2026
MANAGERIAL ECONOMICS
THEORY SUMMARY (EXAMPLES IN SEPARATE BUNDLE)
KOEN HANEGREEFS
VUB
,Contents
Right-click the table below and choose "Update Field" to build the page list.
Contents ............................................................................................................................................................... 0
Chapter 1: Managerial Accounting, the Business Organisation and Ethics ...................................................... 2
Chapter 2: Cost Terms, Concepts and Classifications ..................................................................................... 12
Chapter 3: Cost Behaviour .............................................................................................................................. 16
Chapter 4: Cost Accounting and Cost Allocation ............................................................................................ 22
Chapter 5: Job-Order Costing ......................................................................................................................... 29
Chapter 6: Process Costing ............................................................................................................................. 33
Chapter 7: Activity-Based Costing (ABC) ......................................................................................................... 36
Chapter 8: Cost-Volume-Profit (CVP) Relationships ....................................................................................... 41
Chapter 9: Variable Costing and Absorption Costing...................................................................................... 47
Chapter 10: Relevant Costs for Decision Making ............................................................................................ 52
Chapter 11: Budgets and the Master Budget ................................................................................................. 65
Chapter 12: Flexible Budgets and Variance Analysis ...................................................................................... 70
Master Formula Sheet ........................................................................................................................................ 77
Managerial Accounting: Course Summary Page 1 of 77
,Chapter 1: Managerial Accounting, the Business Organisation and Ethics
Theory in depth: concepts, the why & the method
Managerial accounting serves internal managers; financial accounting serves external users (investors, banks,
regulators). The core principle is relevance vs. precision: financial accounting must be GAAP-compliant,
audited, and historically precise because outsiders need comparability. Management accounting can use any
format, any estimates, and even non-financial data (defect rates, customer scores) because managers need
the most useful information right now, not the most standardized.
The planning and control cycle is how accounting information connects goals to results. Managers set targets
(planning), operations run, the accounting system records what actually happened (controlling), and actual
results are compared to the budget. The gap is a variance, U (Unfavorable) when costs exceed budget or
revenue falls short; F (Favorable) when costs are below budget or revenue exceeds it. Management by
exception says investigate only variances that are large in both absolute amount and percentage, managers
have limited time and should focus where action is needed.
The value chain has six stages: R&D → Design → Production → Marketing → Distribution → Customer
Service. Costs arise at every stage, not just production. When setting a minimum selling price, all six stages
must be covered.
The IMA ethical standards are Competence, Confidentiality, Integrity, and Credibility. When an exam scenario
describes an ethical dilemma, identify which standard is violated, then apply the correct response: refuse,
escalate internally (supervisor → audit committee → board), and only consult legal counsel or resign as a last
resort. Never go outside the organization first. Sarbanes-Oxley (SOX) requires CEOs and CFOs to personally
certify financial statements and assess internal controls, with criminal penalties for knowing falsification.
Common traps:
For a cost line, Actual < Budget = Favorable (spending less is good). Students often mark it Unfavorable
because the number is smaller. Wrong. Always ask: is this a cost or a revenue line?
Management accounting is not required to follow GAAP and is not audited. If an exercise asks whether a
management report must be GAAP-compliant, the answer is no.
Accounting is a staff function, not a line function. The controller has no operating authority over
production; the production manager does.
Credibility ≠ Integrity. Credibility is violated by presenting incomplete or biased information (omitting key
uncertainties). Integrity is violated by falsifying data or acting in a conflict of interest.
Financial vs. managerial accounting
Financial accounting serves external decision-makers, shareholders, lenders, suppliers, tax authorities,
regulators. Its product is the set of four financial statements (income statement, statement of stockholders'
equity, balance sheet, statement of cash flows), prepared to GAAP/IFRS, audited, historical and precise.
Managerial (management) accounting serves internal decision-makers, the managers who run the business.
It is whatever format helps them decide: forward-looking, timely, often non-financial, and not bound by
GAAP. The guiding trade-off is relevance over precision, a roughly-right number today beats a perfectly-right
number next month.
Feature Financial accounting Managerial accounting
Primary users External (investors, banks, tax) Internal (managers)
Rules Must follow GAAP / IFRS No imposed rules: usefulness decides
Time focus Historical, verifiable Future-oriented and current
Emphasis Precision, objectivity Relevance, timeliness
Scope Whole company Segments, products, activities
Status Mandatory, audited Optional, internal only
Managerial Accounting: Course Summary Page 2 of 77
,Exam tip A favourite multiple-choice trap: managerial accounting is not required to follow GAAP and may use
non-financial measures; financial accounting is GAAP-bound and audited.
The roles of accounting information
Accounting information supports three things: decision making (routine and non-routine), planning and
controlling, and the accounting system that records and reports.
Planning: choosing objectives and the means to reach them, over the long and short term.
Controlling: implementing plans, then comparing actual results against the expected (budgeted) results
and acting on the differences.
The management cycle runs continuously: formulate plans → implement and direct → measure performance
→ compare actual against planned → feed the lessons back into the next decision. The accountant's tasks fall
into three types, a favourite classification question:
Task type Purpose Examples (from the Chapter 1
homework)
Scorekeeping Record and report what happened Preparing a depreciation schedule; a
scrap report; the monthly European-
sales statement
Attention-directing Flag where actual differs from expected Interpreting why a production schedule
was missed; explaining a performance
report; interpreting variances
Problem-solving Compare alternatives for a decision Costing the impact of new equipment;
comparing two control systems;
deciding whether to make A380 parts
These map onto the cycle: problem-solving supports planning, attention-directing supports controlling, and
scorekeeping supports measuring. A single task can be all three, preparing a hospital department's budget
involves scorekeeping, attention-directing and problem-solving at once.
Favourable (F) = actual better than budget (revenue higher or cost lower). Unfavourable (U) = actual worse.
