Chapter 1

Managerial Accounting & the Business Environment

2/02/04

Managerial Accounting and Financial Accounting

Managerial accounting provides information for managers inside an organization who direct and control its operations. Financial accounting provides information to stockholders, creditors and others who are outside the organization.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2003

Differences Between Financial and Managerial Accounting

Financial Accounting
1. Users 2. Time focus 3. Verifiability versus relevance 4. Precision versus timeliness 5. Subject 6. Requirements External persons who make financial decisions Historical perspective Emphasis on verifiability Emphasis on precision Primary focus is on the whole organization Must follow GAAP and prescribed formats

Managerial Accounting
Managers who plan for and control an organization Future emphasis Emphasis on relevance for planning and control Emphasis on timeliness Focuses on segments of an organization Need not follow GAAP or any prescribed format

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2003

Organizational Structure
Decentralization is the delegation of decision-making authority throughout an organization.

Corporate Organization Chart

Board of Directors President Purchasing Personnel Vice President Operations Chief Financial Officer Controller

Treasurer
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2003

Line and Staff Relationships

Line positions are directly related to achievement of basic product objectives of an organization.

Staff positions support and assist line positions.

Example: Production supervisors in a manufacturing plant.

Example: Cost accountants in the manufacturing plant. Marketing, sales, admin. Executive management

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2003

Management Accountants
Help management pursue the firms goals Internal consultants or business analysts Time spent interpreting data vs creating it Physically positioned in operating department Work on cross-functional teams Extensive face-to-face communications Actively involved in decision making Trusted advisors
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2003

The Changing Business Environment

Growth of the internet Accelerated pace in innovation of products and services International competition

Business environment changes in the past twenty years

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2003

The Changing Business Environment

New tools for managers!

Just-In-Time Total Quality Management Process Reengineering Theory of Constraints

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2003

Just-in-Time (JIT) Concept

Receive customer orders. Schedule production, pull system. Receive materials just in time for production.
McGraw-Hill/Irwin

Complete products just in time to ship customers.

Complete parts just in time for assembly into products.

The McGraw-Hill Companies, Inc., 2003

JIT Requirements
Focused factory layout Reduced setup time Zero production defects Flexible workforce

JIT purchasing Fewer, but more ultra-reliable suppliers. Frequent JIT deliveries in small lots. Defect-free supplier deliveries.
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2003

Benefits of a JIT System

Reduced inventory costs Freed-up funds Freed-up space Greater customer satisfaction More rapid response to customer orders
The McGraw-Hill Companies, Inc., 2003

Higher quality products

Increased throughput
McGraw-Hill/Irwin

Total Quality Management

Do it right the first time
Benchmarking

Where are we?

Where do we want to go? Plan

Do we need to change the plan?

Act

is

How do Do we start? Collect data Continuous Improvement

The McGraw-Hill Companies, Inc., 2003

Check

McGraw-Hill/Irwin

How are we doing? Evaluate data.

Process Reengineering
A business process is diagrammed in detail.
Anticipated results: Process is simplified. Process is completed in less time. Costs are reduced. Opportunities for errors are reduced. The process is redesigned to include only those steps that make our product more valuable. Eliminate non-value added The McGraw-Hill Companies, Inc., 2003 steps. Examples?

Every step in the business process must be justified.

McGraw-Hill/Irwin

Theory of Constraints
A sequential process of identifying and removing constraints in a system.

Restrictions or barriers that impede progress toward an objective

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2003

Theory of Constraints
Only actions that strengthen the weakest link in the chain improve the process.

2. Identify process constraints

1. Measure process capacity 4. Coordinate processes See Exh 1-5, Pg 22

McGraw-Hill/Irwin

3. Eliminate bottlenecks

The McGraw-Hill Companies, Inc., 2003

Importance of Ethics in Accounting

Ethical accounting practices build trust and promote loyal, productive relationships with users of accounting information. Many companies and professional organizations, such as the Institute of Management Accountants (IMA), have written codes of ethics which serve as guides for employees. Code of Conduct for Management Accountants
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2003

IMA Code of Ethics for Management Accountants

Four broad areas of responsibility:
Maintain a high level of professional competence Treat sensitive matters with confidentiality Maintain personal integrity Be objective in all disclosures

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2003

IMA Code of Ethics for Management Accountants

Follow applicable laws, regulations and standards.

Maintain professional competence.

Competence
Prepare complete and clear reports after appropriate analysis.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2003

IMA Code of Ethics for Management Accountants

Do not disclose confidential information unless legally obligated to do so. Do not use confidential information for personal advantage.

Confidentiality

Ensure that subordinates do not disclose confidential information.

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2003

IMA Code of Ethics for Management Accountants

Avoid conflicts of interest and advise others of potential conflicts. Do not subvert organizations legitimate objectives.

Integrity
Recognize and communicate personal and professional limitations.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2003

IMA Code of Ethics for Management Accountants

Avoid activities that could affect your ability to perform duties. Refrain from activities that could discredit the profession. Refuse gifts or favors that might influence behavior.

Integrity
Communicate unfavorable as well as favorable information.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2003

IMA Code of Ethics for Management Accountants

Communicate information fairly and objectively.

Objectivity
Disclose all information that might be useful to management.
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2003

IMA Code of Ethics for Management Accountants

Resolution of Ethical Conflict
Follow established policies. For unresolved ethical conflicts:

Discuss the conflict with immediate superior. If supervisor involved, go up chain If immediate superior is the CEO, consider the board of directors or the audit committee. Except where legally prescribed, maintain confidentiality.
The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

IMA Code of Ethics for Management Accountants

Resolution of Ethical Conflict
Clarify issues in a confidential discussion with an objective advisor. Consult an attorney as to legal obligations. The last resort is to resign.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2003

End of Chapter 1

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2003