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Management Accounting: Roles and Objectives

Chapter 1 outlines the objectives, role, and scope of management accounting, emphasizing the key management functions of planning, directing, and controlling. It distinguishes between management accounting, cost accounting, and financial accounting based on user perspective, report types, and purpose. The chapter also discusses the roles of the controller and treasurer, the differences between line and staff functions, and the standards of ethical conduct for management accountants.

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14 views3 pages

Management Accounting: Roles and Objectives

Chapter 1 outlines the objectives, role, and scope of management accounting, emphasizing the key management functions of planning, directing, and controlling. It distinguishes between management accounting, cost accounting, and financial accounting based on user perspective, report types, and purpose. The chapter also discusses the roles of the controller and treasurer, the differences between line and staff functions, and the standards of ethical conduct for management accountants.

Uploaded by

nunez.estefan.cobspcf
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 1: OBJECTIVES, ROLE AND SCOPE OF MANAGEMENT ACCOUNTING

Management Functions and Concepts

Managers carry out three major activities in an organization: PLANNING, DIRECTING AND
MOTIVATING, and CONTROLLING.

1. Planning - involves establishing a basic strategy, selecting a course of action, and specifying how
the action will be implemented. It includes the following acts:
 Setting immediate ( short-term) and long-term objectives
 Determining the resources and tactics needed to achieve the plan
 Deciding which alternative is best suited to attain the set objectives

2. Directing and Motivating- involves mobilizing people to carry out plans and run routine
operations. It includes the following acts:
 Take action to implement the plan
 Motivate others to achieve results
3. Controlling – Involves ensuring that the plan is actually carried out and is appropriately modified
as circumstances change. It includes, among others, the following acts:
 Comparing actual performance with set plans or standards
 Monitoring results to determine if the plan is being achieved
 Deciding what corrective actions to take should there be any deviation ( variance)
between actual and planned performance
 Adjusting future plans, if necessary.

Distinction among Management Accounting, Cost Accounting and Financial Accounting

The Primary goal of accounting is to provide useful information for decision making. The main difference
between financial accounting and managerial accounting is the intended user of the information.
Because of this, several factors are affected:

Financial Accounting Managerial Accounting


User Perspective Primarily for external users, Exclusively for internal users,
such as investors and creditors such as managers(or
management) and employees
Types of reports/information Financial statements; primarily Monetary and non-monetary
monetary(financial in nature) reports such as budgets,
performance evaluation and
cost reports

Guiding Principles Generally Accepted Accounting What management wants and


Principles( GAAP) needs
Purpose or end result Financial reporting and Decision-making planning and
compliance control
Nature of information or Objective, reliable and historical Subjective, Relevant and future
emphasis of reports oriented
CHAPTER 1: OBJECTIVES, ROLE AND SCOPE OF MANAGEMENT ACCOUNTING

Time orientation Mainly historical(past) data Future-oriented using current


and past data
Unifying model Asset = Liabilities + Equity No unifying model or equation
Frequency of reporting Prepared periodically(monthly, Prepared as needed, perhaps
quarterly, annually) day-to-day or even in real time
Level of detail Focus mainly on business as a Extensive and detailed
whole
Necessity Mandatory( especially for public Discretionary or optional
entities)
Source of data From company’s internal From internal and external
information system sources

How about cost accounting?


Cost accounting is a subset of BOTH management and financial accounting. Cost accounting system is
utilized for internal reporting for use in management planning and control, and external reporting to the
extent its product-costing function satisfies external reporting requirements.

Role and Activities of Controller and Treasurer

The Controller: Chief Management Accounting

 Controllership – The process by which management assures itself that company resources are
obtained and utilized according to plans that are in line with the company’s SET OBJECTIVES.
This is the practice established science of control
 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. This is often referred to as the chief accountant.

Controller vs. Treasurer


1. Controller – responsible for supervising the personnel in the accounting department and for
preparing the information and reports used in both managerial and financial accounting
2. Treasurer – responsible for raising capital, safeguarding the organization’s assets, management
of its investments, credit policy and insurance coverage
Note: A controller, who is primarily concerned with ACCOUNTING, must not hold at the same
time the position of treasurer, who is primarily concerned with CUSTODY of funds.

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
Economic Appraisal Investments
Insurance
CHAPTER 1: OBJECTIVES, ROLE AND SCOPE OF MANAGEMENT ACCOUNTING

Internal Auditor – responsible for reviewing the accounting procedures, records and reports in both
the controller’s and the treasurer’s areas of responsibility. He expresses an opinion to top
management regarding the effectiveness of the organization’s accounting system. He may also make
broad performance evaluations of middle and lower management.

