Managerial Accounting and the

Business Environment
Chapter 1

© 2010 The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin Slide 2
McGraw-Hill/Irwin Slide 3
 Internet Usage

The
The Internet
Internet fuels
fuels globalization
globalization
by
by providing
providing companies
companies withwith greater
greater
access
access to
to geographically
geographically dispersed
dispersed
customers,
customers, employees,
employees, and and suppliers.
suppliers.

As
As of
of 2008,
2008, more
more than
than 78%
78% of
of
the
the world's
world's population
population was
was still
still
not
not connected
connected to
to the
the Internet.
Internet.
McGraw-Hill/Irwin Slide 4
 Strategy

A strategy
is a “game plan”
that enables a company
to attract customers
by distinguishing itself
from competitors.

The
The focal point
point of a
company’s
company’s strategy should
be
be its
its target
target customers.
customers.
McGraw-Hill/Irwin Slide 5
 Customer Value Propositions
Customer
Understand and respond to
Intimacy
individual customer needs.
Strategy

Operational Deliver products and services

Excellence faster, more conveniently,
Strategy and at lower prices.

Product
Leadership Offer higher quality products.
Strategy
McGraw-Hill/Irwin Slide 6
 Learning Objective 1

Understand the role of

management
accountants in an
organization.

McGraw-Hill/Irwin Slide 7
 Organizational Structure
Decentralization
Decentralization is
is the
the delegation
delegation of
of decision-
decision-
making
making authority
authority throughout
throughout anan organization.
organization.

C o r p o r a t e O r g a n i z
B o a r d o f D i r e c t o r s

P r e s id e n t

P u r c h a s iP n e g r s o n Vn ei c l e P r e C s hi d i e fn tF i n a n c
O p e r a t i o nO s f f i c e r

T r e a s uC r o e n r t r o l l

McGraw-Hill/Irwin Slide 8
 Line and Staff Relationships
Line positions are directly
related to achievement of
the basic objectives of an
organization.
 Example: Production
supervisors in a
manufacturing plant.
McGraw-Hill/Irwin
Staff positions support
and assist line positions.
 Example: Cost
accountants in the
manufacturing plant.
Slide 9
 The Chief Financial Officer (CFO)

A member of the top management team responsible

for:

 Providing timely and relevant data to support planning
and control activities.
 Preparing financial statements for external users.


McGraw-Hill/Irwin Slide 10
 Learning Objective 2

Understand the basic

concepts underlying
Lean Production, the
Theory of Constraints,
and Six Sigma.

McGraw-Hill/Irwin Slide 11
 Process Management
A business
process is a series of
steps that are followed in order to
carry out some task in
a business.

Product Customer
R&D Design Manufacturing Marketing Distribution Service

Business functions making up the value chain

McGraw-Hill/Irwin Slide 12
 Process Management

There are three approaches to

improving business processes . . .
Theory of
Constraints (TOC)
Lean Six
Production Sigma

McGraw-Hill/Irwin Slide 13
 Traditional “Push” Manufacturing Company

Forecast Sales Order components Store Inventory

Make Sales from

Finished Goods Store Produce goods in
Inventory Inventory anticipation of Sales

McGraw-Hill/Irwin Slide 14
 Traditional “Push” Manufacturing Company
Traditional “push” Large
manufacturing inventories

Raw Work in Finished

materials process goods

Materials waiting Completed products

to be processed. awaiting sale.

Partially completed products

requiring more work before
they are ready for sale.
McGraw-Hill/Irwin Slide 15
 Lean Production
 Identify value  Identify the
in specific business process
products/services. that delivers value.

The lean thinking  Organize work

model is a five arrangements around
step approach. the flow of the
business process.

 Continuously pursue  Create a pull

perfection in the system that responds
business process. to customer orders.
McGraw-Hill/Irwin Slide 16
 Lean Production
The five step process results in a “pull” manufacturing system
that reduces inventories, decreases defects, reduces
wasted effort, and shortens customer response times.

Customer places Create Production Generate component

an order Order requirements

Goods delivered Production begins Components

when needed as parts arrive are ordered
McGraw-Hill/Irwin Slide 17
 Lean Production

Lean thinking can be used to improve business

processes that link companies together.

The term supply chain management refers to the

coordination of business processes across
companies to better serve end consumers.

McGraw-Hill/Irwin Slide 18
 Theory of Constraints
A constraint (also called a bottleneck) is anything that prevents you from
getting more of what you want.
The Theory of Constraints is based on the observation that effectively
managing the constraint is the key to success.