Management by exception means spending attention only on the items that differ materially, here the
£2,500 U on ingredients, which alone explains the profit shortfall.
Two design criteria sit behind any accounting system: a cost-benefit balance (the system must be worth more
than it costs) and behavioural implications (what gets measured shapes how employees act).
Product life cycle and the value chain
Every product moves through a life cycle, development → introduction → growth → maturity → phase-out.
Pricing has to recover the development and phase-out costs, not just the cost of making each unit, which is
why firms try to shorten the no-revenue development phase.
The value chain is the sequence of functions that add value, and accounting feeds every stage, costs are
incurred everywhere, not only in production:
Organisational structure and accounting's place in it
Stockholders elect the board of directors, which appoints management and the external auditor. The crucial
distinction is line vs. staff:
Line roles are directly responsible for making and selling the product and hold operating authority over
those activities, production and sales managers, and ultimately the CEO.
Staff roles advise and support the line and hold no operating authority, accounting, HR, legal,
engineering, risk management. So accounting is a staff function.
Managerial Accounting: Course Summary Page 3 of 77
,Line vs. staff, roles and examples (as drilled in the Chapter 1 pre-test, E1-34)
Role Line / staff Value-chain function (or general
support)
Chief executive officer Line General management → Support (not
one specific function)
Regional / zonal sales manager Line Marketing
Plant or production manager, line Line Production
supervisor
Chief engineer Staff Support (advises the line)
Head of human resources Staff Support
Accountant / controller Staff Support
Enterprise-risk / internal-audit analyst Staff Support
Legal counsel Staff Support
Exam tip Two traps from the pre-test: the CEO is line (ultimate operating authority) even though their value-
chain contribution is general support, not one function; and a sales manager is line but sits within the
marketing function. Everyone who only advises, engineer, HR, accountant, risk analyst, lawyer, is
staff/support.
The CFO (chief financial officer) oversees two roles:
Controller: the chief management accountant, internally focused: planning for control, reporting and
interpreting results, evaluating and consulting, tax administration, government reporting, asset protection
and economic appraisal.
Treasurer: focused on financial assets and outside financing: raising capital, investor relations, short-term
financing, banking and custody, credit and collections, investments and risk management.
The qualifications mirror the internal/external split: the CMA (Certified Management Accountant) is the
internal counterpart to the CPA (Certified Public Accountant), who audits the external statements.
The changing role and professional ethics
Three trends have reshaped the management accountant's job: the spread of management accounting
beyond manufacturing into service and non-profit organisations (where labour dominates, output is hard to
measure, and services can't be stored); a faster, more global environment with integrated ERP systems; and
continuous business-process management that changes costs directly. The accountant now spends less time
compiling standard reports and more time interpreting them, effectively an internal consultant.
Because outsiders cannot see how good the numbers really are, they must trust the preparer, which is why
ethics are central. The IMA standards are competence, confidentiality, integrity and credibility. Sarbanes-
Oxley (SOX) is the regulatory response to the scandals that broke that trust, holding executives accountable
and tightening internal controls.
Exam tip Be ready to name which standard a scenario breaches: leaking inside information = confidentiality;
falsifying reports or a conflict of interest = integrity; acting beyond your skill = competence; presenting
misleading information = credibility.
Chapter 1 in practice: homework & pre-test
Chapter 1 is examined almost entirely through classification questions. Beyond line-vs-staff and the three task
types above, three more recur:
Managerial Accounting: Course Summary Page 4 of 77
,(a) Tag each feature as financial or management accounting. The wording the pre-test uses:
Financial accounting Management accounting
Regulated by standards / GAAP Highly flexible
Serves external users Serves internal users; insights on internal control
A posterior (after-the-fact) assessment only Detailed and customised reports
Precise, verifiable Behavioural impact is primary; goes beyond financial
transactions; includes budgets
(b) Service organisations. Examples: public accounting, insurance, transport, banks, law firms. They tend to be
labour-intensive, with outputs that are hard to define and measure, and inputs and outputs that cannot be
stored.
(c) Why (and whether) to change an accounting system, the cost-benefit balance. A new or more detailed
system is worth adopting only when the benefit of better decisions exceeds the added cost of collecting
data, preparing reports, and training people to use them. Firms like Boeing change systems when their
competitive environment and processes change so much that the old system no longer produces competitive
cost information; the more money at stake, the more attention (and accountability) the system deserves.
Budgeted revenue was £291,200 (a 12% rise over £260,000); the firm actually achieved the figures below. Net
= Revenues − Advertising cost; label each variance F or U.
Profit fell even though new products were added, because costs rose faster than revenue. Plausible reasons
the requirement asks you to list: raw-material costs for the new products were higher than budgeted;
customer satisfaction was low, causing unplanned replacement costs; and uncontrollable external factors
(operating-cost rises, weather, the economy) decreased efficiency.
(d) Applying the ethics standards (post-test). Match the situation to the standard: withholding a confidential
geologist's report = confidentiality; refusing a gift or invitation that would impair objectivity = integrity;
researching the tax law before acting = competence (with integrity). When standards seem to conflict,
confidentiality gives way only when there is a legal or credibility duty to disclose.
(e) Behavioural implications (post-test). Line managers stop trusting accounting when budgets are not taken
seriously, when the controller's office only appears once costs are over budget (acting as “police”), and when
reports arrive late and are not specific enough. The fix is behavioural, not numerical: win cooperation, show
managers how the information helps them decide, and change how reports are presented and used.
Chapter 1: formula & fact recap
Item Key point
Relevance vs. precision Managerial favours relevant/timely; financial favours
precise/auditable
Variance Actual − Budget; F if it raises income, U if it lowers it
Line vs. staff Line = operating authority; staff (incl. accounting) = advisory
Controller vs. treasurer Controller = internal/scorekeeping; treasurer =
financing/assets
Ethics standards Competence, Confidentiality, Integrity, Credibility (+ SOX)
Further essentials from the textbook
Customer Focus at the Centre of the Value Chain
Concept. The textbook places "Customer Focus" at the literal centre of its value-chain diagram (Exhibit 1-5, p.
