discontinued.

The opportunity cost of the facilities being used by production are also relevant since outsourcing will
allow the company to use its facilities for an alternative purpose. If a more profitable alternative is
available, management should consider diverting the capacity to this use.

c. Decision involving a single scarce resource

A scarce resource is a resource that is essential to a production or service activity but is available only in
some limited quantity. Scarce resources create constraints on producing goods or providing services and
can include machine hours, skilled labor hours, raw materials, and production capacity.

In a decision involving a single scarce resource, if the objective is to maximize company contribution
margin and profits, then production and sales should be focused toward the product with the highest
contribution margin per unit of the scarce resource.
 d. Special Order Decision

A special order decision is a situation that requires management to compute a reasonable sales price for
production or service jobs outside the company’s normal realm of operations. Special prices may be
justified when orders are unusual, because the products are being tailor-made to customer
specifications, or when goods are produced for a one-time job.

In a special order decision, the minimum selling price that a company should charge is the sum of all the
incremental costs of production and sales on the order.

e. Sales Mix Decision

Sales mix is the relative combination of quantities of sales of the various products that make up the total
sales of a company.

In a sales mix decision, changes in selling prices and advertising will normally affect sales volume and
change the company’s contribution margin ratio. Tying sales commissions to contribution margin will
motivate salespeople to sell products that will most benefit the company’s profits.

Knowledge in CVP analysis will greatly help you understand sales mix decision.

f. Product Line and Segment Decision

In a product line decision, product lines should be evaluated based on their segment margins rather
than on net income. Segment margin captures the change in corporate net income that would occur if
the segment were discontinued.

The segment margin represents the excess of revenues over direct variable expenses and avoidable
fixed expenses; the amount remaining is available to cover unavoidable direct fixed expenses and
common expenses, and to provide profits.