The constraint in a system is determined

by the step that has the smallest capacity.

McGraw-Hill/Irwin Slide 19
 Theory of Constraints
Only actions 2. Allow the
that strengthen weakest link to
the weakest link set the tempo.
in the “chain”
improve the
process.
3. Focus on
1. Identify the improving
weakest link. the weakest
link.

4. Recognize that
the weakest link
is no longer so.
McGraw-Hill/Irwin Slide 20
 Six Sigma
A
A process
process improvement
improvement method
method relying
relying on
on customer
customer
feedback
feedback and
and fact-based
fact-based data
data gathering
gathering and
and analysis
analysis
techniques
techniques to
to drive
drive process
process improvement.
improvement.

Refers
Refers to
to aa process
process that
that Sometimes
Sometimes
generates
generates no no more
more associated
associated
than
than 3.4
3.4 defects
defects per
per million
million with
with the
the term
term zero
zero
opportunities.
opportunities. defects.
defects.

McGraw-Hill/Irwin Slide 21
 Six Sigma
The Six Sigma DMAIC Framework
Stage Goals
Define ● Establish the scope and purpose of the project.
● Diagram the flow of the current process.
● Establish the customer's requirements for the
process.
Measure ● Gather baseline performance data related to
the existing process.
● Narrow the scope of the project to the most
important problems.
Analyze ● Identify the root cause(s) of the problems
identified in the Measure stage.
Improve ● Develop, evaluate, and implement solutions
to the problems.
Control ● Ensure that problems remain fixed.
● Seek to improve the new methods over time.

McGraw-Hill/Irwin Slide 22
 Learning Objective 3

Understand the
importance of upholding
ethical standards.

McGraw-Hill/Irwin Slide 23
 Code of Conduct for Management
Accountants

The Institute of Management Accountant’s (IMA)

Statement of Ethical Professional Practice
consists of two parts that offer guidelines for:
 Ethical behavior.
 Resolution for an ethical conflict.

McGraw-Hill/Irwin Slide 24
 IMA Guidelines for Ethical Behavior
Recognize
Recognize and
and
communicate
communicate professional
professional
limitations
limitations that
that preclude
preclude
responsible
responsible judgment.
judgment.

Maintain
Maintain Follow
Follow applicable
applicable
professional
professional Competence laws,
laws, regulations
regulations
competence.
competence. and
and standards.
standards.

Provide
Provide accurate,
accurate, clear,
clear,
concise,
concise, and
and timely
timely decision
decision
support
support information.
information.
McGraw-Hill/Irwin Slide 25
 IMA Guidelines for Ethical Behavior

Do
Do not
not disclose
disclose confidential
confidential
information
information unless
unless legally
legally
obligated
obligated to
to do
do so.
so.

Do
Do not
not use
use
confidential
confidential
information
information forfor Confidentiality
Confidentiality
unethical
unethical or
or illegal
illegal
advantage.
advantage.

Ensure
Ensure that
that subordinates
subordinates do
do
not
not disclose
disclose confidential
confidential
information.
information.
McGraw-Hill/Irwin Slide 26
 IMA Guidelines for Ethical Behavior

Mitigate
Mitigate conflicts
conflicts of
of
interest
interest and
and advise
advise others
others
of
of potential
potential conflicts.
conflicts.
Refrain
Refrain from
from
conduct
conduct that
that
would
would prejudice
prejudice Integrity
carrying
carrying out
out
duties
duties ethically.
ethically.
Abstain
Abstain from
from activities
activities that
that
might
might discredit
discredit the
the
profession.
profession.

McGraw-Hill/Irwin Slide 27
 IMA Guidelines for Ethical Behavior
Communicate
Communicate information
information
fairly
fairly and
and objectively.
objectively.

Disclose
Disclose delays
delays or
or
deficiencies
deficiencies inin information
information
Credibility
Credibility timeliness,
timeliness, processing,
processing, or or
internal
internal controls.
controls.

Disclose
Disclose all
all relevant
relevant
information
information that
that could
could
influence
influence aa user’s
user’s
understanding
understanding of of reports
reports
and
and recommendations.
recommendations.
McGraw-Hill/Irwin Slide 28
 IMA Guidelines for Resolution of an Ethical
Conflict
Follow
Follow employer’s
employer’s established
established policies.
policies.
For
For an
an unresolved
unresolved ethical
ethical conflict:
conflict:
 Discuss
Discuss thethe conflict
conflict with
with immediate
immediate supervisor
supervisor or or
next
next highest
highest uninvolved
uninvolved manager.
manager.
 If
If immediate
immediate supervisor
supervisor is is the
the CEO,
CEO, consider
consider the
the
board
board ofof directors
directors or
or the
the audit
audit committee.
committee.
 Contact
Contact with
with levels
levels above
above thethe immediate
immediate supervisor
supervisor
should
should only
only be
be initiated
initiated with
with the
the supervisor’s
supervisor’s
knowledge,
knowledge, assuming
assuming the the supervisor
supervisor is
is not
not involved.
involved.