29). Every one of the six value-chain functions should orient toward creating value for the customer. Sam
Walton's principle: "There is only one boss, the customer. Customers can fire everybody in the company from
the chairman on down, simply by spending their money somewhere else."
Managerial Accounting: Course Summary Page 5 of 77
,Why it matters for exams. A question may ask which principle sits at the heart of the value chain, or why
companies perform value-chain activities. The textbook answer is: to create value for the customer.
Exam trap. Students list the six stages and forget that all six are means to the same end: satisfying the
customer. "Customer focus" is the organising principle, not a seventh stage.
Controller's Full List of Seven Duties
The MD note mentions only the first three controllership functions. Exam exercises classify activities across all
seven. The authoritative source is Financial Executives International.
Controllership (seven duties):
1. Planning for control
2. Reporting and interpreting
3. Evaluating and consulting
4. Tax administration
5. Government reporting
6. Protection of assets
7. Economic appraisal
Treasurership (seven duties, for comparison):
1. Provision of capital
2. Investor relations
3. Short-term financing
4. Banking and custody
5. Credit management and cash collections
6. Investments
7. Risk management (insurance)
Exam classification guide. "Preparing tax returns" = Controller (duty 4). "Arranging insurance coverage" =
Treasurer (duty 7). "Meeting with Wall Street analysts" = Treasurer (duty 2). "Advising on the least costly
alternative" = Controller (duty 3). "Protecting physical assets" = Controller (duty 6). "Arranging short-term
financing" = Treasurer (duty 3).
Professional Accounting Qualifications Beyond CPA/CMA
The textbook names three globally recognised entry routes into accounting alongside CPA and CMA:
• ACA (Institute of Chartered Accountants): United Kingdom and Ireland focus; three to five years.
• ACCA (Association of Chartered Certified Accountants): globally recognised; three to five years.
• CIMA (Chartered Institute of Management Accountants): the management accounting route; three to five
years.
Exam tip. CIMA is the management-accounting-focused qualification in the UK/global context, just as CMA is
in the US context. A question asking for the management accounting counterpart to a chartered accountancy
qualification expects CIMA (global) or CMA (US).
The Four Business Trends (Exact Textbook Taxonomy)
The textbook (Objective 6, p. 33) names exactly four major trends. Present them as a numbered list because
exam questions may ask "what are the four trends" or identify which of five options is not a textbook trend.
The four trends influencing management accounting:
1. Shift from a manufacturing-based to a service-based economy
2. Increased global competition
3. Advances in technology (covering e-commerce, ERP, XBRL, Big Data)
4. Changes in business process management (covering reengineering, JIT, lean, TQM, Six Sigma)
Managerial Accounting: Course Summary Page 6 of 77
,Global competition (trend 2) in more detail. Many countries have lowered international trade barriers
(tariffs, duties) and deregulated industries. The result has been a worldwide shift in economic power. To
compete, companies redesign accounting systems to provide more accurate and timely cost information,
enabling more agile and responsive decision making.
Exam trap. The textbook is precise: exactly these four categories. "Sustainability" and "government
regulation" are not in the textbook's four-trend list for Chapter 1 (they appear later). Do not add a fifth
category.
Technology Sub-topics: e-Commerce, ERP, XBRL, and Big Data
Electronic commerce (e-commerce). Conducting business online.
• B2C (business-to-consumer): company sells directly to end consumers online.
• B2B (business-to-business): company transacts with other companies online. B2B creates large savings;
procurement processing costs can fall by as much as 70% through automation. B2B activity is growing
especially fast.
ERP systems (enterprise resource planning). Integrated information systems that support all functional areas
of a company. Accounting is one part of an ERP. Examples: SAP, Oracle JD Edwards EnterpriseOne, Microsoft
Dynamics, Sage Group. Key point: ERP integrates accounting with customer relationship management, supply-
chain management, and all other functions in a single system.
XBRL (eXtensible Business Reporting Language). An XML-based accounting language that communicates
financial information electronically by tagging data with standardised labels. XBRL makes cross-company
comparisons much simpler and reduces transmission errors. It influences both internal and external reporting.
Big Data and analytics. An IMA survey found 45% of companies now take a "strong" or "very strong" data-
centric approach to information technology. Starbucks uses data intelligence (via Esri's Atlas tool) to choose
store locations, design menus, and run targeted promotions. Management accountants spend less time
compiling standard reports and more time analysing data, functioning as internal consultants.
Exam traps.
• ERP vs. XBRL: ERP is an operational system integrating all functions; XBRL is a reporting language for
communicating financial data electronically. They are different things.
• B2B vs. B2C: B2B is between businesses; B2C is business to consumer. The textbook emphasises B2B for
cost savings.
Business Process Management Sub-topics
All five items below fall under the textbook's fourth trend: "Changes in Business Process Management."
Business process reengineering. The fundamental rethinking and radical redesign of business processes to
improve performance in areas such as cost, quality, service, and speed. Involves three supporting
technologies:
• CAD (computer-aided design): uses computer technology to design products that can be manufactured
efficiently.
• CAM (computer-aided manufacturing): uses computer-based software to direct and control production
equipment.
• CIM (computer-integrated manufacturing): combines CAD, CAM, robots, and computer-controlled
machines. CIM replaces most assembly-line labour with robots and computerised machines; the cost
structure shifts from labour-intensive to capital-intensive.
JIT (just-in-time) philosophy. Originally an inventory system: materials arrive just as needed for production;
finished goods are made just in time for shipment. Zero or minimal inventory is held. JIT originated in
Japanese companies such as Toyota and Kawasaki. It expanded into a broader management philosophy of
eliminating waste and synchronising the whole supply chain. COVID-19 exposed the key limitation: when
supply chains break (lockdowns, transport disruptions, quarantines), zero-buffer companies cannot cope and
shelves go empty. The textbook explicitly discusses this vulnerability (p. 34-35).
