Managerial Accounting and the Business Environment

Chapter 1

© 2010 The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin

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McGraw-Hill/Irwin

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Internet Usage The Internet fuels globalization The Internet fuels globalization by providing companies with greater by providing companies with greater access to geographically dispersed access to geographically dispersed customers, employees, and suppliers. customers, employees, and suppliers. As of 2008, more than 78% of As of 2008, more than 78% of the world's population was still the world's population was still not connected to the Internet. not connected to the Internet.
McGraw-Hill/Irwin
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Strategy A strategy is a “game plan” that enables a company to attract customers by distinguishing itself from competitors. The focal point of a The point company’s strategy should company’s be its target customers. McGraw-Hill/Irwin Slide 5 . be its target customers.

Operational Excellence Strategy Product Leadership Strategy McGraw-Hill/Irwin Deliver products and services faster. and at lower prices. Offer higher quality products.Customer Value Propositions Customer Intimacy Strategy Understand and respond to individual customer needs. Slide 6 . more conveniently.

McGraw-Hill/Irwin Slide 7 .Learning Objective 1 Understand the role of management accountants in an organization.

making authority throughout an organization.Organizational Structure Decentralization is the delegation of decisionDecentralization is the delegation of decisionmaking authority throughout an organization. C o r p B o o r a t e a r d o f D O r g r s a n i z i r e c t o P P u r c h a s iP n e g r s o r e s id e n t n V ei c l e n P r e C s h d i e fn tF i n a n c i O p e r a t i o nO s f f i c e r T r e a s u r o e nr t r o C Slide 8 l l McGraw-Hill/Irwin .

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

   McGraw-Hill/Irwin Slide 10 .  Preparing financial statements for external users.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.

Learning Objective 2 Understand the basic concepts underlying Lean Production. and Six Sigma. McGraw-Hill/Irwin Slide 11 . the Theory of Constraints.

Product Design Customer Manufacturing Marketing Distribution Service R&D Business functions making up the value chain McGraw-Hill/Irwin Slide 12 .Process Management A business process is a series of steps that are followed in order to carry out some task in a business.

. .Process Management There are three approaches to improving business processes . Theory of Constraints (TOC) Lean Production Six Sigma McGraw-Hill/Irwin Slide 13 .

Traditional “Push” Manufacturing Company Forecast Sales Order components Store Inventory Make Sales from Finished Goods Inventory McGraw-Hill/Irwin Store Inventory Produce goods in anticipation of Sales Slide 14 .

Traditional “Push” Manufacturing Company Traditional “push” manufacturing Raw materials Materials waiting to be processed. Large inventories Work in process Finished goods Completed products awaiting sale. Partially completed products requiring more work before they are ready for sale. McGraw-Hill/Irwin Slide 15 .

Lean Production  Identify value in specific products/services.  Create a pull system that responds to customer orders.  Organize work arrangements around the flow of the business process. Slide 16  Continuously pursue perfection in the business process.  Identify the business process that delivers value. The lean thinking model is a five step approach. McGraw-Hill/Irwin .

reduces wasted effort. decreases defects. Customer places an order Create Production Order Generate component requirements Goods delivered when needed McGraw-Hill/Irwin Production begins as parts arrive Components are ordered Slide 17 . and shortens customer response times.Lean Production The five step process results in a “pull” manufacturing system that reduces inventories.

The term supply chain management refers to the coordination of business processes across companies to better serve end consumers. McGraw-Hill/Irwin Slide 18 .Lean Production Lean thinking can be used to improve business processes that link companies together.

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.Theory of Constraints A constraint (also called a bottleneck) is anything that prevents you from getting more of what you want. McGraw-Hill/Irwin Slide 19 .

4. 1. Identify the weakest link.Theory of Constraints Only actions that strengthen the weakest link in the “chain” improve the process. Focus on improving the weakest link. 3. Recognize that the weakest link is no longer so. Allow the weakest link to set the tempo. McGraw-Hill/Irwin Slide 20 . 2.

Refers to a process that Refers to a process that generates no more generates no more than 3.4 defects per million opportunities. Sometimes Sometimes associated associated with the term zero with the term zero defects. McGraw-Hill/Irwin Slide 21 .Six Sigma A process improvement method relying on customer A process improvement method relying on customer feedback and fact-based data gathering and analysis feedback and fact-based data gathering and analysis techniques to drive process improvement. defects. techniques to drive process improvement.4 defects per million than 3. opportunities.

