Chap 1

GarrisonNoreenBrewer: 1.
Managerial Accounting Text The McGrawHill

Managerial Accounting, and the Business Companies, 2006
11th Edition Environment
C h a p t e r
1
Managerial Accounting
and the Business
Environment
LEARNING OBJECTIVES
After studying Chapter 1, you should be able to:
LO1 Identify the major differences and similarities between financial and
managerial accounting.
LO2 Understand the role of management accountants in an organization.
LO3 Understand the basic concepts underlying Just-In-Time (JIT), Total

Quality Management (TQM), Process Reengineering, and the Theory
of Constraints (TOC).
LO4 Understand the importance of upholding ethical standards.

GarrisonNoreenBrewer: 1. Managerial Accounting Text The McGrawHill
Making Fact-Based Decisions in Real Time
C
isco Systems and Alcoa are on the leading edge of their industries and real-time man-
agement accounting is one of the keys to their success. Managers at these companies BUSINESS FOCUS
can drill down into the companys management accounting system to find the latest data
on revenues, margins, order backlogs, expenses, and other data, by region, by business
unit, by distribution channel, by salesperson, and so on. The Chief Financial Officer of Cisco, Larry
Carter, says that with this kind of live information you can empower all your management team to
improve decision making. Richard Kelson, the Chief Financial Officer of Alcoa, says: The earlier you
get information, the easier it is to fix a problem. For example, with up-to-date data, managers at Al-
coa saw a downturn in aerospace markets early enough to shift production from hard alloys that are
used in aircraft to other products. John Chambers, the CEO of Cisco, says: At any time in the quar-
ter, first-line managers can look at margins and products and know exactly what the effect of their
decisions will be.
Source: Thomas A. Stewart, Making Decisions in Real Time, Fortune, June 26, 2000, pp. 332333.
4 Chapter 1 Managerial Accounting and the Business Environment
M
anagerial accounting is concerned with providing information to
managersthat is, people inside an organization who direct and control its
operations. In contrast, financial accounting is concerned with providing in-
formation to stockholders, creditors, and others who are outside an organi-
zation. Managerial accounting provides the essential data that are needed to run
organizations. Financial accounting provides the essential data that are used by outsiders
to judge a companys past financial performance.
Managerial accountants prepare a variety of reports. Some reports focus on how well
managers or business units have performedcomparing actual results to plans and to
benchmarks. Some reports provide timely, frequent updates on key indicators such as or-
ders received, order backlog, capacity utilization, and sales. Other analytical reports are
prepared as needed to investigate specific problems such as a decline in the profitability
of a product line. And yet other reports analyze a developing business situation or oppor-
tunity. In contrast, financial accounting is oriented toward producing a limited set of spe-
cific prescribed annual and quarterly financial statements in accordance with generally
accepted accounting principles (GAAP).
Because it is manager oriented, any study of managerial accounting must be preceded
by some understanding of what managers do, the information managers need, and the
general business environment. Accordingly, the purpose of this chapter is to briefly ex-
amine these subjects.
The Work of ManagementTheand theofNeed

Work for Managerial
Management and the Need for
Accounting InformationManagerial Accounting Information
Suggested Reading Every organizationlarge and smallhas managers. Someone must be responsible for
A number of Statements on Man-
making plans, organizing resources, directing personnel, and controlling operations. This
agement Accounting issued by
is true of the Bank of America, the Peace Corps, the University of Illinois, the Red Cross,
the Institute of Management Ac-
countants, Montvale, New Jersey
and the Coca-Cola Corporation, as well as the local 7-Eleven convenience store. In this
(www.imanet.org) are relevant to the chapter, we will use a particular organizationGood Vibrations, Inc.to illustrate the
introductory material in this chapter work of management. What we have to say about the management of Good Vibrations,
concerning the work of management however, is very general and can be applied to virtually any organization.
accountants. See, in particular, Good Vibrations runs a chain of retail outlets that sells a full range of music CDs. The
Statement Number 1A, Definition of chains stores are concentrated in Pacific Rim cities such as Sydney, Singapore, Hong
Management Accounting; Statement Kong, Beijing, Tokyo, and Vancouver. The company has found that the best way to gen-
Number 1B, Objectives of Manage- erate sales, and profits, is to create an exciting shopping environment. Consequently, the
ment Accounting; Statement Num- company puts a great deal of effort into planning the layout and decor of its stores
ber 1D, The Common Body of
which are often quite large and extend over several floors in key downtown locations.
Knowledge for Management Ac-
Management knows that different types of clientele are attracted to different kinds of mu-
countants; Statement Number 5B,
Fundamentals of Reporting Informa-
sic. The international rock section is generally decorated with bold, brightly colored
tion to Managers; Statement Number graphics, and the aisles are purposely narrow to create a crowded feeling much like one
5D, Developing Comprehensive would experience at a popular nightclub on Friday night. In contrast, the classical music
Competitive Intelligence; and State- section is wood-paneled and fully sound insulated, with the rich, spacious feeling of a
ment Number 5E, Redesigning the country club meeting room.
Finance Function. Managers at Good Vibrations like managers everywhere, carry out three major
activitiesplanning, directing and motivating, and controlling. Planning involves se-
lecting a course of action and specifying how the action will be implemented. Directing
and motivating involves mobilizing people to carry out plans and run routine operations.
Controlling involves ensuring that the plan is actually carried out and is appropri-
ately modified as circumstances change. Management accounting information plays a
Chapter 1 Managerial Accounting and the Business Environment 5
vital role in these basic management activitiesbut most particularly in the planning and
control functions.
Planning
The first step in planning is to identify alternatives and then to select from among the al-
ternatives the one that does the best job of furthering the organizations objectives. The
basic objective of Good Vibrations is to earn profits for the owners of the company by
providing superior service at competitive prices in as many markets as possible. To fur-
ther this objective, every year top management carefully considers a range of options, or
alternatives, for expanding into new geographic markets. This year management is con-
sidering opening new stores in Shanghai, Los Angeles, and Auckland.
When making this and other choices, management must balance the opportunities
against the demands made on the companys resources. Management knows from bitter
experience that opening a store in a major new market is a big step that cannot be taken
lightly. It requires enormous amounts of time and energy from the companys most expe-
rienced, talented, and busy professionals. When the company attempted to open stores in
both Beijing and Vancouver in the same year, resources were stretched too thinly. The re-
sult was that neither store opened on schedule, and operations in the rest of the company
suffered. Therefore, entering new markets is planned very, very carefully.
Among other data, top management looks at the sales volumes, profit margins, and
costs of the companys established stores in similar markets. These data, supplied by the
management accountant, are combined with projected sales volume data at the proposed
new locations to estimate the profits that would be generated by the new stores. In gen-
eral, virtually all important alternatives considered by management in the planning
process have some effect on revenues or costs, and management accounting data are es-
sential in estimating those effects.
After considering all of the alternatives, Good Vibrations top management decided to
open a store in the booming Shanghai market in the third quarter of the year, but to defer
opening any other new stores to another year. As soon as this decision was made, detailed
plans were drawn up for all parts of the company that would be involved in the Shanghai
opening. For example, the Personnel Departments travel budget was increased, since it
would be providing extensive on-site training to the new personnel hired in Shanghai.
As in the Personnel Department example, the plans of management are often ex-
pressed formally in budgets, and the term budgeting is applied to generally describe this
part of the planning process. Budgets are usually prepared under the direction of the con-
troller, who is the manager in charge of the Accounting Department. Typically, budgets
are prepared annually and represent managements plans in specific, quantitative terms.
In addition to a travel budget, the Personnel Department will be given goals in terms of
new hires, courses taught, and detailed breakdowns of expected expenses. Similarly, the
manager of each store will be given a target for sales volume, profit, expenses, pilferage
losses, and employee training. These data will be collected, analyzed, and summarized for
management use in the form of budgets prepared by management accountants.
Directing and Motivating

In addition to planning for the future, managers must oversee day-to-day activities and
keep the organization functioning smoothly. This requires the ability to motivate and ef-
fectively direct people. Managers assign tasks to employees, arbitrate disputes, answer
questions, solve on-the-spot problems, and make many small decisions that affect cus-
tomers and employees. In effect, directing is that part of the managers work that deals
with the routine and the here and now. Managerial accounting data, such as daily sales re-
ports, are often used in this type of day-to-day decision making.
Controlling
In carrying out the control function, managers seek to ensure that the plan is being fol-
lowed. Feedback, which signals whether operations are on track, is the key to effective
control. In sophisticated organizations, this feedback is provided by detailed reports of

various types. One of these reports, which compares budgeted to actual results, is called
a performance report. Performance reports suggest where operations are not proceeding
as planned and where some parts of the organization may require additional attention. For
example, before opening the new Shanghai store in the third quarter of the year, the
stores manager will be given sales volume, profit, and expense targets for the fourth
quarter of the year. As the fourth quarter progresses, periodic reports will be made in
which the actual sales volume, profit, and expenses are compared to the targets. If the ac-
tual results fall below the targets, top management will be alerted that the Shanghai store
requires more attention. Experienced personnel can be flown in to help the new manager,
or top management may conclude that its plans need to be revised. As we shall see in fol-
lowing chapters, providing this kind of feedback to managers is one of the central pur-
poses of managerial accounting.
The End Results of Managers Activities

As a customer enters one of the Good Vibrations stores, the results of managements plan-
ning, directing and motivating, and controlling activities will be evident in the many de-
tails that make the difference between a pleasant and an irritating shopping experience.
The store will be clean, fashionably decorated, and logically laid out. Featured artists
videos will be displayed on TV monitors throughout the store, and the background rock
music will be loud enough to send older patrons scurrying for the classical music section.
Popular CDs will be in stock, and the latest hits will be available for private listening on
earphones. Specific titles will be easy to find. Regional music, such as CantoPop in Hong
Kong, will be prominently featured. Checkout clerks will be alert, friendly, and efficient.
In short, what the customer experiences doesnt simply happen; it is the result of the ef-
forts of managers who must visualize and then fit together the processes that are needed
to get the job done.
The Planning and Control Cycle

The work of management can be summarized in a model such as the one shown in Ex-
hibit 11. The model, which depicts the planning and control cycle, illustrates the
smooth flow of management activities from planning through directing and motivating,
controlling, and then back to planning again. All of these activities involve decision mak-
ing, so it is depicted as the hub around which the other activities revolve.
Comparison of Financial and Managerial