McGraw-Hill/Irwin Slide 29
 IMA Guidelines for Resolution of an Ethical
Conflict
Follow
Follow employer’s
employer’s established
established policies.
policies.
For
For an
an unresolved
unresolved ethical
ethical conflict:
conflict:
 Except
Except where
where legally
legally prescribed,
prescribed, maintain
maintain
confidentiality.
confidentiality.
 Clarify
Clarify issues
issues in
in aa confidential
confidential discussion
discussion with
with an
an
objective
objective advisor.
advisor.
 Consult
Consult an an attorney
attorney asas to
to legal
legal obligations.
obligations.

McGraw-Hill/Irwin Slide 30
 Why Have Ethical Standards?

Ethical
Ethical standards
standards in
in business
business are
are essential
essential for
for aa
smooth
smooth functioning
functioning economy.
economy.

Without ethical standards in business, the

economy, and all of us who depend on it for
jobs, goods, and services, would suffer.

Abandoning ethical standards in business would

lead to a lower quality of life with less
desirable goods and services at higher prices.
McGraw-Hill/Irwin Slide 31
 Company Codes of Conduct

Broad-based
Broad-based statements
statements ofof aa
company’s
company’s responsibilities
responsibilities to:
to:

Employees Customers Suppliers

And to the communities in

which the company operates.
McGraw-Hill/Irwin Slide 32
 Codes of Conduct on the International Level
The Code of Ethics for Professional
Accountants, issued by the International
Federation of Accountants (IFAC), governs the
activities of professional accountants worldwide.

In addition to integrity and objectivity, resolution of ethical

conflicts, competence, and confidentiality, the IFAC’s code
deals with the accountant’s ethical responsibilities in:
Taxes,
Independence,
Fees and commissions,
Advertising and solicitation,
Handling of monies, and
Cross-border activities.
McGraw-Hill/Irwin Slide 33
 Corporate Governance

The system by
which a company is directed
and controlled.
Board of Incentives and
Directors monitoring for

Top To pursue
Management objectives of

Stockholders
McGraw-Hill/Irwin Slide 34
 The Sarbanes-Oxley Act of 2002
The
The Sarbanes-Oxley
Sarbanes-Oxley Act Act of
of 2002
2002 was
was intended
intended to to protect
protect the
the
interests
interests of
of those
those who
who invest
invest in
in publicly
publicly traded
traded companies
companies by by
improving
improving the
the reliability
reliability and
and accuracy
accuracy ofof corporate
corporate financial
financial
reports
reports and
and disclosures.
disclosures. SixSix key
key aspects
aspects ofof the
the legislation
legislation include:
include:
 The
 The Act
Act requires
requires both
both the
the CEO
CEO and
and CFO
CFO toto certify
certify in
in writing
writing
that
that their
their company’s
company’s financial
financial statements
statements and
and disclosures
disclosures
fairly
fairly represent
represent the
the results
results of
of operations.
operations.
 The
 The Act
Act establishes
establishes the
the Public
Public Company
Company Accounting
Accounting Oversight
Oversight
Board
Board to
to provide
provide additional
additional oversight
oversight of
of the
the audit
audit profession.
profession.
 The
 The Act
Act places
places the
the power
power to to hire,
hire, compensate,
compensate, and and terminate
terminate
public
public accounting
accounting firms
firms in
in the
the hands
hands of of the
the audit
audit committee.
committee.
 The
 The Act
Act places
places restrictions
restrictions onon audit
audit firms,
firms, such
such as
as prohibiting
prohibiting
public
public accounting
accounting firms
firms from
from providing
providing aa variety
variety of
of non-audit
non-audit
services
services to
to an
an audit
audit client.
client.
McGraw-Hill/Irwin Slide 35
 The Sarbanes-Oxley Act of 2002
(continued)
(continued)
 The
 The Act
Act requires
requires aa public
public company’s
company’s independent
independent auditor
auditor
to
to issue
issue an
an opinion
opinion on
on the
the effectiveness
effectiveness of of the
the company’s
company’s
internal
internal control
control over
over financial
financial reporting
reporting to
to accompany
accompany
management’s
management’s assessment,
assessment, and
and both
both are
are included
included in
in the
the
company’s
company’s annual
annual report.
report.
f.f. The
The Act
Act establishes
establishes severe
severe penalties
penalties for
for certain
certain behaviors,
behaviors,
such
such as:
as:
•• UpUp to
to 20
20 years
years in
in prison
prison for
for altering
altering or
or destroying
destroying any
any
documents
documents that
that may
may eventually
eventually bebe used
used in
in an
an official
official
proceeding.
proceeding.
•• UpUp to
to 10
10 years
years in
in prison
prison for
for retaliating
retaliating against
against aa
“whistle
“whistle blower.”
blower.”
McGraw-Hill/Irwin Slide 36
 Enterprise Risk Management
Should I try to avoid the risk,
share the risk, accept the
risk, or reduce the risk?
A process used
by a company to
proactively identify
and manage risk.