Managerial Accounting: Course Summary Page 7 of 77
,Lean manufacturing. Applies continuous process improvements to eliminate waste from the entire
enterprise, not just the factory floor. Example: Matsushita Electric's Saga plant reduced production time from
2.5 days to 40 minutes by replacing conveyor belts with robot clusters.
TQM (total quality management). An approach to quality that focuses on prevention of defects and on
customer satisfaction, rather than on inspection after the fact. Minimises total costs by maximising quality.
TQM builds quality in from the start.
Six Sigma. A data-driven, disciplined continuous process-improvement effort designed to eliminate defects in
any process. Pioneered by Motorola in the 1980s; adopted by GE, Samsung, Amazon, and others; used by
about 35% of major US companies. The aim: internal processes must run as efficiently as possible, with
defects reduced toward zero through statistical measurement. Six Sigma has expanded beyond manufacturing
into staff functions such as legal departments.
Why these matter for accounting. All five business process changes affect costs directly. When companies
change production processes, accountants: (a) predict anticipated cost savings before the change; (b)
measure actual cost savings after the change; (c) develop product costs for the new production environment.
If the system was built for labour-intensive production, it must be redesigned when CIM replaces labour with
equipment.
Exam distinctions.
• JIT focuses on inventory and timing of supply; lean focuses on eliminating all forms of waste across the
enterprise.
• TQM is a quality philosophy (prevention, customer focus); Six Sigma is a measurement and improvement
methodology (data-driven, defect reduction toward a statistical near-zero level).
• Reengineering is radical redesign; lean is continuous incremental improvement.
International Code of Ethics for Professional Accountants (IESBA/IFAC)
The textbook presents two ethics frameworks in Chapter 1. Most of the summary covers the IMA framework
(four standards). The textbook also teaches the IESBA/IFAC International Code, which has five fundamental
principles.
The five IESBA/IFAC fundamental principles:
Principle Core obligation
Integrity Be straightforward and honest in all professional and
business relationships.
Objectivity Exercise professional judgment without being compromised
by bias, conflict of interest, or undue influence of individuals,
organisations, technology, or other factors.
Professional Competence and Due Care Attain and maintain professional knowledge and skill at the
required level; act diligently in accordance with applicable
technical and professional standards.
Confidentiality Respect the confidentiality of information acquired as a
result of professional and business relationships.
Professional Behavior Comply with relevant laws and regulations; behave in a
manner consistent with the profession's responsibility to act
in the public interest; avoid conduct that might discredit the
profession.
Managerial Accounting: Course Summary Page 8 of 77
, Structure of the code. Three parts:
• Part 1: Complying with the Code, Fundamental Principles and Conceptual Framework. Includes a
conceptual framework to identify, evaluate, and address threats to compliance.
• Part 2: Professional Accountants in Business. Seven areas: conflict of interest; preparation and
presentation of information; acting with sufficient expertise; financial interests; compensation linked to
financial reporting; inducements including gifts and hospitality; responding to non-compliance with laws
and regulations and pressure to breach principles.
• Part 3: Professional Accountants in Public Practice. Six areas similar to Part 2 but for public-practice
context.
Distinction from IMA framework.
• IMA: four standards (Competence, Confidentiality, Integrity, Credibility).
• IESBA/IFAC: five principles (Integrity, Objectivity, Professional Competence and Due Care, Confidentiality,
Professional Behavior).
• "Objectivity" and "Professional Behavior" appear in IESBA but not as IMA labels. "Credibility" is an IMA
label with no exact IESBA counterpart; it maps roughly to Objectivity and Professional Behavior combined.
Resolution under the IESBA Code. When complying with one principle conflicts with another, consult
(anonymously if necessary): others within the firm; those charged with governance; a professional body; a
regulatory body; or legal counsel. Consultation does not relieve the accountant of responsibility. Document
the issue, discussions, decisions, and rationale.
Exam traps.
• "How many fundamental principles does the International Code have?" The answer is five, not four.
• "Name the five principles." Students who only memorised the IMA four will miss Objectivity and
Professional Behavior, or will write "Credibility" instead.
• Always check whether the question says "IMA Standards" (four) or "International Code/IESBA" (five).
The textbook's worked example (Summary Problem, p. 40-41: Yang Electronics / Chua). CFO Martinez asks
Chua to delete from his board report all mention of a faulty component causing high warranty costs. This
violates Professional Competence and Due Care (the report is not complete and clear); Integrity (the revision
subverts organisational objectives for personal ones; management accountants must communicate
unfavourable as well as favourable information); and Professional Behavior (the report would not disclose all
relevant information the board needs). Chua's proper response: inform Martinez of his misgivings; if not
resolved, inform her he will take the issue to the company president and, if necessary, the board. He must not
discuss the matter outside YEC, as that would violate Confidentiality.
SOX Requirement on Codes of Ethics for Senior Financial Officers
The Sarbanes-Oxley Act of 2002 requires companies to disclose whether they have adopted a code of ethics
for senior financial officers (the principal financial officer, comptroller, or principal accounting officer). If no
such code exists, the reason must be disclosed publicly.
Why this matters. SOX drove the formalisation of corporate codes of conduct beyond just certification of
financial statements. It added a disclosure obligation about ethics infrastructure.
Key nuance. Having a code is necessary but not sufficient. Enron had a code specifying "business is to be
conducted in compliance with the highest professional and ethical standards" and still failed catastrophically.
The real determinant is corporate culture and top-management behaviour.
Code of Conduct: Definition and Why Insufficient Alone
Definition. A code of conduct is a document specifying the ethical standards of an organisation. It is the
centrepiece of most ethics programmes.
Typical contents. Maintaining confidentiality; not accepting personal gifts from stakeholders; avoiding conflict
of interest; complying with laws; not using organisation property for personal use; reporting illegal or
questionable activity; avoiding racial or sexual discrimination.