Comparison Accounting
of Financial and Managerial Accounting
LEARNING OBJECTIVE 1
Financial accounting reports are prepared for external parties such as shareholders and
Identify the major differences creditors, whereas managerial accounting reports are prepared for managers inside the or-
and similarities between ganization. This contrast in orientation results in a number of major differences between
financial and managerial financial and managerial accounting, even though both disciplines often rely on the same
accounting. underlying financial data. These differences are summarized in Exhibit 12.
As shown in Exhibit 12, financial and managerial accounting differ not only in their
Reinforcing Problems user orientation but also in their emphasis on the past and the future, in the type of data
Learning Objective 1 provided to users, and in several other ways. These differences are discussed in the fol-
Exercise 11 Basic 10 min. lowing paragraphs.
Topic Tackler
Emphasis on the Future
Since planning is such an important part of the managers job, managerial accounting has
PLUS
a strong future orientation. In contrast, financial accounting primarily provides summaries
11 of past financial transactions. These summaries may be useful in planning, but only to a
EXHIBIT 11
The Planning and Control Cycle
Formulating long- and

short-term plans (Planning)
Comparing actual to Implementing

Decision
planned performance plans (Directing
Making
(Controlling) and Motivating)
Measuring performance
(Controlling)
EXHIBIT 12
Comparison of Financial and Managerial Accounting
Accounting
Recording
Estimating Financial and
Organizing Operational Data
Summarizing
Financial Managerial
Accounting Accounting
Reports to those outside Reports to those inside

the organization: the organization for:
Owners Planning
Lenders Directing and motivating
Tax authorities Controlling
Regulators Performance evaluation
Emphasis is on summaries Emphasis is on decisions

of financial consequences affecting the future.
of past activities.
Objectivity and verifiability Relevance is emphasized.

of data are emphasized.
Precision is required. Timeliness is required.
Only summarized data for Detailed segment reports

the entire organization about departments, products,
are prepared. customers, and employees
are prepared.
Must follow GAAP. Need not follow GAAP.
Mandatory for external reports. Not mandatory.

point. The future is not simply a reflection of what has happened in the past. Changes are
constantly taking place in economic conditions, customer needs and desires, competitive
conditions, and so on. All of these changes demand that the managers planning be based
in large part on estimates of what will happen rather than on summaries of what has al-
ready happened.
Relevance of Data
Financial accounting data are expected to be objective and verifiable. However, for inter-
nal uses the manager wants information that is relevant even if it is not completely objec-
tive or verifiable. By relevant, we mean appropriate for the problem at hand. For
example, it is difficult to verify estimated sales volumes for a proposed new store at Good
Vibrations, but this is exactly the type of information that is most useful to managers in
their decision making. The managerial accounting information system should be flexible
enough to provide whatever data are relevant for a particular decision.
IN BUSINESS WHY DO YOU ASK?

Caterpillar has long been at the forefront of management accounting practice. When asked by a
manager for the cost of something, accountants at Caterpillar have been trained to ask What are
you going to use the cost for? One management accountant at Caterpillar explains: We want to
make sure the information is formatted and the right elements are included. Do you need a variable
cost, do you need a fully burdened cost, do you need overhead applied, are you just talking about
discretionary cost? The cost that they really need depends on the decision they are making.
Source: Gary Siegel, Practice Analysis: Adding Value, Strategic Finance, November 2000, pp. 8990.
Less Emphasis on Precision

Making sure that dollar amounts are accurate down to the last dollar or penny takes time
and effort. While that kind of accuracy is required for external reports, most managers
would rather have a good estimate immediately than wait for a more precise answer later.
For this reason, managerial accountants often place less emphasis on precision than fi-
nancial accountants do. In fact, one authoritative source recommends that, as a general
rule, no one needs more than three significant digits in the data that are used in decision-
making.1 For example, in a decision involving hundreds of millions of dollars, estimates
that are rounded off to the nearest million dollars are probably good enough. In addition
to placing less emphasis on precision than financial accounting, managerial accounting
places much more weight on nonmonetary data. For example, data about customer satis-
faction may be routinely used in managerial accounting reports.
Segments of an Organization
Financial accounting is primarily concerned with reporting for the company as a whole.
By contrast, managerial accounting focuses much more on the parts, or segments, of a
company. These segments may be product lines, sales territories, divisions, departments,
or any other categorization of the companys activities that management finds useful. Fi-
nancial accounting does require some breakdowns of revenues and costs by major seg-
ments in external reports, but this is a secondary emphasis. In managerial accounting,
segment reporting is the primary emphasis.
1
Statements on Management Accounting, Statement Number 5B, Fundamentals of Reporting Infor-
mation to Managers, Institute of Management Accountants, Montvale, NJ, p. 6.
Generally Accepted Accounting Principles (GAAP)

Financial accounting statements prepared for external users must be prepared in accor-
dance with generally accepted accounting principles (GAAP). External users must have
some assurance that the reports have been prepared in accordance with some common set
of ground rules. These common ground rules enhance comparability and help reduce
fraud and misrepresentation, but they do not necessarily lead to the type of reports that
would be most useful in internal decision making. For example, GAAP requires that land
be stated at its historical cost on financial reports. However, if management is consider-
ing moving a store to a new location and then selling the land that the store currently sits
on, management would like to know the current market value of the landa vital piece
of information that is ignored under GAAP.
Managerial accounting is not bound by GAAP. Managers set their own rules con-
cerning the content and form of internal reports. The only constraint is that the expected
benefits from using the information should outweigh the costs of collecting, analyzing,
and summarizing the data. Nevertheless, as we shall see in subsequent chapters, it is un-
deniably true that financial reporting requirements have heavily influenced management
accounting practice.
Managerial AccountingNot Mandatory

Financial accounting is mandatory; that is, it must be done. Various outside parties such as
the Securities and Exchange Commission (SEC) and the tax authorities require periodic
financial statements. Managerial accounting, on the other hand, is not mandatory. A com-
pany is completely free to do as much or as little as it wishes. No regulatory bodies or
other outside agencies specify what is to be done, or, for that matter, whether anything is
to be done at all. Since managerial accounting is completely optional, the important ques-
tion is always, Is the information useful? rather than, Is the information required?
Organizational Structure Organizational Structure

Management must accomplish its objectives by working through people. Presidents of LEARNING OBJECTIVE 2
companies like Good Vibrations could not possibly execute all of their companys strate- Understand the role of
gies alone; they must rely on other people. This is done by creating an organizational management accountants in
structure that permits effective decentralization. an organization.
Reinforcing Problems
Decentralization Learning Objective 2
Decentralization is the delegation of decision-making authority throughout an organiza- Exercise 11 Basic 10 min.
tion by providing managers with the authority to make decisions relating to their area of Problem 14 Basic 30 min.
responsibility. Some organizations are more decentralized than others. Because of Good Problem 16 Medium 30 min.
Vibrations geographic dispersion and the peculiarities of local markets, the company is
highly decentralized.
Good Vibrations president (also called chief executive officer or CEO) sets the broad
strategy for the company and makes major strategic decisions such as opening stores in new
markets, but much of the remaining decision-making authority is delegated to managers on
various levels throughout the organization. These levels are as follows: The company has a
number of retail stores, each of which has a store manager as well as a separate manager for
each section such as international rock and classical/jazz. In addition, the company has sup-
port departments such as a central Purchasing Department and a Personnel Department.
The organizational structure of the company is depicted in Exhibit 13 (page 10).
The arrangement of boxes shown in Exhibit 13 is called an organization chart. The
purpose of an organization chart is to show how responsibility is divided among managers
and to show formal lines of reporting and communication, or chain of command. Each
box depicts an area of management responsibility, and the lines between the boxes show
EXHIBIT 13
Organization Chart, Good Vibrations, Inc.
Board of
Directors
President
Purchasing Personnel Vice President Chief Financial

Department Department Operations Officer
Treasurer Controller
Manager Manager
Hong Kong store Tokyo store
Manager Manager Manager Manager

Intnl Rock Classical/Jazz Intnl Rock Classical/Jazz
Manager Manager
CantoPop Karaoke
Other Stores
the lines of formal authority between managers. The chart tells us, for example, that the
store managers are responsible to the operations vice president. In turn, the latter is re-
sponsible to the company president, who in turn is responsible to the board of directors.
Following the lines of authority and communication on the organization chart, we can see
that the manager of the Hong Kong store would ordinarily report to the operations vice
president rather than directly to the president of the company.
Informal relationships and channels of communication often develop outside the for-
mal reporting relationships on the organization chart as a result of personal contacts be-
tween managers. The informal structure does not appear on the organization chart, but it
is often vital to effective operations.
Line and Staff Relationships

An organization chart also depicts line and staff positions in an organization. A person in
a line position is directly involved in achieving the basic objectives of the organization. A
person in a staff position, by contrast, is only indirectly involved in achieving those basic
objectives. Staff positions support or provide assistance to line positions or other parts of
the organization, but they do not have direct authority over line positions. Refer again to
the organization chart in Exhibit 13. Since the basic objective of Good Vibrations is to
sell recorded music at a profit, those managers whose areas of responsibility are directly
related to the sales effort occupy line positions. These positions, which are shown in a
darker color in the exhibit, include the managers of the various music departments in each
store, the store managers, the operations vice president, and members of top management.
By contrast, the manager of the central Purchasing Department occupies a staff posi- Suggested Reading
tion, since the only function of the Purchasing Department is to support and serve the line See Counting More, Counting Less:
departments by doing their purchasing for them. However, both line and staff managers Transformations in the Management
Accounting Profession, The 1999
have authority over the employees in their own departments.
Practice Analysis of Management
Accounting, IMA, research con-
The Chief Financial Officer ducted by the Gary Siegel Organi-
zation, August 1999, for survey data
As previously mentioned, in the United States the manager of the accounting department concerning the state of management
is often known as the controller. The controller in turn reports to the Chief Financial Of- accounting.
ficer (CFO). The Chief Financial Officer is the member of the top management team
who is responsible for providing timely and relevant data to support planning and control
activities and for preparing financial statements for external users. An effective CFO is
considered a key member of the top management team whose advice is sought in all ma-
jor decisions. The CFO is a highly paid professional who has command over the techni-
cal details of accounting and finance, who can provide leadership to other professionals
Suggested Reading
in his or her department, who can analyze new and evolving situations, who can commu- For insight regarding how the roles
nicate technical data to others in a simple and clear manner, and who is able to work well of CFO and controller are evolving,
with top managers from other disciplines. see Margaret Johnsson, The
It should be noted that few of the people who are trained as accountants and who work Changing Role of the CFO, Strate-
under the Chief Financial Officer in either the treasurers office or the controllers office gic Finance, June 2002, pp. 5467;
think of themselves as accountants. If asked, they are likely to identify themselves as and Stephen D. Colton, The Chang-
working in finance. Management accounting is not about debits and credits or recording ing Role of the Controller, Journal of
journal entries, although some knowledge of that is necessary. Management accounting is Cost Management, November/
about helping managers to pursue the organizations goals. A recent report states that: December 2001, pp. 510.
Growing numbers of management accountants spend the bulk of their time as inter-
nal consultants or business analysts within their companies. Technological advances
have liberated them from the mechanical aspects of accounting. They spend less time
preparing standardized reports and more time analyzing and interpreting information.
Many have moved from the isolation of accounting departments to be physically po-
sitioned in the operating departments with which they work. Management accoun-
tants work on cross-functional teams, have extensive face-to-face communications
with people throughout their organizations, and are actively involved in decision
making. . . . They are trusted advisors.2
BEYOND THE NUMBERS IN BUSINESS