Line Function vs. Staff Function

 Line Function – The authority to command or give orders to subordinates. It exercises direct
downward authority over line departments. Managers in line positions are directly involved in
the provision of goods and services
 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. Managers in staff positions supervise activities that support the
organization’s overall mission, but they are only indirectly involved in operational activities.
These include the general counsel, the executive VP for government relations and CFO, among
others.

Standards of Ethical Conduct for Management Accountants


1. Competence
2. Confidentiality
3. Integrity
4. Credibility or Objectivity

Common questions

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Beyond financial oversight, the internal auditor reviews accounting procedures, records, and reports to assess the effectiveness of the organization's financial system. They provide broad performance evaluations, including of middle and lower management, ensuring compliance and suggesting improvements. This role supports management accounting by fostering a culture of continuous improvement, enhancing operational efficiency, and ensuring that management's strategic objectives are being adequately supported by financial controls .

Preparing management accounting reports on a need basis allows for greater flexibility and responsiveness to changing business environments, enabling managers to make timely, informed decisions. This contrasts with the periodic nature of financial accounting, which can delay information flow. The need-based approach supports dynamic strategic planning and operational adjustments, aiding in swift responses to market changes and internal operational demands, thereby enhancing the organization's agility and competitive advantage .

The controlling function involves comparing actual performance with set plans or standards, monitoring these results to determine if the plans are being achieved, and deciding what corrective actions are necessary for any variance between actual and planned performance. Adjusting future plans as needed is also a key activity. These activities ensure effective plan implementation by continuously assessing and realigning processes with strategic objectives, allowing for timely intervention and adjustment to maintain alignment with overall goals .

The distinction is critical because line functions involve direct authority over operations and the active delivery of services, making them crucial for implementing strategic objectives efficiently. Staff functions, providing advisory and specialized support, ensure that line functions have accurate and timely information for decision-making. This separation allows management to maintain clear command structures and accountability while leveraging expert advice to improve operational effectiveness and strategic decision-making in a management accounting context .

Management accountants must adhere to four primary ethical standards: competence, ensuring they possess relevant skills and knowledge; confidentiality, protecting sensitive information; integrity, maintaining honesty in all professional activities; and credibility, ensuring unbiased and accurate reporting. These standards are critical to uphold trust and integrity in financial reporting and decision-making processes, as they ensure that accountants act responsibly, manage sensitive information appropriately, and provide reliable information for decision-making .

Time orientation is crucial because financial accounting primarily deals with historical data to create objective, reliable reports for external stakeholders on a periodic basis. In contrast, managerial accounting is future-oriented, using current and past data to make subjective and relevant decisions quickly for internal use. This difference in time orientation affects how the information is utilized: financial accounting provides a retrospective view necessary for transparency and compliance, while managerial accounting facilitates proactive decision-making to enhance operational efficiency .

The staff function supports the line function by providing specialized service and technical advice, allowing line managers to focus on direct operational activities. In management accounting, staff functions enable line functions by advising on financial data interpretation, cost analysis, and strategic planning. This complementary relationship enhances decision-making efficiency and supports the organization's overall mission by integrating technical expertise into operational processes, allowing the line managers to make informed and strategic decisions .

Financial accounting primarily serves external users, such as investors and creditors, focusing on historical and objective data guided by Generally Accepted Accounting Principles (GAAP). Its reports are financial statements prepared periodically. In contrast, managerial accounting caters to internal users like managers and employees, with reports being both monetary and non-monetary, future-oriented, and based on management's needs rather than GAAP. This structural flexibility allows managerial accounting to support decisions and strategy implementation, while financial accounting ensures compliance and external transparency .

The controller is primarily responsible for the accounting aspect of management control, which includes supervising accounting personnel and preparing managerial and financial accounting reports. In contrast, the treasurer is focused on the custody of funds, including raising capital, safeguarding assets, managing investments, and handling credit and insurance. Holding both roles simultaneously could create conflicts of interest, as one role requires management of financial reporting while the other focuses on the handling and safety of funds, necessitating a division to ensure checks and balances within financial operations .

Cost accounting serves as a subset of both management and financial accounting by providing internal reports for management planning and control, such as cost evaluations and budgeting, while also offering product-costing information essential for financial accounting's external reporting requirements. By doing so, it bridges the gap between management's need for detailed, operational cost analysis and the external need for standardized financial statements, fulfilling unique functions in both strategic internal decision-making and external financial reporting .

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