Managerial Accounting: Course Summary Page 9 of 77
MANAGERIAL ECONOMICS
THEORY SUMMARY (EXAMPLES IN SEPARATE BUNDLE)
KOEN HANEGREEFS
VUB
,Contents
Right-click the table below and choose "Update Field" to build the page list.
Contents ............................................................................................................................................................... 0
Chapter 1: Managerial Accounting, the Business Organisation and Ethics ...................................................... 2
Chapter 2: Cost Terms, Concepts and Classifications ..................................................................................... 12
Chapter 3: Cost Behaviour .............................................................................................................................. 16
Chapter 4: Cost Accounting and Cost Allocation ............................................................................................ 22
Chapter 5: Job-Order Costing ......................................................................................................................... 29
Chapter 6: Process Costing ............................................................................................................................. 33
Chapter 7: Activity-Based Costing (ABC) ......................................................................................................... 36
Chapter 8: Cost-Volume-Profit (CVP) Relationships ....................................................................................... 41
Chapter 9: Variable Costing and Absorption Costing...................................................................................... 47
Chapter 10: Relevant Costs for Decision Making ............................................................................................ 52
Chapter 11: Budgets and the Master Budget ................................................................................................. 65
Chapter 12: Flexible Budgets and Variance Analysis ...................................................................................... 70
Master Formula Sheet ........................................................................................................................................ 77
Managerial Accounting: Course Summary Page 1 of 77
,Chapter 1: Managerial Accounting, the Business Organisation and Ethics
Theory in depth: concepts, the why & the method
Managerial accounting serves internal managers; financial accounting serves external users (investors, banks,
regulators). The core principle is relevance vs. precision: financial accounting must be GAAP-compliant,
audited, and historically precise because outsiders need comparability. Management accounting can use any
format, any estimates, and even non-financial data (defect rates, customer scores) because managers need
the most useful information right now, not the most standardized.
The planning and control cycle is how accounting information connects goals to results. Managers set targets
(planning), operations run, the accounting system records what actually happened (controlling), and actual
results are compared to the budget. The gap is a variance, U (Unfavorable) when costs exceed budget or
revenue falls short; F (Favorable) when costs are below budget or revenue exceeds it. Management by
exception says investigate only variances that are large in both absolute amount and percentage, managers
have limited time and should focus where action is needed.
The value chain has six stages: R&D → Design → Production → Marketing → Distribution → Customer
Service. Costs arise at every stage, not just production. When setting a minimum selling price, all six stages
must be covered.
The IMA ethical standards are Competence, Confidentiality, Integrity, and Credibility. When an exam scenario
describes an ethical dilemma, identify which standard is violated, then apply the correct response: refuse,
escalate internally (supervisor → audit committee → board), and only consult legal counsel or resign as a last
resort. Never go outside the organization first. Sarbanes-Oxley (SOX) requires CEOs and CFOs to personally
certify financial statements and assess internal controls, with criminal penalties for knowing falsification.
Common traps:
For a cost line, Actual < Budget = Favorable (spending less is good). Students often mark it Unfavorable
because the number is smaller. Wrong. Always ask: is this a cost or a revenue line?
Management accounting is not required to follow GAAP and is not audited. If an exercise asks whether a
management report must be GAAP-compliant, the answer is no.
Accounting is a staff function, not a line function. The controller has no operating authority over
production; the production manager does.
Credibility ≠ Integrity. Credibility is violated by presenting incomplete or biased information (omitting key
uncertainties). Integrity is violated by falsifying data or acting in a conflict of interest.
Financial vs. managerial accounting
Financial accounting serves external decision-makers, shareholders, lenders, suppliers, tax authorities,
regulators. Its product is the set of four financial statements (income statement, statement of stockholders'
equity, balance sheet, statement of cash flows), prepared to GAAP/IFRS, audited, historical and precise.
Managerial (management) accounting serves internal decision-makers, the managers who run the business.
It is whatever format helps them decide: forward-looking, timely, often non-financial, and not bound by
GAAP. The guiding trade-off is relevance over precision, a roughly-right number today beats a perfectly-right
number next month.
Feature Financial accounting Managerial accounting
Primary users External (investors, banks, tax) Internal (managers)
Rules Must follow GAAP / IFRS No imposed rules: usefulness decides
Time focus Historical, verifiable Future-oriented and current
Emphasis Precision, objectivity Relevance, timeliness
Scope Whole company Segments, products, activities
Status Mandatory, audited Optional, internal only
Managerial Accounting: Course Summary Page 2 of 77
,Exam tip A favourite multiple-choice trap: managerial accounting is not required to follow GAAP and may use
non-financial measures; financial accounting is GAAP-bound and audited.
The roles of accounting information
Accounting information supports three things: decision making (routine and non-routine), planning and
controlling, and the accounting system that records and reports.
Planning: choosing objectives and the means to reach them, over the long and short term.
Controlling: implementing plans, then comparing actual results against the expected (budgeted) results
and acting on the differences.
The management cycle runs continuously: formulate plans → implement and direct → measure performance
→ compare actual against planned → feed the lessons back into the next decision. The accountant's tasks fall
into three types, a favourite classification question:
Task type Purpose Examples (from the Chapter 1
homework)
Scorekeeping Record and report what happened Preparing a depreciation schedule; a
scrap report; the monthly European-
sales statement
Attention-directing Flag where actual differs from expected Interpreting why a production schedule
was missed; explaining a performance
report; interpreting variances
Problem-solving Compare alternatives for a decision Costing the impact of new equipment;
comparing two control systems;
deciding whether to make A380 parts
These map onto the cycle: problem-solving supports planning, attention-directing supports controlling, and
scorekeeping supports measuring. A single task can be all three, preparing a hospital department's budget
involves scorekeeping, attention-directing and problem-solving at once.