Judy C. Lewent is the Chief Financial Officer (CFO) of Merck, a major pharmaceutical company. She
is in charge of 750 people and is intimately involved in the companys most important strategic de-
cisions. Cynthia Beach, vice president of global investment research at Goldman Sachs & Co., says
this about Lewent: From my standpoint, Merck is one of the best-managed [pharmaceutical] com-
panies, and Judy is a key reason why. Mercks chairman, CEO, and president Raymond Gilmartin
adds this about Lewent: Many CFOs take as their prime directive the timely, accurate delivery of de-
tailed financial data and analysis to top management. While the importance of these services can-
not be overestimated, with Judy they are simply one of the many ways she contributes to the
business. [Lewent and her organization] make decisions about which developmental-product pro-
jects to fund and how to structure our product franchises, acquisition possibilities, and licensing
arrangements.
Source: Russ Banham, Merck Grows from the Inside Out, Powered by the CFOs Joint Ventures, CFO, October
2000, pp. 6970.
2
Gary Siegel Organization, Counting More, Counting Less: Transformations in the Management Ac-
counting Profession, The 1999 Practice Analysis of Management Accounting, Institute of Management
Accountants, Montvale, NJ, August 1999, p. 3.
IN BUSINESS WHAT DOES IT TAKE?

A controller at McDonalds describes the characteristics needed by its most successful manage-
ment accountants as follows:
[I]ts a given that you know your accounting cold. Youre expected to know the tax implications
of proposed courses of action. You need to understand cost flows and information flows. You
have to be very comfortable with technology and be an expert in the companys business and
accounting software. You have to be a generalist. You need a working knowledge of what peo-
ple do in marketing, engineering, human resources, and other departments. You need to un-
derstand how the processes, departments, and functions work together to run the business.
Youll be expected to contribute ideas at planning meetings, so you have to see the big picture,
keep a focus on the bottom line, and think strategically.
Source: Gary Siegel, James E. Sorensen, and Sandra B. Richtermeyer, Becoming a Business Partner: Part 2,
Strategic Finance, October 2003, pp. 3741. Used with permission from the Institute of Management Accoun-
tants (IMA), Montvale, N.J., USA, www.imanet.org.
The Changing BusinessThe Changing Business Environment

Environment
The last two decades have been a period of tremendous turmoil and change in the busi-
Understand the basic concepts
ness environment. Competition in many industries has become worldwide in scope, and
underlying Just-In-Time (JIT),
the pace of innovation in products and services has accelerated. This has been good news
Total Quality Management
for consumers, since intensified competition has generally led to lower prices, higher
(TQM), Process Reengineering,
quality, and more choices. However, the last two decades have been a period of wrench-
and the Theory of Constraints
ing change for many businesses and their employees. Many managers have learned that
(TOC).
cherished ways of doing business dont work anymore and that major changes must be
made in how organizations are managed and in how work gets done. And to add even
Reinforcing Problems more dynamism, the Internet has been changing ways of doing business in more and more
Learning Objective 3 industries since the mid 1990s.
Exercise 12 Basic 10 min. These changes in the business environment have affected managerial accountingas
Problem 18 Medium 30 min. we will see throughout the rest of the text. First, however, it is necessary to have an ap-
preciation of the ways in which organizations are transforming themselves to become
Topic Tackler
more competitive. Since the early 1980s, many companies have gone through several
waves of improvement programs, starting with Just-In-Time (JIT) and passing on to Total
PLUS
Quality Management (TQM), Process Reengineering, Lean Production, Six Sigma, and
various other management programsincluding in some companies the Theory of Con-
12 straints (TOC). When properly implemented, these improvement programs can enhance
quality, reduce cost, increase output, eliminate delays in responding to customers, and ul-
Suggested Reading timately increase profits. However, they have not always been wisely implemented, and
As global competition has emerged, considerable controversy remains concerning the ultimate value of each of these pro-
the nature and intensity of competi- grams. Nevertheless, the current business environment cannot be properly understood
tion have increased. In such a dy-
without some appreciation of what these programs attempt to accomplish. Each is worthy
namic competitive environment, it is
of extended study, but we will discuss only those aspects of the programs that are essen-
doubtful that any competitive advan-
tage can be sustained. Competition
tial for understanding managerial accounting. The details of improvement programs are
in a world of temporary advantage is best handled in operations management courses.
discussed in Robin Cooper, Lean This section on the changing business environment will close with a discussion of the
Enterprises and the Confrontation role of international competition and the impact of the Internet on business.
Strategy, Academy of Management
Executive, August 1996, pp. 2840.
Just-In-Time (JIT)
Traditionally, manufacturers have forecasted demand for their products into the future and
then have attempted to smooth out production to meet that forecasted demand. At the same
time, they have also attempted to keep everyone and everything as busy as possible pro-
ducing output so as to maximize efficiency and (hopefully) reduce costs. Unfortunately,
this approach has a number of major drawbacks including large inventories, long produc- Suggested Reading
tion times, high defect rates, product obsolescence, an inability to meet delivery schedules, For critical perspectives on JIT, TQM,
and (ironically) high costs. None of this is obviousif it were, companies would long ago Process Reengineering, and so on,
see: Malcolm Smith, Innovation and
have abandoned this approach. Managers at Toyota are credited with the insight that an en-
the Great ABC Trade-Off, Manage-
tirely new approach, called Just-In-Time, was needed.
ment Accounting (UK), January
When companies use the Just-In-Time (JIT) production and inventory control sys- 1998, pp. 2426; Daniel Butler,
tem, they purchase materials and produce units only as needed to meet actual customer de- Here Today, Wrong Tomorrow, Ac-
mand. In a JIT system, inventories are reduced to the minimum and in some cases are zero. countancy International, June 1998,
For example, the Memory Products Division of Stolle Corporation in Sidney, Ohio, slashed pp. 4041; Darrel K. Rigby, Whats
its work in process inventory from 10,000 units to 250 units by using JIT techniques.3 Todays Special at the Consultants
The JIT approach can be used in both merchandising and manufacturing companies. Caf? Fortune, September 7, 1998,
It has the most profound effects, however, on the operations of manufacturing companies, pp. 162163; Michael S. Malone,
which maintain three classes of inventoriesraw materials, work in process, and finished A Way Too Short History of Fads,
goods. Raw materials are the materials that are used to make a product. Work in process Forbes ASAP, April 7, 1997, p. 72;
Thomas A. Stewart, Another Fad
inventories consist of units of product that are only partially complete and will require
Worth Killing, Fortune, February 3,
further work before they are ready for sale to a customer. Finished goods inventories con-
1997, pp. 9293; Eileen Shapiro,
sist of units of product that have been completed but have not yet been sold to customers. Managing in the Age of Gurus,
Traditionally, manufacturing companies have maintained large amounts of all three Harvard Business Review, March-
kinds of inventories to act as buffers so that operations can proceed smoothly even if there April 1997, pp. 142147; and
are unanticipated disruptions. Raw materials inventories provide insurance in case suppli- Joseph B. White, Next Big Thing:
ers are late with deliveries. Work in process inventories are maintained in case a worksta- Reengineering Gurus Take Steps to
tion is unable to operate due to a breakdown or other reason. Finished goods inventories Remodel Their Stalling Vehicles,
are maintained to accommodate unanticipated fluctuations in customer demand. The Wall Street Journal, November
While these inventories provide buffers against unforeseen events, they have a cost. 26, 1996, pp. A1, A10.
In addition to the money tied up in the inventory, experts argue that the presence of in-
ventories encourages inefficient and sloppy work, results in too many defects, and dra-
matically increases the amount of time required to complete a product.
CHOPPING INVENTORIES AT PORSCHE IN BUSINESS

