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COST ACCOUNTING AND CONTROL SYSTEM
OVERVIEW OF COST ACCOUNTING AND MANAGEMENT ACCOUNTING
Module 001
Overview of Cost Accounting and
Management Accounting
LEARNING OBJECTIVES (LO)
After completing this module, the student should be able to:
1. Define the meaning of accounting
2. Familiarize the users of accounting information and uses of cost
accounting information
3. Understand the decision-making processes and the organization
structure in the accounting function
4. Describe the difference between financial accounting, managerial
accounting and cost accounting
5. Illustrate the value chain analysis
6. Knows the ethical guidelines that management accountants should
observe
Course Module
LO No. 1
Accounting is a systematic process of providing financial information of an organization or
unit that is intended to be useful in decision making.
LO No. 2
In an organization, users of financial information are the ones making decisions. In other
words, accounting supplies financial information to users which are referred to as internal
and external users, so they can make informed judgment and sound decisions.
Internal users
These are the users of financial information who working within the company and
use financial information primarily on planning, controlling and making decision for
the betterment of the company’s operations. They are the company’s management
itself – Senior/top-level management, middle level management and low-level
management.
External users
These are the users of financial information who are outside of an organization and
do not directly run its operations but uses financial information of the company to
make decisions particularly if decisions involve investing or granting credit to the
company.
Accounting has different branches that cater specific financial information needed by
decision makers. Of these branches, the three common financials information being
conveyed are the information provided by financial accounting, management or managerial
accounting and cost accounting.
These three branches of accounting give information that is usually being used for
planning, controlling, strategy formulation, leading, and organizing, all of which leads to
decision making.
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COST ACCOUNTING AND CONTROL SYSTEM
OVERVIEW OF COST ACCOUNTING AND MANAGEMENT ACCOUNTING
LO No. 3
Decision making involves the process of selecting the best course of actions among the
given different competing alternatives which roots from the primary pillars of accounting
which are the planning and controlling.
On the planning phase, goals are first set, and its detailed courses of actions are
individually enumerated. This phase helps decision makers to answer the following
questions:

What are the current problems or issues of an organization?

What are the short-term and long-term objectives of an organization that they wish
to achieve?

What would be the alternative courses of actions that an organization should
undertake?
On the other side, controlling involves the process of gathering responses and feedbacks
on the plan being executed through evaluation and monitoring, so as to ensure that goals
are met.
Course Module
Shown below is the cycle of planning and controlling: (excerpted from Managerial Accounting by Brewer et.al,
12th Edition, p.8)
Formulating long and short-term plans
(PLANNING)
Comparing actual to planned
performance
(CONTROLLING)
Decision
Making
Implementing plans
(DIRECTING and
MOTIVATING)
Measuring Performance
(CONTROLLING)
On this context, decision making process, thus, involves the following steps:
1. Identify the problems or issues.
2. Obtain the necessary information in order to solve the current problems or
issues.
3. Anticipate possible outcomes in the future.
4. Lay down different alternative courses of actions and choose the best among
them.
5. Implement the decision
6. Evaluate performance by comparing what was planned to actual outcomes.
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COST ACCOUNTING AND CONTROL SYSTEM
OVERVIEW OF COST ACCOUNTING AND MANAGEMENT ACCOUNTING
The following are the guidelines which can be of help to decision makers:
DECISION MAKING PROCESS
PLANNING
PHASE
• Identify the problems or issues.
• Obtain the necessary information in order to
solve the current problems or issues.
• Anticipate possible outcomes in the future
• Lay down different alternative courses of
actions and choose the best among them
•5. Implement the decision
•6. Evaluate performance by comparing what
was planned to actual outcomes.
CONTROLLING
PHASE
LO No. 4
ACCOUNTING INFORMATION NEEDED
Budgets
Reports on:
 Costs
 Actual vs.
Budgeted
Comparison of Three Common Branches of Accounting (Financial, Managerial and Cost
Accounting)
Financial Accounting
It is an area of accounting which is primarily concerned in recording business
transactions and finally prepares financial statements. Thus, this is usually intended
for external use. Financial accounting adhere strict compliance to Generally
Accepted Accounting Principles (GAAP), the framework of accounting standards,
rules and procedures.
Course Module
Managerial Accounting
Managerial or management accounting is used to gather both the financial and
nonfinancial information needed by internal users. It commonly addresses
individual or divisional concerns rather than the organization as a whole.
This area of accounting measures, analyzes, and reports financial and nonfinancial
information that help managers make decisions to fulfil the goals of an organization.
Managers use management accounting information to choose and implement
strategies.
Primary users
Purpose
FINANCIAL ACCOUNTING
MANAGERIAL ACCOUNTING
External
Internal
of Conveys
information
financial Helps managers to make decisions
information
to
banks,
investors, to fulfill an organization’s objectives
government
regulatory
agencies
and
other outside parties
Scope
of Entire (whole) organization
Divisions/Departments/Segments
of Past-oriented
Future-oriented
of Must be:
May be:
information
Emphasis
information
Characteristics
information
Overriding criteria