Develop.Six Sigma Stage Define ● ● ● The Six Sigma DMAIC Framework Goals Establish the scope and purpose of the project. Gather baseline performance data related to the existing process. Ensure that problems remain fixed. Measure ● ● Analyze ● Improve ● Control ● ● McGraw-Hill/Irwin Slide 22 . Narrow the scope of the project to the most important problems. Seek to improve the new methods over time. and implement solutions to the problems. Establish the customer's requirements for the process. Diagram the flow of the current process. evaluate. Identify the root cause(s) of the problems identified in the Measure stage.

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 .

competence. Follow applicable Follow applicable laws. concise. clear. Competence Provide accurate.IMA Guidelines for Ethical Behavior Recognize and Recognize and communicate professional communicate professional limitations that preclude limitations that preclude responsible judgment. clear. Maintain Maintain professional professional competence. and timely decision support information. and standards. regulations laws. and timely decision concise. responsible judgment. Provide accurate. regulations and standards. support information. McGraw-Hill/Irwin Slide 25 .

McGraw-Hill/Irwin Slide 26 . obligated to do so.IMA Guidelines for Ethical Behavior Do not disclose confidential Do not disclose confidential information unless legally information unless legally obligated to do so. information. Do not use Do not use confidential confidential information for information for unethical or illegal unethical or illegal advantage. advantage. Confidentiality Confidentiality Ensure that subordinates do Ensure that subordinates do not disclose confidential not disclose confidential information.

Refrain from Refrain from conduct that conduct that would prejudice would prejudice carrying out carrying out duties ethically. of potential conflicts. duties ethically. Integrity Abstain from activities that Abstain from activities that might discredit the might discredit the profession. profession.IMA Guidelines for Ethical Behavior Mitigate conflicts of Mitigate conflicts of interest and advise others interest and advise others of potential conflicts. McGraw-Hill/Irwin Slide 27 .

Disclose delays or Disclose delays or deficiencies in information deficiencies in information timeliness. Credibility Credibility Disclose all relevant Disclose all relevant information that could information that could influence a user’s influence a user’s understanding of reports understanding of reports and recommendations. internal controls. and recommendations. fairly and objectively.IMA Guidelines for Ethical Behavior Communicate information Communicate information fairly and objectively. processing. McGraw-Hill/Irwin Slide 28 . or timeliness. or internal controls. processing.

assuming the supervisor is not involved.   McGraw-Hill/Irwin Slide 29 .  Contact with levels above the immediate supervisor  Contact with levels above the immediate supervisor should only be initiated with the supervisor’s should only be initiated with the supervisor’s knowledge. board of directors or the audit committee. For an unresolved ethical conflict: For an unresolved ethical conflict: Discuss the conflict with immediate supervisor or Discuss the conflict with immediate supervisor or next highest uninvolved manager. knowledge. assuming the supervisor is not involved. next highest uninvolved manager.  If immediate supervisor is the CEO. consider the  If immediate supervisor is the CEO. Follow employer’s established policies. consider the board of directors or the audit committee.IMA Guidelines for Resolution of an Ethical Conflict Follow employer’s established policies.

maintain  Except where legally prescribed.  Clarify issues in a confidential discussion with an  Clarify issues in a confidential discussion with an objective advisor. Follow employer’s established policies.  Consult an attorney as to legal obligations. confidentiality.IMA Guidelines for Resolution of an Ethical Conflict Follow employer’s established policies.  Consult an attorney as to legal obligations. McGraw-Hill/Irwin Slide 30 . For an unresolved ethical conflict: For an unresolved ethical conflict:  Except where legally prescribed. maintain confidentiality. objective advisor.

Without ethical standards in business. Abandoning ethical standards in business would lead to a lower quality of life with less desirable goods and services at higher prices.Why Have Ethical Standards? Ethical standards in business are essential for a Ethical standards in business are essential for a smooth functioning economy. and services. the economy. and all of us who depend on it for jobs. smooth functioning economy. goods. McGraw-Hill/Irwin Slide 31 . would suffer.

McGraw-Hill/Irwin Slide 32 .Company Codes of Conduct Broad-based statements of a Broad-based statements of a company’s responsibilities to: company’s responsibilities to: Employees Customers Suppliers And to the communities in which the company operates.

resolution of ethical conflicts. governs the activities of professional accountants worldwide. In addition to integrity and objectivity.Codes of Conduct on the International Level The Code of Ethics for Professional Accountants. Handling of monies. and confidentiality. Independence. Fees and commissions. and Cross-border activities. issued by the International Federation of Accountants (IFAC). competence. Advertising and solicitation. McGraw-Hill/Irwin Slide 33 . the IFAC’s code deals with the accountant’s ethical responsibilities in: Taxes.