Industry insiders were writing off Porsche as an independent carmaker in the earlier 1990s. Sales
in 1992 were down to less than 15,000 cars, one-fourth their 1986 peak, and losses had mounted
to $133 million. Thats when Wendelin Wiedeking became the top manager at the revered, but ailing,
company.
Wiedeking hired two Japanese efficiency experts to help overcome Porsches stubborn tradi-
tionalism. They immediately tackled a wasteful inventory of parts stacked on shelves all over the
three-story Stuttgart factory. One of the experts handed Wiedeking a circular saw. While astounded
assembly workers watched, he moved down an aisle and chopped the top half off a row of shelves.
They proceeded to overhaul the assembly process, slashing the time required to build the new
911 Carrera model from 120 hours down to just 60 hours. They cut the time required to develop a
new model from seven years to just three years. And a quality-control program has helped reduce
the number of defective parts by a factor of 10. As a consequence of these, and other actions, the
companys sales have more than doubled to about 34,000 cars, and earnings were about $55 mil-
lion in the latest fiscal year.
Source: David Woodruff, Porsche Is BackAnd Then Some, Business Week, September 15, 1997, p. 57.
Under ideal conditions, a company operating a Just-In-Time system would purchase

only enough materials each day to meet that days needs. Moreover, the company would
have no goods still in process at the end of the day, and all goods completed during the day
would have been shipped immediately to customers. As this sequence suggests, just-in-
time means that raw materials are received just in time to go into production, manufactured
3
Nabil Hassan, Herbert E. Brown, Paula M. Sanders, and Nick Koumoutzis, Stolle Puts World Class
into Memory, Management Accounting, January 1993, pp. 2225.
parts are completed just in time to be assembled into products, and products are completed
just in time to be shipped to customers.
Although few companies have been able to reach this ideal, many companies have
been able to reduce inventories to only a fraction of their previous levels. The result has
been a substantial reduction in ordering and warehousing costs, and much more efficient
and effective operations. In JIT, the traditional emphasis on keeping everyone busy is
abandoned in favor of producing only what customers actually wanteven if that means
some workers are idle.
Suggested Reading JIT Consequences Managers who attempted to implement the JIT approach found
Rosemary Fullerton and Cheryl that it was necessary to make other major improvements in operations if inventories were
McWatters studied a sample of 253
to be significantly reduced. First, production would be held up and a deadline for shipping
U.S. manufacturing firms to examine
a product would be missed if a key part was missing or was found to be defective. So sup-
the relationship between the level of
JIT practices implemented and the
pliers had to be able to deliver defect-free goods in just the right quantity and just when
design of management accounting needed. This typically meant that the company would have to rely on a few, ultra-reliable
systems in The Role of Performance suppliers that would be willing to make frequent deliveries in small lots just before the
Measures and Incentive Systems in parts and materials would be needed in production. Second, the typical plant layout
Relation to the Degree of JIT Imple- needed to be improved. Traditionally, similar machines were grouped together in a single
mentation, Accounting, Organiza- location. All of the drill presses would be in one place, all of the lathes in another place,
tions and Society, November 2002, and so on. As a result, work in process had to be moved frequently over long distances
pp. 711735. creating delays, difficulties in locating orders, and sometimes damage. In a JIT system, all
of the machines required to make a single product or product line are typically brought to-
gether in one locationcreating what is called a focused factory or a manufacturing cell.
This improved plant layout allows workers to focus all of their efforts on one product
from start to finishcreating a sense of ownership and pride in the product and minimiz-
ing handling and moving. One company was able to reduce the distance traveled by one
product from three miles to just 300 feet. An improved plant layout can dramatically in-
crease throughput, which is the total volume of production through a facility during a pe-
riod, and it can dramatically reduce throughput time (also known as cycle time), which
is the time required to make a product.
IN BUSINESS CANON GOES CELLULAR

Canon has completely revamped its production processes in its photocopier plants, ripping out the
conveyor belts and heavy equipment that used to be the core of its assembly lines. Instead, Canon
has adopted cell production with small teams of about six workers concentrating on building a sin-
gle type of copying machine. Instead of being bolted to the floor, the production equipment is lighter
and more modular, and can be more easily moved into new configurations. Workers are encour-
aged to come up with their own solutions. For example, one worker rigged a lid that comes down
over photosensitive drums she is installing into copiers to prevent dust and light from harming
them. As a result, assembly costs have been cut in half and productivity has been boosted by 20%.
Source: William J. Holstein, Canon Takes Aim at Xerox, Fortune, October 14, 2002, pp. 215220.
Changing over production from one product to another, which involves setups, also
creates problems for JIT. Setups require activitiessuch as moving materials, changing
machine settings, setting up equipment, and running teststhat must be performed when-
ever production is switched over to making a different product. For example, a company
that makes side panels for DaimlerChryslers PT Cruiser must prime and paint the steel
panels with the color specified by DaimlerChrysler. Every time the color is changed, the
spray paint reservoirs must be completely purged and cleaned. This may take hours and
results in wasted paint. Because of the time and expense involved in such setups, many
managers believe setups should be avoided and therefore items should be produced only
in large batches. Think of this in terms of scheduling your classes. If you have to com-
mute to school and pay for parking, would you rather have two classes back-to-back on
the same day or on different days? By scheduling your classes back-to-back on the same
day, you will only have to commute and pay for parking once.
Managers follow the same reasoning when they schedule production. If the customer
has ordered 400 units, most managers would rather produce all of them in one big batch and
incur the setup costs once rather than in two batches of 200 units each, which incurs the
setup costs twice. Indeed, because of setup costs, most companies have rules about the min-
imum batch size that can be run. If the customer orders just 25 units, managers will still run
the order in a batch of 400 units and keep the other 375 units in inventory in case someone
orders the item later. The problem with this line of reasoning is that big batches result in
large amounts of inventorythe exact opposite of what JIT attempts to accomplish. In JIT,
this problem is attacked directly by reducing setup time so that it becomes insignificant.
Simple techniques, such as doing as much setup work as possible in advance off-line rather
than waiting until production is shut down, are often very effective in reducing setup time
and costs. Reduced setup times make smaller batches more economical, which in turn
makes it easier to respond quickly to the market with exactly the items that customers want.
Defective units create big problems in a JIT environment. If a completed order contains
a defective unit, the company must ship the order with less than the promised quantity or it
must restart the whole production process to make just one unit. At minimum, this creates a
delay in shipping the order and may generate a ripple effect that delays other orders. For this
and other reasons, defects cannot be tolerated in a JIT system. Companies that are deeply in-
volved in JIT tend to become zealously committed to a goal of zero defects. Even though it
may be next to impossible to attain the zero defect goal, companies have found that they can
come very close. For example, Motorola, Allied Signal, and many other companies now
measure defects in terms of the number of defects per million units of product.
Benefits of a JIT System Many companieslarge and smallhave employed JIT Suggested Reading
with great success. Among the major companies using JIT are Bose, Goodyear, Westing- Michael Kinney and William Wempe
house, General Motors, Hughes Aircraft, Ford Motor Company, Black and Decker, use a sample of 201 JIT adopters
and matched nonadopters to exam-
Chrysler, Borg-Warner, John Deere, Xerox, Tektronix, and Intel. The main benefits of JIT
ine the relationship between financial
include:
performance and JIT in Further
1. Funds that were tied up in inventories can be used elsewhere. Evidence on the Extent and Origins
2. Areas previously used to store inventories are made available for other, more pro- of JITs Profitability Effects, The
ductive uses. Accounting Review, January 2002,
pp. 203225.
3. Throughput time is reduced, resulting in greater potential output and quicker re-
sponse to customers.
4. Defect rates are reduced, resulting in less waste and greater customer satisfaction.
As a result of benefits such as those cited above, more companies are embracing JIT
each year. Most companies find, however, that simply reducing inventories is not enough.
To remain competitive in an ever changing and increasingly competitive business envi-
ronment, companies must strive for continuous improvement.
THE DOWNSIDE OF JIT IN BUSINESS

Just-In-Time (JIT) systems have many advantages, but they are vulnerable to unexpected disruptions
in supply. A production line can quickly come to a halt if essential parts are unavailable. Toyota, the
developer of JIT, found this out the hard way. One Saturday, a fire at Aisin Seiki Companys plant in
Aichi Prefecture stopped the delivery of all brake parts to Toyota. By Tuesday, Toyota had to close
down all of its Japanese assembly lines. By the time the supply of brake parts had been restored,
Toyota had lost an estimated $15 billion in sales.
Source: Toyota to Recalibrate Just-in-Time, International Herald Tribune, February 8, 1997, p. 9.
Suggested Reading
Statement on Management Account-
Total Quality Management (TQM) ing Number 4R, Managing Quality
Improvements, issued by the Insti-
Perhaps the most popular approach to continuous improvement is known as Total Qual- tute of Management Accountants,
ity Management. There are two major characteristics of Total Quality Management Montvale, NJ (www.imanet.org) con-
(TQM): (1) a focus on serving customers and (2) systematic problem solving using teams tains materials dealing with TQM.
made up of front-line workers. A variety of specific tools are available to aid teams in
their problem solving. One of these tools, benchmarking, involves studying organiza-
tions that are among the best in the world at performing a particular task. For example,
General Mills studied NASCAR pit crews in action to figure out how to cut the time to
change a production line from one product to another from 4.5 hours to just 12 minutes.4
Suggested Reading Perhaps the most important feature of TQM is that it improves productivity by en-
Steven Spear and H. Kent Bowen
couraging the use of science in decision-making and discouraging counter-productive de-
explain how Toyota uses the scien-
fensive behavior.5
tific method to systematically solve
problems and continuously improve
Thousands of organizations have been involved in TQM and similar programs. Some
operations in Decoding the DNA of of the more well-known companies are American Express, AT&T, Cadillac Motor Car,
the Toyota Production System, Har- Corning, Dun & Bradstreet, Ericsson of Sweden, Federal Express, GTE Directories, First
vard Business Review, September- National Bank of Chicago, Florida Power and Light, General Electric, Hospital Corpora-
October 1999, pp. 96108. tion of America, IBM, Johnson & Johnson, KLM Royal Dutch Airlines, LTV, 3M, Mil-
liken & Company, Motorola, Northern Telecom of Canada, Phillips of the Netherlands,
Ritz Carlton Hotel, Texas Instruments, Westinghouse Electric, and Xerox. As this list il-
lustrates, TQM is international in scope and is not confined to manufacturing. Indeed, a
survey by the American Hospital Association of 3,300 hospitals found that 69% have
launched quality-improvement programs. For example, Intermountain Healthcares LDS
Hospital in Salt Lake City is using TQM techniques to reduce infection rates among
surgery patients and the toxic side effects of chemotherapy.6
Suggested Reading In sum, TQM provides tools and techniques for continuous improvement based on
Farzaneh Fazel compares Total facts and analysis; and if properly implemented, it avoids counterproductive organiza-
Quality Management and Business
tional infighting.
Process Reengineering in TQM vs.
BPR, Quality Progress, October
2003, pp. 5963. Process Reengineering
Process Reengineering is a more radical approach to improvement than TQM. Instead of
tweaking the existing system in a series of incremental improvements, in Process
Reengineering a business process is diagrammed in detail, questioned, and then com-
pletely redesigned to eliminate unnecessary steps, to reduce opportunities for errors, and
to reduce costs. A business process is any series of steps that are followed to carry out
Suggested Reading some task in a business. For example, the steps followed to make a large pineapple and
Michael Hammer coined the phrase Canadian bacon pizza at Godfathers Pizza are a business process. The steps followed by
reengineering in a 1990 Harvard your bank when you deposit a check are a business process. While Process Reengineer-
Business Review article. His more ing is similar in some respects to TQM, its proponents view it as a more sweeping ap-
recent thinking with respect to
proach to change. One difference is that while TQM emphasizes a team approach
reengineering is summarized in
involving people who work directly in the processes, Process Reengineering is more
two articles, namely How Process
Enterprises Really Work, Harvard
likely to be imposed from above and to use outside consultants.
Business Review, November 1999, Process Reengineering focuses on simplification and elimination of wasted effort. A
pp. 108118; and The Super- central idea of Process Reengineering is that all activities that do not add value to a prod-
efficient Company, Harvard uct or service should be eliminated. Activities that do not add value to a product or ser-
Business Review, September 2001, vice that customers are not willing to pay for are known as non-value-added activities.
pp. 8291. For example, moving large batches of work in process from one workstation to another is
a non-value-added activity. To some degree, JIT involves Process Reengineering as does
Suggested Reading
M.R. Rotab Khan provides a good
TQM. These management approaches often overlap.7
example of a business process Managers must be very careful when trying to convert business process improve-
reengineering project in Business ments into more profits. There are only two ways to increase profitsdecrease costs or
Process Reengineering of an Air increase sales. Cutting costs may seem easylay off workers who are no longer needed
Cargo Handling Process, Interna-
tional Journal of Production Econom- 4
Pallavi Gogoi, Thinking Outside the Cereal Box, Business Week, July 28, 2003, pp. 7475.
ics, January 2000, pp. 99109. 5
Karen Hopper Wruck and Michael C. Jensen, Science, Specific Knowledge, and Total Quality Man-
agement, Journal of Accounting and Economics 18 (1994), pp. 247287.
6
Ron Wilson, Excising Waste: Health-Care Providers Try Industrial Tactics in U.S. to Cut Costs,
The Wall Street Journal Europe, November 10, 1993, pp. 1 & 8.
7
Activity-based costing and activity-based management, both of which are discussed in Chapter 8, can
be helpful in identifying areas in the company that could benefit from process reengineering.
because of the elimination of non-value-added activities. However, employees quickly get