Historical data

Current data

Quantitative

Forecasted data

Monetary

Quantitative or qualitative

Verifiable

Monetary or nonmonetary

Timely
Generally
Accepted Does not conform with GAAP as
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COST ACCOUNTING AND CONTROL SYSTEM
OVERVIEW OF COST ACCOUNTING AND MANAGEMENT ACCOUNTING
Accounting
Principles long as it is relevant to management
(GAAP)
decision making and complies with
standards set by the management
Recordkeeping
Formal
Independent
Financial reports must be Does not need to be audited by an
examination
Combination of formal and informal
and audited by an independent independent CPA
verification process
Certified Public Accountant
(CPA)
Cost Accounting
It is an intersection between financial and managerial accounting. It captures
company's costs of production by assessing the costs incurred to each step of
production.
Cost accounting information is needed and used by both financial and managerial
accounting.
External parties and management uses product cost information for investment
decision and, planning and controlling.
Course Module
LO No. 5
Uses of Cost Accounting Data
1. It is being used to determining product costs to help management in
making the following decisions:

What would be the selling price of a product

What would be the bestselling price to meet competition in the
market

Given the costs data, what would be the profitability of the
company
2. It also helps management in planning and controlling operations
particularly those decisions involving costs of materials, labour and other
factors needed in the production
LO No. 6
Value Chain
It is a cycle of processes in an organization. Taking the side of a business organization, it
functions as an order of business functions namely; research and development, design of
products, services and processes, production, marketing, distribution and customer
service.
Each of those mentioned business functions is vital in an organization’s success in the
business industry since it caters the essentials of satisfying customers.
Accordingly, through this value chain, planning and controlling activities in the
organization is to be managed on a sequential order of the business functions, as depicted
below:(excerpted from Cost Accounting by Horngren et.al, 13th Edition, p.7)
Research and
Development
Design of
products,
services and
processes
Production
Marketing
Distribution
Customer
service
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COST ACCOUNTING AND CONTROL SYSTEM
OVERVIEW OF COST ACCOUNTING AND MANAGEMENT ACCOUNTING
On the financial side, accountants’ top most concern on this value chain are the costs being
incurred on each business function, since the goal is always to reduce costs but improve
efficiency.
LO No. 7
Organization Structure in the Accounting Function
Sample illustration of an organizational chart
Board of Directors
President / CEO
Chief Operating Officer
(COO)
Production
Marketing
Chief Financial Officer
(CFO)
Distribution
Controller/
Accounting
Treasury
Line and Staff Relationships
Line Position
It is the position in the organization structure wherein the personnel assigned are directly
involved in the responsibility of achieving the goals of an organization. This position is
usually assigned to the production, marketing and distribution management.
Course Module
Purchasing
Staff Position
Personnel involvement in achieving the goals of an organization is only indirect. This
position provides assistance to the line position but has no controlling authority to
personnel under the line positions.
Chief Financial Officer
This is an executive position wherein the personnel assigned is responsible in overseeing
the overall financial operations of the company. This top management position is
responsible in providing financial information necessary in planning and controlling
activities of the organization.
LO No. 8
Ethical Guidelines that Management Accountants Should Observe
The Institute of Management Accountants (IMA) of the United States has adopted an ethical
code called Statement of Ethical Professional Practice that describes the ethical
responsibilities of management accountants
(NOTE: excerpted from Introduction to Managerial Accounting by
Brewer et.al, 7th Edition, p.9)
Institute of Management Accountants (IMA), the association of accountants and financial
professionals in business, is one of the largest and most respected associations focused
exclusively on advancing the management accounting profession.
Globally, IMA supports the profession through research, the CMA® (Certified Management
Accountant) program, continuing education, networking, and advocacy of the highest
ethical business practices.
IMA has a global network of more than 85,000 members in 140 countries and 300
professional and student chapters. Headquartered in Montvale, N.J., USA, IMA provides
localized services through its four global regions: The Americas, Asia/Pacific, Europe, and
Middle East/ India.
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COST ACCOUNTING AND CONTROL SYSTEM
OVERVIEW OF COST ACCOUNTING AND MANAGEMENT ACCOUNTING
IMA has been committed to advocating the highest standards of ethical business
practices—both for its members and the profession at large—since the organization was
founded in 1919. In the early 1980s, IMA took a bold leadership role in the area of ethics by
developing its first written code of ethics: Standards of Ethical Conduct of Management
Accountants.
In 2005, in the wake of global financial scandals and an increasing need for more direct