Once
Once a company
company identifies its
its risks,
risks, perhaps
perhaps the
the
most
most common
common riskrisk management
management tactic
tactic is
is to
to reduce
reduce
risks
risks by
by implementing specific
specific controls.
controls.
McGraw-Hill/Irwin Slide 37
 Enterprise Risk Management
Examples of Business Risks
● Products harming customers
● Losing market share due to the
unforeseen actions of competitors
● Poor weather conditions shutting
down operations
● Website malfunction
● A supplier strike halting the flow
of raw materials
● Financial statements unfairly
reporting the value of inventory
● An employee accessing
unauthorized information
McGraw-Hill/Irwin
Examples of Controls to
Reduce Business Risks
● Develop a formal and rigorous
new product testing program
● Develop an approach for legally
gathering information about
competitors' plans and practices
● Develop contingency plans for
overcoming weather-related
disruptions
● Thoroughly test the website
before going "live" on the Internet
● Establish a relationship with two
companies capable of providing
raw materials
● Count the physical inventory on
hand to make sure that it agrees
with the accounting records
● Create password-protected barriers
that prohibit employees from
obtaining information not needed
to do their jobs
Slide 38
 Corporate Social Responsibility
Corporate social responsibility (CSR) is a concept
whereby organizations consider the needs
of all stakeholders when making decisions.

Environmental
Customers Employees Suppliers Communities Stockholders & Human Rights
Advocates

CSR extends beyond legal compliance

to include voluntary actions that satisfy
stakeholder expectations.
McGraw-Hill/Irwin Slide 39
 Corporate Social Responsibility
Examples of Corporate Social Responsibility
Companies should provide customers with: Companies and their suppliers should provide
● Safe, high quality products that are fairly employees with:
priced ● Safe and humane working conditions
● Competent, courteous, and rapid delivery ● Non-discriminatory treatments and the
of products and services right to organize and file grievances
● Full disclosure of product-related risks ● Fair compensation
● Easy to use information systems for ● Opportunities for training, promotion,
shopping and tracking orders and personal development
Companies should provide suppliers with: Companies should provide communities with:
● Fair contract terms and prompt payments ● Payment of fair taxes
● Reasonable time to prepare orders ● Honest information about plans such as
● Hassle-free acceptance of timely and plant closings
complete deliveries ● Resources that support charities, schools,
● Cooperative rather than unilateral and civic activities
actions ● Reasonable access to media sources
Companies should provide stockholders with: Companies should provide environmental
● Competent management and human rights advocates with:
● Easy access to complete and accurate ● Greenhouse gas emissions data
financial information ● Recycling and resource conservation data
● Full disclosure of enterprise risks ● Child labor transparency
● Honest answers to knowledgeable ● Full disclosure of suppliers located in
questions developing countries

McGraw-Hill/Irwin Slide 40
 Certified Management Accountant

AA management
management accountant
accountant
who
who has
has the
the necessary
necessary qualifications
qualifications and
and
who
who passes
passes aa rigorous
rigorous professional
professional exam
exam earns
earns
the
the right
right to
to be
be known
known as
as aa Certified
Certified
Management
Management Accountant
Accountant (CMA).
(CMA).

Information
Information about
about becoming
becoming aa CMACMA and
and the
the CMA
CMA
program
program can
can be
be accessed
accessed onon the
the IMA’s
IMA’s website
website at
at
www.imanet.org
www.imanet.org or
or by
by calling
calling 1-800-638-4427.
1-800-638-4427.
McGraw-Hill/Irwin Slide 41
 End of Chapter 1

McGraw-Hill/Irwin Slide 42