the message that process improvements lead to job losses and they will understandably re-
sist further improvement efforts. If improvement is to be ongoing, employees must be
convinced that the end result of improvement will be more secure rather than less secure
jobs. This can only happen if management uses business process improvements to gener-
ate more business rather than to cut the workforce.
The Theory of Constraints (TOC)

A constraint is anything that prevents you from getting more of what you want. Every in-
dividual and every organization faces at least one constraint, so it is not difficult to find
examples of constraints. You may not have enough time to study thoroughly for every
subject and to go out with your friends on the weekend, so time is your constraint. United
Airlines has only a limited number of loading gates available at its busy OHare hub, so Suggested Reading
Victoria J. Mabin and Steven J.
its constraint is loading gates. Vail Resorts has only a limited amount of land to develop
Balderstone analyze quantitative
as homesites and commercial lots at its ski areas, so its constraint is land.
data available from more than 80
The Theory of Constraints (TOC) is based on the insight that effectively managing TOC applications in The Perfor-
the constraint is a key to success. As an example, long waiting periods for surgery are a mance of the Theory of Constraints
chronic problem in the National Health Service (NHS), the government-funded provider Methodology: Analysis and Discus-
of health care in the United Kingdom. The diagram in Exhibit 14 illustrates a simplified sion of Successful TOC Application,
version of the steps followed by a patient who is identified for surgery and eventually International Journal of Operations &
treated. The number of patients who can be processed through each step in a day is indi- Production Management 23, no. 6,
cated in the exhibit. For example, appointments for outpatient visits can be made for up 2003, pp. 568596. Their results
to 100 referrals from general practitioners in a day. show that significant improvements
The constraint, or bottleneck, in the system is determined by the step that has the in both operational and financial
performance were achieved as a
smallest capacityin this case surgery. The total number of patients processed through
result of applying the TOC.
the entire system cannot exceed 15 per daythe maximum number of patients who can
be treated in surgery. No matter how hard managers, doctors, and nurses try to improve Suggested Reading
the processing rate elsewhere in the system, they will never succeed in driving down wait To compare JIT production methods
lists until the capacity of surgery is increased. In fact, improvements elsewhere in the with the TOC approach to produc-
systemparticularly before the constraintare likely to result in even longer waiting tion scheduling, see Patricia Huff,
times and more frustrated patients and health care providers. Thus, improvement efforts Using Drum-Buffer-Rope Schedul-
ing Rather than Just-in-Time Produc-
must be focused on the constraint to be effective. A business process, such as the process
tion, Management Accounting
for serving surgery patients, is like a chain. If you want to increase the strength of a chain,
Quarterly, Winter 2001, pp. 3640.
what is the most effective way to do this? Should you concentrate your efforts on
strengthening the strongest link, all the links, or the weakest link? Clearly, focusing your Instructors Note
effort on the weakest link will bring the biggest benefit. Explain to students that the theory of
Continuing with this analogy, the procedure to follow to strengthen the chain is clear. constraints (TOC) can help a com-
First, identify the weakest link, which is the constraint. Second, dont place a greater strain pany prioritize the use of time. Ask
students whether they would be
on the system than the weakest link can handleif you do, the chain will break. In the case
better off spending their available
of the NHS, waiting lists become unacceptably long. Third, concentrate improvement ef-
time studying for a course in which
forts on strengthening the weakest link. Find ways to increase the number of surgeries that they have an A average or one in
can be performed in a day. Fourth, if the improvement efforts are successful, eventually the which they have a C average.
EXHIBIT 14
Processing Surgery Patients at an NHS Facility (simplified)*
Add to
General
Appointment Outpatient surgery Follow-up
practitioner Surgery Discharge
made visit waiting visit
referral
list
100 patients 100 patients 50 patients 150 patients 15 patients 60 patients 140 patients
per day per day per day per day per day per day per day
*This diagram originally appeared in the February 1999 issue of the U.K. magazine Health Management.
weakest link will improve to the point where it is no longer the weakest link. At that point,
the new weakest link (i.e., the new constraint) must be identified, and improvement efforts
must be shifted over to that link. This simple sequential process provides a powerful strat-
egy for continuous improvement. The TOC approach is a perfect complement to other im-
provement tools such as TQM and process reengineeringit focuses improvement efforts
where they are likely to be most effective.
IN BUSINESS WATCH WHERE YOU CUT COSTS

At one hospital, the emergency room became so backlogged that its doors were closed to the pub-
lic and patients were turned away for over 36 hours in the course of a single month. It turned out,
after investigation, that the constraint was not the emergency room itself; it was the housekeeping
staff. To cut costs, managers at the hospital had laid off housekeeping workers. This created a bot-
tleneck in the emergency room because rooms were not being cleaned as quickly as the emergency
room staff could process new patients. Thus, laying off some of the lowest paid workers at the hos-
pital had the effect of forcing the hospital to idle some of its most highly paid staff and most ex-
pensive equipment!
Source: Tracey Burton-Houle, AGI Continues to Steadily Make Advances with the Adaptation of TOC into
Healthcare, www.goldratt.com/toctquarterly/august2002.htm.
IN BUSINESS THE CONSTRAINT IS THE KEY

The Lessines plant of Baxter International makes medical products such as sterile bags. Manage-
ment of the plant is acutely aware of the necessity to actively manage its constraints. For example,
when materials are a constraint, management may go to a secondary vendor and purchase materi-
als at a higher cost than normal. When a machine is the constraint, a weekend shift is often added
on the machine. If a particular machine is chronically the constraint and management has exhausted
the possibilities of using it more effectively, then additional capacity is purchased. For example,
when the constraint was the plastic extruding machines, a new extruding machine was ordered.
However, even before the machine arrived, management had determined that the constraint would
shift to the blenders once the new extruding capacity was added. Therefore, a new blender was al-
ready being planned. By thinking ahead and focusing on the constraints, management is able to in-
crease the plants real capacity at the lowest possible cost.
Source: Eric Noreen, Debra Smith, and James Mackey, The Theory of Constraints and Its Implications for Man-
agement Accounting (Montvale, NJ: The IMA Foundation for Applied Research, Inc.), p. 67.
International Competition
Over the last several decades, competition has become worldwide in many industries.
This has been caused by reductions in tariffs, quotas, and other barriers to free trade; im-
provements in global transportation systems; and increasing sophistication in interna-
tional markets. These factors work together to reduce the costs of conducting international
trade and make it possible for foreign companies to compete on a more equal footing with
local companies.
Reductions in trade barriers have made it easier for agile and aggressive companies
to expand outside of their home markets. As a result, very few companies can afford to be
complacent. A company may be very successful today in its local market relative to its lo-
cal competitors, but tomorrow the competition may come from halfway around the globe.
As a matter of survival, even companies that are presently doing very well in their home
markets must become world-class competitors. On the bright side, the freer international
movement of goods and services presents tremendous export opportunities for those com-
panies that can transform themselves into world-class competitors. And, from the stand-
point of consumers, heightened competition promises an even greater variety of goods, at
higher quality and lower prices.
What does increased global competition imply for managerial accounting? It would
be very difficult for a company to become world-class if it plans, directs, and controls its
operations and makes decisions using a second-class management accounting system. An
excellent management accounting system will not by itself guarantee success, but a poor
management accounting system can stymie the best efforts of people in an organization
to make the company truly competitive.
Throughout this text we will highlight the differences between obsolete management
accounting systems that get in the way of success and well-designed management ac-
counting systems that can enhance a companys performance. It is noteworthy that ele-
ments of well-designed management accounting systems have originated in many
countries. More and more, managerial accounting has become a worldwide discipline.
GLOBAL FORCES IN BUSINESS