Favourable (F) = actual better than budget (revenue higher or cost lower). Unfavourable (U) = actual worse.
Management by exception means spending attention only on the items that differ materially, here the
£2,500 U on ingredients, which alone explains the profit shortfall.
Two design criteria sit behind any accounting system: a cost-benefit balance (the system must be worth more
than it costs) and behavioural implications (what gets measured shapes how employees act).
Product life cycle and the value chain
Every product moves through a life cycle, development → introduction → growth → maturity → phase-out.
Pricing has to recover the development and phase-out costs, not just the cost of making each unit, which is
why firms try to shorten the no-revenue development phase.
The value chain is the sequence of functions that add value, and accounting feeds every stage, costs are
incurred everywhere, not only in production:
Organisational structure and accounting's place in it
Stockholders elect the board of directors, which appoints management and the external auditor. The crucial
distinction is line vs. staff:
Line roles are directly responsible for making and selling the product and hold operating authority over
those activities, production and sales managers, and ultimately the CEO.
Staff roles advise and support the line and hold no operating authority, accounting, HR, legal,
engineering, risk management. So accounting is a staff function.
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,Line vs. staff, roles and examples (as drilled in the Chapter 1 pre-test, E1-34)
Role Line / staff Value-chain function (or general
support)
Chief executive officer Line General management → Support (not
one specific function)
Regional / zonal sales manager Line Marketing
Plant or production manager, line Line Production
supervisor
Chief engineer Staff Support (advises the line)
Head of human resources Staff Support
Accountant / controller Staff Support
Enterprise-risk / internal-audit analyst Staff Support
Legal counsel Staff Support
Exam tip Two traps from the pre-test: the CEO is line (ultimate operating authority) even though their value-
chain contribution is general support, not one function; and a sales manager is line but sits within the
marketing function. Everyone who only advises, engineer, HR, accountant, risk analyst, lawyer, is
staff/support.
The CFO (chief financial officer) oversees two roles:
Controller: the chief management accountant, internally focused: planning for control, reporting and
interpreting results, evaluating and consulting, tax administration, government reporting, asset protection
and economic appraisal.
Treasurer: focused on financial assets and outside financing: raising capital, investor relations, short-term
financing, banking and custody, credit and collections, investments and risk management.
The qualifications mirror the internal/external split: the CMA (Certified Management Accountant) is the
internal counterpart to the CPA (Certified Public Accountant), who audits the external statements.
The changing role and professional ethics
Three trends have reshaped the management accountant's job: the spread of management accounting
beyond manufacturing into service and non-profit organisations (where labour dominates, output is hard to
measure, and services can't be stored); a faster, more global environment with integrated ERP systems; and
continuous business-process management that changes costs directly. The accountant now spends less time
compiling standard reports and more time interpreting them, effectively an internal consultant.
Because outsiders cannot see how good the numbers really are, they must trust the preparer, which is why
ethics are central. The IMA standards are competence, confidentiality, integrity and credibility. Sarbanes-
Oxley (SOX) is the regulatory response to the scandals that broke that trust, holding executives accountable
and tightening internal controls.
Exam tip Be ready to name which standard a scenario breaches: leaking inside information = confidentiality;
falsifying reports or a conflict of interest = integrity; acting beyond your skill = competence; presenting
misleading information = credibility.
Chapter 1 in practice: homework & pre-test
Chapter 1 is examined almost entirely through classification questions. Beyond line-vs-staff and the three task
types above, three more recur:
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,(a) Tag each feature as financial or management accounting. The wording the pre-test uses:
Financial accounting Management accounting
Regulated by standards / GAAP Highly flexible
Serves external users Serves internal users; insights on internal control
A posterior (after-the-fact) assessment only Detailed and customised reports
Precise, verifiable Behavioural impact is primary; goes beyond financial
transactions; includes budgets
(b) Service organisations. Examples: public accounting, insurance, transport, banks, law firms. They tend to be
labour-intensive, with outputs that are hard to define and measure, and inputs and outputs that cannot be
stored.
(c) Why (and whether) to change an accounting system, the cost-benefit balance. A new or more detailed
system is worth adopting only when the benefit of better decisions exceeds the added cost of collecting
data, preparing reports, and training people to use them. Firms like Boeing change systems when their
competitive environment and processes change so much that the old system no longer produces competitive
cost information; the more money at stake, the more attention (and accountability) the system deserves.
Budgeted revenue was £291,200 (a 12% rise over £260,000); the firm actually achieved the figures below. Net
= Revenues − Advertising cost; label each variance F or U.
Profit fell even though new products were added, because costs rose faster than revenue. Plausible reasons
the requirement asks you to list: raw-material costs for the new products were higher than budgeted;
customer satisfaction was low, causing unplanned replacement costs; and uncontrollable external factors
(operating-cost rises, weather, the economy) decreased efficiency.
(d) Applying the ethics standards (post-test). Match the situation to the standard: withholding a confidential
geologist's report = confidentiality; refusing a gift or invitation that would impair objectivity = integrity;
researching the tax law before acting = competence (with integrity). When standards seem to conflict,
confidentiality gives way only when there is a legal or credibility duty to disclose.
(e) Behavioural implications (post-test). Line managers stop trusting accounting when budgets are not taken
seriously, when the controller's office only appears once costs are over budget (acting as “police”), and when
reports arrive late and are not specific enough. The fix is behavioural, not numerical: win cooperation, show
managers how the information helps them decide, and change how reports are presented and used.
Chapter 1: formula & fact recap
Item Key point
Relevance vs. precision Managerial favours relevant/timely; financial favours
precise/auditable
Variance Actual − Budget; F if it raises income, U if it lowers it
Line vs. staff Line = operating authority; staff (incl. accounting) = advisory
Controller vs. treasurer Controller = internal/scorekeeping; treasurer =
financing/assets
Ethics standards Competence, Confidentiality, Integrity, Credibility (+ SOX)
Further essentials from the textbook
Customer Focus at the Centre of the Value Chain
Concept. The textbook places "Customer Focus" at the literal centre of its value-chain diagram (Exhibit 1-5, p.