ethical guidelines, IMA issued new guidance to better reflect the ethical climate of the time.
The result was the IMA Statement of Ethical Professional Practice, which required each IMA
member to be committed to the highest ethical behaviour.
After considering the many changes in the business and regulatory environment, including
the globalization of commerce and the management accounting profession, IMA
determined to issue a revised Statement in 2017, which is published here as a Statement on
Management Accounting. More concise and simpler to understand and apply, this updated
version more fully reflects the global scope of management accounting. It also requires IMA
members to contribute to a positive ethical culture in their organization and to place
integrity of the profession above personal interests. These requirements recognize the
need for members to take an active role in ensuring their organization has a strong, open,
and positive ethical culture.
Course Module
IMA Statement of Ethical Professional Practice
Effective July 1, 2017
Members of IMA shall behave ethically. A commitment to ethical professional practice
includes overarching principles that express our values and standards that guide member
conduct.
Principles
IMA’s overarching ethical principles include: Honesty, Fairness, Objectivity, and
Responsibility. Members shall act in accordance with these principles and shall encourage
others within their organizations to adhere to them.
Standards
IMA members have a responsibility to comply with and uphold the standards of
Competence, Confidentiality, Integrity, and Credibility. Failure to comply may result in
disciplinary action.
I.
COMPETENCE
1. Maintain an appropriate level of professional leadership and expertise by
enhancing knowledge and skills.
2. Perform professional duties in accordance with relevant laws, regulations, and
technical standards.
3. Provide decision support information and recommendations that are accurate,
clear, concise, and timely. Recognize and help manage risk.
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COST ACCOUNTING AND CONTROL SYSTEM
OVERVIEW OF COST ACCOUNTING AND MANAGEMENT ACCOUNTING
II.
CONFIDENTIALITY
1. Keep information confidential except when disclosure is authorized or legally
required.
2. Inform all relevant parties regarding appropriate use of confidential
information. Monitor to ensure compliance.
3. Refrain from using confidential information for unethical or illegal advantage.
III.
INTEGRITY
1. Mitigate actual conflicts of interest. Regularly communicate with business
associates to avoid apparent conflicts of interest. Advise all parties of any
potential conflicts of interest.
2. Refrain from engaging in any conduct that would prejudice carrying out duties
ethically.
3. Abstain from engaging in or supporting any activity that might discredit the
profession.
4. Contribute to a positive ethical culture and place integrity of the profession
above personal interests.
Course Module
IV.
CREDIBILITY
1. Communicate information fairly and objectively.
2. Provide all relevant information that could reasonably be expected to influence
an intended user’s understanding of the reports, analyses, or recommendations.
3. Report any delays or deficiencies in information, timeliness, processing, or
internal controls in conformance with organization policy and/or applicable law.
4. Communicate professional limitations or other constraints that would preclude
responsible judgment or successful performance of an activity
Resolving Ethical Issues
In applying the Standards of Ethical Professional Practice, the member may encounter
unethical issues or behaviour. In these situations, the member should not ignore them, but
rather should actively seek resolution of the issue. In determining which steps to follow,
the member should consider all risks involved and whether protections exist against
retaliation.
When faced with unethical issues, the member should follow the established policies of his
or her organization, including use of an anonymous reporting system if available. If the
organization does not have established policies, the member should consider the following
courses of action:

The resolution process could include a discussion with the member’s immediate
supervisor. If the supervisor appears to be involved, the issue could be presented to
the next level of management.
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COST ACCOUNTING AND CONTROL SYSTEM
OVERVIEW OF COST ACCOUNTING AND MANAGEMENT ACCOUNTING

IMA offers an anonymous helpline that the member may call to request how key
elements of the IMA Statement of Ethical Professional Practice could be applied to
the ethical issue.

The member should consider consulting his or her own attorney to learn of any
legal obligations, rights, and risks concerning the issue.
If resolution efforts are not successful, the member may wish to consider disassociating
from the organization.
End of Module 1
Course Module
References and Supplementary Materials
Books and Journals
1. Brewer P., Garrison, R., and Eric Noreen (2016). Introduction to Managerial
accounting (7th ed). New York City: Mc Graw Hill Eudcation.
2. Horngren, C. T., Datar, S. M., and Madhav V. Rajan (2018). Cost Accounting: A
Managerial Emphasis (16th ed). New Jersey: Prentice Hall.
Online Supplementary Reading Materials
1. IMA
Statement
of
Ethical
Professional
Practice;
https://www.imanet.org//media/b6fbeeb74d964e6c9fe654c48456e6
1f.ashx; June 15, 2018