Traditionally, management accounting practices have differed significantly from one country to an-
other. For example, Spain, Italy, and Greece have relied on less formal management accounting
systems than other European countries. According to Professor Norman B. Macintosh, In Greece
and Italy the predominance of close-knit, private, family firms motivated by secrecy, tax avoidance,
and largesse for family members along with lack of market competition (price fixing?) mitigated the
development of management accounting and control systems. Spain also followed this pattern and
relied more on personal relationships and oral inquisitions than on hard data for control. At the
same time, other Western European countries such as Germany, France, and the Netherlands de-
veloped relatively sophisticated formal management accounting systems emphasizing efficient op-
erations. In the case of France, these were codified in law. In England, management accounting
practice was influenced by economists, who emphasized the use of accounting data in decision
making. The Nordic countries tended to import management accounting ideas from both Germany
and England.
A number of factors have been acting in recent years to make management accounting prac-
tices more similar within Europe and around the world. These forces include: intensified global com-
petition, which makes it more difficult to continue sloppy practices; standardized information system
software sold throughout the world by vendors such as SAP, PeopleSoft, Oracle, and Baan; the in-
creasing significance and authority of multinational corporations; the global consultancy industry;
the diffusion of information throughout academia; and the global use of market-leading textbooks.
Sources: Markus Granlund and Kari Lukka, Its a Small World of Management Accounting Practices, Journal
of Management Accounting Research 10, 1998, pp. 153171; and Norman B. Macintosh, Management Ac-
counting in Europe: A View from Canada, Management Accounting Research 9, 1998, pp. 495500.
E-Commerce Suggested Reading

Widespread use of the Internet is a fairly new phenomenon, and the impact it will even- While the internet is reshaping how
tually have on business is far from settled. For a few brief months, it looked like dot.com businesses function with external
parties, intranets are also affecting
startups would take over the business worldtheir stock market valuations reached as-
how companies operate internally.
tonishing heights. But, of course, the bubble burst and few of the startups are now in busi-
For example, D. Keith Denton dis-
ness. With the benefit of hindsight, it is now clear that the managers of the dot.com cusses how intranets can be used to
startups would have benefited from the use of many of the tools covered in this book, in- enhance the performance measure-
cluding cost concepts (Chapter 2), cost estimation (Chapter 5), cost-volume-profit analy- ment process in Use an Intranet for
sis (Chapter 6), activity-based costing (Chapter 8), budgeting (Chapter 9), decision Performance Measurement, Indus-
making (Chapter 13), and capital budgeting (Chapter 14). While applying these tools to a trial Management, January/February
new company with little operational history would be difficult, it needs to be done. And 2003, pp. 2834.
the investors who plowed billions into dot.com startups only to see their money vanish
would have been wise to pay attention to the tools covered in the chapters on the state-
ment of cash flows (Chapter 16) and financial statement analysis (Chapter 17).
At the time of this writing, it is still not clear if a successful business model will
emerge for Internet-based companies. It is generally believed that Amazon.com and eBay
may have the best chances of building sustainable e-commerce businesses, but even Ama-
zon.com has its detractors who believe it will never break even on a cash flow basis. If a
Suggested Reading successful e-commerce business model does emerge, it will be based on attracting enough
For an insightful perspective on profitable customers to cover the fixed expenses of the company as discussed in Chapter 6.
strategy in the e-commerce arena, Established brick-and-mortar companies like General Electric, Wells Fargo, Ameri-
see Michael Porter, Strategy and
can Airlines, and Wal-Mart will undoubtedly continue to expand into cyberspaceboth
the Internet, Harvard Business
for business-to-business transactions and for retailing. The Internet has important advan-
Review, March 2001, pp. 6279.
tages over more conventional marketplaces for some kinds of transactions such as mort-
gage banking. The financial institution does not have to tie up staff filling out formsthat
can be done directly by the consumer over the Internet. And data and funds can be sent
back and forth electronicallyno UPS delivery truck needs to drop by the consumers
home to deliver a check. However, it is unlikely that a successful blockbuster business
will ever be built around the concept of selling low-value, low-margin, and bulky items
like groceries over the Internet.
Professional Ethics Professional Ethics
A series of major financial scandals involving Enron, Tyco International, HealthSouth,
Understand the importance of Adelphia Communications, WorldCom, Global Crossing, Arthur Andersen, Rite Aid, and
upholding ethical standards. other companies have raised deep concerns about ethics in business. The managers and
companies involved in these scandals have suffered mightilyfrom huge fines to jail
terms and financial collapse. And the recognition that ethical behavior is absolutely es-
Reinforcing Problems sential for the functioning of our economy has led to numerous regulatory changes and
Learning Objective 4 calls for new legislation. But why is ethical behavior so important? This is not a matter
Exercise 13 Basic 15 min. of just being nice. Ethical behavior is the lubricant that keeps the economy running.
Problem 15 Basic 20 min. Without that lubricant, the economy would operate much less efficientlyless would be
Problem 17 Medium 20 min. available to consumers, quality would be lower, and prices would be higher. As James
Problem 18 Medium 30 min. Surowiecki writes:
Suggested Reading [F]lourishing economies require a healthy level of trust in the reliability and fairness
For a brief discussion of how large
of everyday transactions. If you assumed every potential deal was a rip-off or that the
frauds and bankruptcies, such as
products you were buying were probably going to be lemons, then very little business
WorldCom, affect other stakehold-
ers, see Joseph Bower and Stuart
would get done. More important, the costs of the transactions that did take place
Gilson, The Social Cost of Fraud would be exorbitant, since youd have to do enormous work to investigate each deal
and Bankruptcy, Harvard Business and youd have to rely on the threat of legal action to enforce every contract. For an
Review, December 2003, pp. 2022. economy to prosper, whats needed is not a Pollyanish faith that everyone else has
your best interests at heartcaveat emptor [buyer beware] remains an important
truthbut a basic confidence in the promises and commitments that people make
about their products and services.8
Take a very simple example. Suppose that unethical farmers, distributors, and grocers
knowingly tried to sell wormy apples as good apples and that grocers refused to take back
wormy apples. What would you do? Go to another grocer? But what if all grocers acted
in this way? What would you do then? You would probably either stop buying apples or
you would spend a lot of time inspecting apples before buying them. So would everyone
else. Now notice what has happened. Because farmers, distributors, and grocers cannot be
trusted, sales of apples would plummet and those who did buy apples would waste a lot
of time meticulously inspecting them. Everyone loses. Farmers, distributors, and gro-
ceries make less money, consumers enjoy fewer apples, and consumers waste time look-
ing for worms.
One commentator argues that integrity is particularly critical in companies whose as-
sets are largely intangible:
[U]ntil quite recently, most corporate assets were tangible. . . . We still had plenty of
business fraud, but in the end someone could go to the rail yard and see if the goods
8
James Surowiecki, A Virtuous Cycle, Forbes, December 23, 2002, pp. 248256.
were there. In many of todays high-profile disasters, by contrast, the assets at the
heart of the trouble are purely digital [such as Enrons bewildering partnerships] and
digits are a lot easier to hide than boxcars.
In the new, digital, trust-based economy, the stakes are extraordinarily high. A
companys trustworthiness, embodied in brand and reputation, is increasingly all that
customers, employees, and investors have to rely on. . . . Experience shows that this
asset is built slowly and painfully but can be lost in an eye blink, and in losing it, you
lose everything.9
Thus, for the good of everyoneincluding profit-making companiesit is vitally
important that business be conducted within an ethical framework that builds and sustains
trust.
NO TRUSTNO ENRON IN BUSINESS

Jonathan Karpoff reports on a particularly important, but often overlooked, aspect of the Enron
debacle:
As we know, some of Enrons reported profits in the late 1990s were pure accounting fiction.
But the firm also had legitimate businesses and actual assets. Enrons most important busi-
nesses involved buying and selling electricity and other forms of energy. [Using Enron as an in-
termediary, utilities that needed power bought energy from producers with surplus generating
capacity.] Now when an electric utility contracts to buy electricity, the managers of the utility
want to make darned sure that the seller will deliver the electrons exactly as agreed, at the con-
tracted price. There is no room for fudging on this because the consequences of not having the
electricity when consumers switch on their lights are dire. . . .
This means that the firms with whom Enron was trading electricity . . . had to trust Enron.
And trust Enron they did, to the tune of billions of dollars of trades every year. But in October
2001, when Enron announced that its previous financial statements overstated the firms prof-
its, it undermined such trust. As everyone recognizes, the announcement caused investors to
lower their valuations of the firm. Less understood, however, was the more important impact of
the announcement; by revealing some of its reported earnings to be a house of cards, Enron
sabotaged its reputation. The effect was to undermine even its legitimate and (previously) prof-
itable operations that relied on its trustworthiness.
This is why Enron melted down so fast. Its core businesses relied on the firms reputation.
When that reputation was wounded, energy traders took their business elsewhere. . . .
Energy traders lost their faith in Enron, but what if no other company could be trusted to deliver on Suggested Reading
its commitments to provide electricity as contracted? In that case, energy traders would have For an overview of the parties that
nowhere to turn. As a direct result, energy producers with surplus generating capacity would be un- must all function properly for corpo-
rate governance to be credible, see
able to sell their surplus power. As a consequence, their existing customers would have to pay
Zabihollah Rezaee, The Six-Legged
higher prices. And utilities that did not have sufficient capacity to meet demand on their own would
Stool, Strategic Finance, February
have to build more capacity, which would also mean higher prices for their consumers. So a general 2003, pp. 14; and Alfred King,
lack of trust in companies such as Enron would ultimately result in overinvestment in energy- Enron: An Affront to America,
generating capacity and higher energy prices for consumers. Journal of Cost Management,
July/August 2002, pp. 3335.
Source: Jonathan M. Karpoff, Regulation vs. Reputation in Preventing Corporate Fraud, UW Business, Spring
2002, pp. 2830
The Institute of Management Accountants (IMA) of the United States has adopted an
ethical code called the Standards of Ethical Conduct for Practitioners of Management Ac-
counting and Financial Management that describes in some detail the ethical responsi-
bilities of management accountants. Even though the standards were specifically
developed for management accountants, they have much broader application.
9
Geoffrey Colvin, Tapping the Trust Fund, Fortune, April 29, 2002, p. 44, 2002, Time Inc. All
rights reserved.
Code of Conduct for Management Accountants