Board of Directors Incentives and monitoring for Top Management To pursue objectives of Stockholders McGraw-Hill/Irwin Slide 34 .Corporate Governance The system by which a company is directed and controlled.

fairly represent the results of operations.  The Act places restrictions on audit firms. and terminate public accounting firms in the hands of the audit committee. such as prohibiting public accounting firms from providing a variety of non-audit public accounting firms from providing a variety of non-audit services to an audit client. Six key aspects of the legislation include:  The Act requires both the CEO and CFO to certify in writing  The Act requires both the CEO and CFO to certify in writing that their company’s financial statements and disclosures that their company’s financial statements and disclosures fairly represent the results of operations. such as prohibiting  The Act places restrictions on audit firms. public accounting firms in the hands of the audit committee.The Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 was intended to protect the The Sarbanes-Oxley Act of 2002 was intended to protect the interests of those who invest in publicly traded companies by interests of those who invest in publicly traded companies by improving the reliability and accuracy of corporate financial improving the reliability and accuracy of corporate financial reports and disclosures. compensate. and terminate  The Act places the power to hire. Board to provide additional oversight of the audit profession.  The Act establishes the Public Company Accounting Oversight  The Act establishes the Public Company Accounting Oversight Board to provide additional oversight of the audit profession. Six key aspects of the legislation include: reports and disclosures.  The Act places the power to hire. compensate. services to an audit client. McGraw-Hill/Irwin Slide 35 .

” McGraw-Hill/Irwin Slide 36 . •• Up to 10 years in prison for retaliating against a Up to 10 years in prison for retaliating against a “whistle blower.The Sarbanes-Oxley Act of 2002 (continued) (continued)  The Act requires a public company’s independent auditor  The Act requires a public company’s independent auditor to issue an opinion on the effectiveness of the company’s to issue an opinion on the effectiveness of the company’s internal control over financial reporting to accompany internal control over financial reporting to accompany management’s assessment. company’s annual report. f. f. The Act establishes severe penalties for certain behaviors. The Act establishes severe penalties for certain behaviors. and both are included in the management’s assessment. such as: such as: •• Up to 20 years in prison for altering or destroying any Up to 20 years in prison for altering or destroying any documents that may eventually be used in an official documents that may eventually be used in an official proceeding. and both are included in the company’s annual report. proceeding.” “whistle blower.

Enterprise Risk Management Should I try to avoid the risk. or reduce the risk? A process used by a company to proactively identify and manage risk. accept the risk. share the risk. risks by specific controls. perhaps the most common risk management tactic is to reduce most common risk management tactic is to reduce risks by implementing specific controls. McGraw-Hill/Irwin Slide 37 . Once a company identifies its risks. perhaps the Once company its risks.

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 ● ● 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 ● ● ● ● ● McGraw-Hill/Irwin Slide 38 .

McGraw-Hill/Irwin Slide 39 . Customers Employees Suppliers Communities Stockholders Environmental & Human Rights Advocates CSR extends beyond legal compliance to include voluntary actions that satisfy stakeholder expectations.Corporate Social Responsibility Corporate social responsibility (CSR) is a concept whereby organizations consider the needs of all stakeholders when making decisions.

schools. high quality products that are fairly employees with: priced ● Safe and humane working conditions ● Competent. promotion.Examples of Corporate Social Responsibility Companies should provide customers with: Companies and their suppliers should provide ● Safe. courteous. 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. ● 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 Corporate Social Responsibility McGraw-Hill/Irwin Slide 40 . 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.

www. McGraw-Hill/Irwin Slide 41 .imanet.org or by calling 1-800-638-4427.imanet.org or by calling 1-800-638-4427. Information about becoming a CMA and the CMA Information about becoming a CMA and the CMA program can be accessed on the IMA’s website at program can be accessed on the IMA’s website at www.Certified Management Accountant A management accountant A management accountant who has the necessary qualifications and who has the necessary qualifications and who passes a rigorous professional exam earns who passes a rigorous professional exam earns the right to be known as a Certified the right to be known as a Certified Management Accountant (CMA). Management Accountant (CMA).

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