29). Every one of the six value-chain functions should orient toward creating value for the customer. Sam
Walton's principle: "There is only one boss, the customer. Customers can fire everybody in the company from
the chairman on down, simply by spending their money somewhere else."
Managerial Accounting: Course Summary Page 5 of 77
,Why it matters for exams. A question may ask which principle sits at the heart of the value chain, or why
companies perform value-chain activities. The textbook answer is: to create value for the customer.
Exam trap. Students list the six stages and forget that all six are means to the same end: satisfying the
customer. "Customer focus" is the organising principle, not a seventh stage.
Controller's Full List of Seven Duties
The MD note mentions only the first three controllership functions. Exam exercises classify activities across all
seven. The authoritative source is Financial Executives International.
Controllership (seven duties):
1. Planning for control
2. Reporting and interpreting
3. Evaluating and consulting
4. Tax administration
5. Government reporting
6. Protection of assets
7. Economic appraisal
Treasurership (seven duties, for comparison):
1. Provision of capital
2. Investor relations
3. Short-term financing
4. Banking and custody
5. Credit management and cash collections
6. Investments
7. Risk management (insurance)
Exam classification guide. "Preparing tax returns" = Controller (duty 4). "Arranging insurance coverage" =
Treasurer (duty 7). "Meeting with Wall Street analysts" = Treasurer (duty 2). "Advising on the least costly
alternative" = Controller (duty 3). "Protecting physical assets" = Controller (duty 6). "Arranging short-term
financing" = Treasurer (duty 3).
Professional Accounting Qualifications Beyond CPA/CMA
The textbook names three globally recognised entry routes into accounting alongside CPA and CMA:
• ACA (Institute of Chartered Accountants): United Kingdom and Ireland focus; three to five years.
• ACCA (Association of Chartered Certified Accountants): globally recognised; three to five years.
• CIMA (Chartered Institute of Management Accountants): the management accounting route; three to five
years.
Exam tip. CIMA is the management-accounting-focused qualification in the UK/global context, just as CMA is
in the US context. A question asking for the management accounting counterpart to a chartered accountancy
qualification expects CIMA (global) or CMA (US).
The Four Business Trends (Exact Textbook Taxonomy)
The textbook (Objective 6, p. 33) names exactly four major trends. Present them as a numbered list because
exam questions may ask "what are the four trends" or identify which of five options is not a textbook trend.
The four trends influencing management accounting:
1. Shift from a manufacturing-based to a service-based economy
2. Increased global competition
3. Advances in technology (covering e-commerce, ERP, XBRL, Big Data)
4. Changes in business process management (covering reengineering, JIT, lean, TQM, Six Sigma)
Managerial Accounting: Course Summary Page 6 of 77
,Global competition (trend 2) in more detail. Many countries have lowered international trade barriers
(tariffs, duties) and deregulated industries. The result has been a worldwide shift in economic power. To
compete, companies redesign accounting systems to provide more accurate and timely cost information,
enabling more agile and responsive decision making.
Exam trap. The textbook is precise: exactly these four categories. "Sustainability" and "government
regulation" are not in the textbook's four-trend list for Chapter 1 (they appear later). Do not add a fifth
category.
Technology Sub-topics: e-Commerce, ERP, XBRL, and Big Data
Electronic commerce (e-commerce). Conducting business online.
• B2C (business-to-consumer): company sells directly to end consumers online.
• B2B (business-to-business): company transacts with other companies online. B2B creates large savings;
procurement processing costs can fall by as much as 70% through automation. B2B activity is growing
especially fast.
ERP systems (enterprise resource planning). Integrated information systems that support all functional areas
of a company. Accounting is one part of an ERP. Examples: SAP, Oracle JD Edwards EnterpriseOne, Microsoft
Dynamics, Sage Group. Key point: ERP integrates accounting with customer relationship management, supply-
chain management, and all other functions in a single system.
XBRL (eXtensible Business Reporting Language). An XML-based accounting language that communicates
financial information electronically by tagging data with standardised labels. XBRL makes cross-company
comparisons much simpler and reduces transmission errors. It influences both internal and external reporting.
Big Data and analytics. An IMA survey found 45% of companies now take a "strong" or "very strong" data-
centric approach to information technology. Starbucks uses data intelligence (via Esri's Atlas tool) to choose
store locations, design menus, and run targeted promotions. Management accountants spend less time
compiling standard reports and more time analysing data, functioning as internal consultants.
Exam traps.
• ERP vs. XBRL: ERP is an operational system integrating all functions; XBRL is a reporting language for
communicating financial data electronically. They are different things.
• B2B vs. B2C: B2B is between businesses; B2C is business to consumer. The textbook emphasises B2B for
cost savings.
Business Process Management Sub-topics
All five items below fall under the textbook's fourth trend: "Changes in Business Process Management."
Business process reengineering. The fundamental rethinking and radical redesign of business processes to
improve performance in areas such as cost, quality, service, and speed. Involves three supporting
technologies:
• CAD (computer-aided design): uses computer technology to design products that can be manufactured
efficiently.
• CAM (computer-aided manufacturing): uses computer-based software to direct and control production
equipment.
• CIM (computer-integrated manufacturing): combines CAD, CAM, robots, and computer-controlled
machines. CIM replaces most assembly-line labour with robots and computerised machines; the cost
structure shifts from labour-intensive to capital-intensive.
JIT (just-in-time) philosophy. Originally an inventory system: materials arrive just as needed for production;
finished goods are made just in time for shipment. Zero or minimal inventory is held. JIT originated in
Japanese companies such as Toyota and Kawasaki. It expanded into a broader management philosophy of
eliminating waste and synchronising the whole supply chain. COVID-19 exposed the key limitation: when
supply chains break (lockdowns, transport disruptions, quarantines), zero-buffer companies cannot cope and
shelves go empty. The textbook explicitly discusses this vulnerability (p. 34-35).