Suggested Reading The IMAs Standards of Ethical Conduct for Practitioners of Management Accounting
Statement on Management Account- and Financial Management is presented in full in Exhibit 15. The standards have two
ing Number 1C, Standards of Ethical
parts. The first part provides general guidelines for ethical behavior. In a nutshell, a man-
Conduct for Practitioners of Manage-
ment Accounting and Financial Man-
agement accountant has ethical responsibilities in four broad areas: First, to maintain a
agement issued by the Institute of
high level of professional competence; second, to treat sensitive matters with confiden-
Management Accountants, Mont- tiality; third, to maintain personal integrity; and fourth, to be objective in all disclosures.
vale, NJ (www.imanet.org) is the au- The second part of the standards specifies what should be done if an individual finds ev-
thoritative source concerning ethics idence of ethical misconduct. We recommend that you stop at this point and read the stan-
and the management accounting dards in Exhibit 15.
profession.
EXHIBIT 15
Practitioners of management accounting and financial management have an obligation
Standards of Ethical Conduct for
to the public, their profession, the organization they serve, and themselves, to maintain
Practitioners of Management
the highest standards of ethical conduct. In recognition of this obligation, the Institute of
Accounting and Financial Management Accountants has promulgated the following standards of ethical conduct
Management for practitioners of management accounting and financial management. Adherence to
these standards, both domestically and internationally, is integral to achieving the
Objectives of Management Accounting. Practitioners of management accounting and
financial management shall not commit acts contrary to these standards nor shall they
condone the commission of such acts by others within their organizations.
Competence. Practitioners of management accounting and financial management
have a responsibility to:
Maintain an appropriate level of professional competence by ongoing development
of their knowledge and skills.
Perform their professional duties in accordance with relevant laws, regulations,
and technical standards.
Prepare complete and clear reports and recommendations after appropriate
analysis of relevant and reliable information.
Confidentiality. Practitioners of management accounting and financial management
Refrain from disclosing confidential information acquired in the course of their work
except when authorized, unless legally obligated to do so.
Inform subordinates as appropriate regarding the confidentiality of information
acquired in the course of their work and monitor their activities to assure the
maintenance of that confidentiality.
Refrain from using or appearing to use confidential information acquired in the
course of their work for unethical or illegal advantage either personally or through
third parties.
Integrity. Practitioners of management accounting and financial management have a
responsibility to:
Avoid actual or apparent conflicts of interest and advise all appropriate parties of
any potential conflict.
Refrain from engaging in any activity that would prejudice their ability to carry out
their duties ethically.
Refuse any gift, favor, or hospitality that would influence or would appear to
influence their actions.
Refrain from either actively or passively subverting the attainment of the
organizations legitimate and ethical objectives.
Recognize and communicate professional limitations or other constraints that
would preclude responsible judgment or successful performance of an activity.
Communicate unfavorable as well as favorable information and professional
judgments or opinions.
Refrain from engaging in or supporting any activity that would discredit the
profession.
EXHIBIT 15
Objectivity. Practitioners of management accounting and financial management
(concluded)
Communicate information fairly and objectively.
Disclose fully all relevant information that could reasonably be expected to
influence an intended users understanding of the reports, comments, and
recommendations presented.
Resolution of Ethical Conflict. In applying the standards of ethical conduct, practi-
tioners of management accounting and financial management may encounter prob-
lems in identifying unethical behavior or in resolving an ethical conflict. When faced
with significant ethical issues, practitioners of management accounting and financial
management should follow the established policies of the organization bearing on the
resolution of such conflict. If these policies do not resolve the ethical conflict, such
practitioner should consider the following courses of action:
Discuss such problems with the immediate superior except when it appears that
the superior is involved, in which case the problem should be presented initially to
the next higher managerial level. If a satisfactory resolution cannot be achieved
when the problem is initially presented, submit the issues to the next higher
managerial level.
If the immediate superior is the chief executive officer, or equivalent, the
acceptable reviewing authority may be a group such as the audit committee,
executive committee, board of directors, board of trustees, or owners. Contact with
levels above the immediate superior should be initiated only with the superiors
knowledge, assuming the superior is not involved. Except where legally
prescribed, communication of such problems to authorities or individuals not
employed or engaged by the organization is not considered appropriate.
Clarify relevant ethical issues by confidential discussion with an objective advisor
(e.g., IMA Ethics Counseling Service) to obtain a better understanding of possible
courses of action.
Consult your own attorney as to legal obligations and rights concerning the ethical
conflict.
If the ethical conflict still exists after exhausting all levels of internal review, there
may be no other recourse on significant matters than to resign from the
organization and to submit an informative memorandum to an appropriate
representative of the organization. After resignation, depending on the nature of
the ethical conflict, it may also be appropriate to notify other parties.
*Institute of Management Accountants, formerly National Association of Accountants,
Statements on Management Accounting: Objectives of Management Accounting,
Statement No. 1B, New York, NY, June 17, 1982 as revised in 1997.
The ethical standards provide sound, practical advice for management accountants Suggested Reading
and managers. Most of the rules in the ethical standards are motivated by a very practical See Otto B. Martinson and Douglas
Ziegenfuss, Looking at What Influ-
considerationif these rules were not generally followed in business, then the economy
ences Perception and Judgment,
and all of us would suffer. Consider the following specific examples of the consequences Management Accounting Quarterly,
of not abiding by the standards: Fall 2000, pp. 4147, for a study
Suppose employees could not be trusted with confidential information. Then top showing links between the impor-
managers would be reluctant to distribute such information within the company and, tance placed by individuals on
elements of the IMA code of ethics
as a result, decisions would be based on incomplete information and operations
and their own ethical judgments in
would deteriorate. various situations.
Suppose employees accepted bribes from suppliers. Then contracts would tend to go
to suppliers who pay the highest bribes rather than to the most competent suppliers.
Would you like to fly in aircraft whose wings were made by the subcontractor who
paid the highest bribe? Would you fly as often? What would happen to the airline in-
dustry if its safety record deteriorated due to shoddy workmanship on contracted
parts and assemblies?
Suggested Reading Suppose the presidents of companies routinely lied in their annual reports and finan-
For a brief overview of the Sarbanes- cial statements. If investors could not rely on the basic integrity of a companys fi-
Oxley Act, see Andrew J. Felo and nancial statements, they would have little basis for making informed decisions.
Steven A. Solieri, New Laws, New
Suspecting the worst, rational investors would pay less for securities issued by com-
Challenges: Implications of Sar-
panies and may not be willing to invest at all. As a consequence, companies would
banes-Oxley, Strategic Finance,
February 2002, pp. 14.
have less money for productive investmentsleading to slower economic growth,
fewer goods and services, and higher prices.
As these examples suggest, if ethical standards were not generally adhered to, everyone
would sufferbusinesses as well as consumers. Essentially, abandoning ethical standards
would lead to a lower standard of living with lower-quality goods and services, less to
choose from, and higher prices. In short, following ethical rules such as those in the Stan-
dards of Ethical Conduct for Practitioners of Management Accounting and Financial
Management is absolutely essential for the smooth functioning of an advanced market
economy.
Suggested Reading The Standards of Ethical Conduct for Practitioners of Management Accounting and
See Joan L. Luft, Fairness, Ethics
Financial Management call, in some cases, for individuals to go outside the chain of
and the Effect of Management Ac-
command to report wrongdoing. In the past, whistle blowers who have gone outside the
counting on Transaction Costs,
Journal of Management Accounting
chain of command have often been fired or have been retaliated against in other ways.
Research 9, 1997, pp. 199216, The Sarbanes-Oxley Act, which was passed in 2002 in response to the wave of corporate
for an insightful review of literature scandals, gives new legal protections to those who report corporate misconduct. A man-
dealing with fairness and ethics. ager who retaliates against an employee who reports misconduct can be imprisoned for up
to 10 years.
IN BUSINESS LOSING THEIR BEARINGS

Some would argue that changes in the roles of the management accountant and the Chief Financial
Officer have gone too far in recent years. Don Keough, a retired Coca-Cola executive, recalls that,
In my time, CFOs were basically tough, smart, and mean. Bringing good news wasnt their function.
They were the truth-tellers. But that had changed by the late 1990s in some companies. Instead,
CFOs became corporate spokesmen, guiding stock analysts in their quarterly earnings estimates
and then making sure that those earnings estimates were beaten using whatever was necessary, in-
cluding accounting tricks and in some cases outright fraud. CFOs at companies like Enron who
allegedly became entangled in such corrupt practices found themselves under arrest and in hand-
cuffs. What is needed? Greater personal integrity and less emphasis on meeting quarterly earnings
estimates.
Source: Jeremy Kahn, The Chief Freaked Out Officer, Fortune, December 9, 2002, pp. 197202.
Company Codes of Conduct

Those who engage in unethical behavior often justify their actions with one or more of
the following reasons: (1) the organization expects unethical behavior, (2) everyone else
is unethical, and/or (3) behaving unethically is the only way to get ahead.10
To counter the first justification for unethical behavior, many companies have
adopted formal ethical codes of conduct. These codes are generally broad-based state-
ments of a companys responsibilities to its employees, its customers, its suppliers, and
the communities in which the company operates. Codes rarely spell out specific dos
and donts or suggest proper behavior in a specific situation. Instead, they give broad
Suggested Reading guidelines.
For an interesting discussion of Unfortunately, the single-minded emphasis placed on short-term profits in some com-
the negative effects of overempha-
panies may make it seem like the only way to get ahead is to act unethically. When top
sizing short-term profits, see Harris
managers say, in effect, that they will only be satisfied with bottom-line results and will
Collingwood, The Earnings Game:
Everybody Plays, Nobody Wins,
10
Harvard Business Review, June Michael K. McCuddy, Karl E. Reichardt, and David Schroeder, Ethical Pressures: Fact or Fiction?
2001, pp. 512. Management Accounting, April 1993, pp. 5761.
accept no excuses, they are asking for trouble. See the accompanying In Business box
Taking a Chainsaw to Ethics for a vivid example.
TAKING A CHAINSAW TO ETHICS IN BUSINESS