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,Lean manufacturing. Applies continuous process improvements to eliminate waste from the entire
enterprise, not just the factory floor. Example: Matsushita Electric's Saga plant reduced production time from
2.5 days to 40 minutes by replacing conveyor belts with robot clusters.
TQM (total quality management). An approach to quality that focuses on prevention of defects and on
customer satisfaction, rather than on inspection after the fact. Minimises total costs by maximising quality.
TQM builds quality in from the start.
Six Sigma. A data-driven, disciplined continuous process-improvement effort designed to eliminate defects in
any process. Pioneered by Motorola in the 1980s; adopted by GE, Samsung, Amazon, and others; used by
about 35% of major US companies. The aim: internal processes must run as efficiently as possible, with
defects reduced toward zero through statistical measurement. Six Sigma has expanded beyond manufacturing
into staff functions such as legal departments.
Why these matter for accounting. All five business process changes affect costs directly. When companies
change production processes, accountants: (a) predict anticipated cost savings before the change; (b)
measure actual cost savings after the change; (c) develop product costs for the new production environment.
If the system was built for labour-intensive production, it must be redesigned when CIM replaces labour with
equipment.
Exam distinctions.
• JIT focuses on inventory and timing of supply; lean focuses on eliminating all forms of waste across the
enterprise.
• TQM is a quality philosophy (prevention, customer focus); Six Sigma is a measurement and improvement
methodology (data-driven, defect reduction toward a statistical near-zero level).
• Reengineering is radical redesign; lean is continuous incremental improvement.
International Code of Ethics for Professional Accountants (IESBA/IFAC)
The textbook presents two ethics frameworks in Chapter 1. Most of the summary covers the IMA framework
(four standards). The textbook also teaches the IESBA/IFAC International Code, which has five fundamental
principles.
The five IESBA/IFAC fundamental principles:
Principle Core obligation
Integrity Be straightforward and honest in all professional and
business relationships.
Objectivity Exercise professional judgment without being compromised
by bias, conflict of interest, or undue influence of individuals,
organisations, technology, or other factors.
Professional Competence and Due Care Attain and maintain professional knowledge and skill at the
required level; act diligently in accordance with applicable
technical and professional standards.
Confidentiality Respect the confidentiality of information acquired as a
result of professional and business relationships.
Professional Behavior Comply with relevant laws and regulations; behave in a
manner consistent with the profession's responsibility to act
in the public interest; avoid conduct that might discredit the
profession.
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, Structure of the code. Three parts:
• Part 1: Complying with the Code, Fundamental Principles and Conceptual Framework. Includes a
conceptual framework to identify, evaluate, and address threats to compliance.
• Part 2: Professional Accountants in Business. Seven areas: conflict of interest; preparation and
presentation of information; acting with sufficient expertise; financial interests; compensation linked to
financial reporting; inducements including gifts and hospitality; responding to non-compliance with laws
and regulations and pressure to breach principles.
• Part 3: Professional Accountants in Public Practice. Six areas similar to Part 2 but for public-practice
context.
Distinction from IMA framework.
• IMA: four standards (Competence, Confidentiality, Integrity, Credibility).
• IESBA/IFAC: five principles (Integrity, Objectivity, Professional Competence and Due Care, Confidentiality,
Professional Behavior).
• "Objectivity" and "Professional Behavior" appear in IESBA but not as IMA labels. "Credibility" is an IMA
label with no exact IESBA counterpart; it maps roughly to Objectivity and Professional Behavior combined.
Resolution under the IESBA Code. When complying with one principle conflicts with another, consult
(anonymously if necessary): others within the firm; those charged with governance; a professional body; a
regulatory body; or legal counsel. Consultation does not relieve the accountant of responsibility. Document
the issue, discussions, decisions, and rationale.
Exam traps.
• "How many fundamental principles does the International Code have?" The answer is five, not four.
• "Name the five principles." Students who only memorised the IMA four will miss Objectivity and
Professional Behavior, or will write "Credibility" instead.
• Always check whether the question says "IMA Standards" (four) or "International Code/IESBA" (five).
The textbook's worked example (Summary Problem, p. 40-41: Yang Electronics / Chua). CFO Martinez asks
Chua to delete from his board report all mention of a faulty component causing high warranty costs. This
violates Professional Competence and Due Care (the report is not complete and clear); Integrity (the revision
subverts organisational objectives for personal ones; management accountants must communicate
unfavourable as well as favourable information); and Professional Behavior (the report would not disclose all
relevant information the board needs). Chua's proper response: inform Martinez of his misgivings; if not
resolved, inform her he will take the issue to the company president and, if necessary, the board. He must not
discuss the matter outside YEC, as that would violate Confidentiality.
SOX Requirement on Codes of Ethics for Senior Financial Officers
The Sarbanes-Oxley Act of 2002 requires companies to disclose whether they have adopted a code of ethics
for senior financial officers (the principal financial officer, comptroller, or principal accounting officer). If no
such code exists, the reason must be disclosed publicly.
Why this matters. SOX drove the formalisation of corporate codes of conduct beyond just certification of
financial statements. It added a disclosure obligation about ethics infrastructure.
Key nuance. Having a code is necessary but not sufficient. Enron had a code specifying "business is to be
conducted in compliance with the highest professional and ethical standards" and still failed catastrophically.
The real determinant is corporate culture and top-management behaviour.
Code of Conduct: Definition and Why Insufficient Alone
Definition. A code of conduct is a document specifying the ethical standards of an organisation. It is the
centrepiece of most ethics programmes.
Typical contents. Maintaining confidentiality; not accepting personal gifts from stakeholders; avoiding conflict
of interest; complying with laws; not using organisation property for personal use; reporting illegal or
questionable activity; avoiding racial or sexual discrimination.
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