Chainsaw Al Dunlap earned a reputation as a no-nonsense executive specializing in turning around
struggling companies. He is known to have proudly declared: If you want a friend, buy a dog. Ive
got two. The dark side of his tactics came to light after the debacle at Sunbeam, which he took
over as CEO and then left in disgrace two years later. For a while, Dunlap was able to show consis-
tent improvements in quarterly earnings at Sunbeam, but only later did his methods for achieving
this record come to light. John A. Byrne describes what happened:
By the fourth quarter, as it became more difficult to meet the numbers, a new and rather men-
acing management technique was invented. It was called tasking. Kersh [Sunbeams CFO] and
Dunlap would gather the top executives in the boardroom and ask each to run through the num-
bers for their businesses. If one area was lagging, someone else would be asked to make up
the difference so Dunlaps forecasts to Wall Street would be met.
They would say, I dont care what your plan was. I dont care what you delivered last
month, recalls Dixon Thayer, head of international sales. We are going to task you with this
number. Russ [Kersh] would give you a revenue and profit number and say, . . . Your life de-
pends on hitting that number. These numbers got to be so outrageous they were ridiculous.
In an effort to hang on to their jobs and their options, some Sunbeam managers began all
sorts of game playing. Commissions were withheld from independent sales reps. Bills went un-
paid. . . . As Sunbeam moved toward the holiday season, its struggle to make its numbers be-
came more desperate. . . . [T]he company offered retailers major discounts to buy grills nearly
six months before they were needed. The retailers did not have to pay for the grills or accept
delivery of them for six months.
In the often esoteric interpretations that are made in accounting, Kersh was rarely conser-
vative or bashful about his creative competence during his tenure as Sunbeams CFO. In a self-
congratulatory tone, he would point to his chest and boast to fellow executives that he was the
biggest profit center the company had. . . . At meetings, executives recalled, Dunlap would say:
If it werent for Russ and the accounting team, wed be nowhere. Several executives heard Dun-
lap shout to subordinates: Make the [?@!] number. And Russ, you cover it with your ditty bag.
Deirdra DenDanto, then 26, a recently hired member of the companys internal audit department,
challenged the companys questionable practices from the start, but there was little follow-up to her
recommendations. She finally resigned after unsuccessfully attempting to send a warning memo to
the board of directors. A few months later, the accounting ploys Dunlap had been using to bolster
earnings came unraveled, leading to a dramatic boardroom ouster. The companys losses in that
year totaled almost $1 billion and its stock crashed to $6, from an earlier price of $53. The com-
pany and its employees still suffer from the aftermath.
Source: John A. Byrne, Chainsaw: He Anointed Himself Americas Best CEO. But Al Dunlap Drove Sunbeam
into the Ground, Business Week, October 18, 1999, pp. 128149.
WHERE WOULD YOU LIKE TO WORK? IN BUSINESS

Nearly all executives claim that their companies maintain high ethical standards; however, not all ex-
ecutives walk the talk. Employees usually know when top executives are saying one thing and doing
another and they also know that these attitudes spill over into other areas. Working in companies
where top managers pay little attention to their own ethical rules can be extremely unpleasant. Sev-
eral thousand employees in many different organizations were asked if they would recommend their
company to prospective employees. Overall, 66% said that they would. Among those employees
who believed that their top management strives to live by the companys stated ethical standards,
the number of recommenders jumped to 81%. But among those who believed top management did
not follow the companys stated ethical standards, the number was just 21%.
Source: Jeffrey L. Seglin, Good for Goodness Sake, CFO, October 2002, pp. 7578.
Codes of Conduct on the International Level

The Guideline on Ethics for Professional Accountants, issued in July 1990 by the In-
ternational Federation of Accountants (IFAC), governs the activities of all professional
accountants throughout the world, regardless of whether they are practicing as inde-
pendent CPAs, employed in government service, or employed as internal accountants.11
In addition to outlining ethical requirements in matters dealing with competence, ob-
jectivity, independence, and confidentiality, the IFACs code also outlines the accoun-
tants ethical responsibilities in matters relating to taxes, fees and commissions,
advertising and solicitation, the handling of monies, and cross-border activities. Where
cross-border activities are involved, the IFAC ethical requirements must be followed if
they are stricter than the ethical requirements of the country in which the work is being
performed.12
In addition to professional and company codes of ethical conduct, accountants and
managers in the United States are subject to the legal requirements of The Foreign Cor-
rupt Practices Act of 1977. The Act requires that companies devise and maintain a system
of internal controls sufficient to ensure that all transactions are properly executed and
recorded. The Act specifically prohibits giving bribes, even if giving bribes is a common
practice in the country in which the company is doing business.
IN BUSINESS CAPITALISM AND GREED

Capitalism is often associated with ruthless, self-centered behavior, but is that a bum rap? Re-
searchers have run many variations of the following experiment. Two randomly selected players who
do not know each other are placed in different rooms. The individuals cannot see or hear each other
and are never introduced to each other. The first player is given $100 and told to split the money
any way he or she chooses with the second player. The first player could propose a $100/$0 split,
a $80/$20 split, a $50/$50 split, or any other combination that adds up to $100. However, under
the rules of the experiment, the second player is allowed to refuse the offer and in that case, neither
player gets anything. The game is played only once for each pair of players.
What would a greedy person do? A greedy and ruthless first player would reason that the sec-
ond player would accept a very low offer of perhaps $10 since $10 is better than nothing. How-
ever, in repeated experiments of this sort, people cast as player one were usually far more
generous than this and people cast as player two often rejected small offers, even though that left
them with nothing. Even more interestingly, responses differed across cultures. When the experi-
ment was run with farmers from Hamilton, Missouri, player one offered on average $48very
close to a 50/50 split. In contrast, the average offer by player one among the Quichua Indians in
Peru was only $25. The Quichua Indians subsist in a slash-and-burn agricultural society with little
trading, whereas farmers from Hamilton, Missouri, live in a fully developed capitalist market econ-
omy. This experiment has been repeated in many communities around the world and the consis-
tent result is that greed (i.e., a low average offer by player one) is associated with nonmarket,
precapitalist societies, and in general, the more developed the local economy, the closer the of-
fer by player one is to a 50/50 split.
It is not clear what is the cause and what is the effect. Do markets make people act less greed-
ily or is suppression of greed a prerequisite to a fully developed market economy? At any rate, ruth-
less greed seems to be much more a hallmark of people who live in undeveloped, precapitalist
societies than of those who live in fully developed market economies.
Source: David Wessel, Capital: The Civilizing Effect of the Market, The Wall Street Journal, January 24, 2002,
p. A1.
11
A copy of this code can be obtained on the International Federation of Accountants web site
www.ifac.org.
12
Guideline on Ethics for Professional Accountants (New York: International Federation of Accoun-
tants, July 1990), p. 23.
The Certified Management Accountant (CMA)

The Certified Management Accountant (CMA)
A management accountant who possesses the necessary qualifications and who passes a
rigorous professional exam earns the right to be known as a Certified Management Ac-
countant (CMA). In addition to the prestige that accompanies a professional designation,
CMAs are often given greater responsibilities and higher compensation than those who
do not have such a designation. Information about becoming a CMA and the CMA pro-
gram can be accessed on the Institute of Management Accountants (IMA) web site
www.imanet.org or by calling 1-800-638-4427.
To become a Certified Management Accountant, the following four steps must be
completed:
1. File an Application for Admission and register for the CMA examination.
2. Pass all four parts of the CMA examination within a three-year period.
3. Satisfy the experience requirement of two continuous years of professional experi-
ence in management and/or financial accounting prior to or within seven years of
passing the CMA examination.
4. Comply with the Standards of Ethical Conduct for Practitioners of Management Ac-
counting and Financial Management.
HOWS THE PAY? IN BUSINESS

The Institute of Management Accountants has developed the following table that gives you an esti-
mate of how much you would earn as a management accountant. (The table applies specifically to
men. A similar table exists for women, who constitute about 31% of all IMA members.)
Your Calculation
Start with this base amount $64,625
If you are TOP-level management Add $22,970
OR, If you are ENTRY-level management Subtract $20,725
Number of years in the field Times $521

If you have an advanced degree Add $13,737
If you hold the CMA Add $8,786
If you hold the CPA Add $8,619
Your estimated salary level
For example, if you make it to top-level management in 10 years and have an advanced degree and
a CMA, your estimated annual salary would be $115,328 ($64,625 $22,970 10 $521
$13,737 $8,786).
Source: Karl E. Reichardt and David Schroeder, Strategic Finance, Members Salaries Are Still Going Up, June
2003, pp. 2740. Used with permission from the Institute of Management Accountants (IMA), Montvale, N.J.,
USA, www.imanet.org.
Summary Summary
Managerial accounting assists managers in carrying out their responsibilities, which include planning, di-
recting and motivating, and controlling.
Since managerial accounting is geared to the needs of managers rather than to the needs of outsiders,
it differs substantially from financial accounting. Managerial accounting is oriented more toward the fu-
ture, places less emphasis on precision, emphasizes segments of an organization (rather than the organiza-
tion as a whole), is not governed by generally accepted accounting principles, and is not mandatory.
Most organizations are decentralized to some degree. The organization chart depicts who
works for whom in the organization and which units perform staff functions rather than line func-
tions. Accountants perform a staff functionthey support and provide assistance to others inside
the organization.
The business environment in recent years has been characterized by increasing competition
and a relentless drive for continuous improvement. Several approaches have been developed to as-
sist organizations in meeting these challengesincluding Just-In-Time (JIT), Total Quality Man-
agement (TQM), Process Reengineering, and the Theory of Constraints (TOC).
JIT emphasizes the importance of reducing inventories to the barest minimum possible. This
reduces working capital requirements, frees up space, reduces throughput time, reduces defects,
and eliminates waste.
TQM involves focusing on the customer, and it employs systematic problem solving using
teams made up of front-line workers. By emphasizing teamwork, a focus on the customer, and
facts, TQM can avoid the organizational infighting that might otherwise block improvement.
Process Reengineering involves completely redesigning a business process in order to elimi-
nate non-value-added activities and to reduce opportunities for errors. Process Reengineering re-
lies more on outside specialists than TQM and is more likely to be imposed by top management.
The Theory of Constraints emphasizes the importance of managing the organizations con-
straints. Since the constraint is whatever is holding back the organization, improvement efforts usu-
ally must be focused on the constraint in order to be really effective.
Ethical standards serve a very important practical function in an advanced market economy.
Without widespread adherence to ethical standards, material living standards would fall. Ethics are
the lubrication that keep a market economy functioning smoothly. The Standards of Ethical Con-
duct for Practitioners of Management Accounting and Financial Management provide sound, prac-
tical guidelines for resolving ethical problems that might arise in an organization.
Glossary Glossary
At the end of each chapter, a list of key terms and their definitions is provided for your review.
(These terms are printed in boldface where they are defined in the chapter.) Carefully study each
term to be sure you understand its meaning. The list for Chapter 1 follows.
Benchmarking A study of organizations that are among the best in the world at performing a par-
ticular task. (p. 16)
Budget A detailed plan for the future, usually expressed in formal quantitative terms. (p. 5)
Business process A series of steps that are followed in order to carry out some task in a business.
(p. 16)
Chief Financial Officer The member of the top management team who is responsible for provid-
ing timely and relevant data to support planning and control activities and for preparing fi-
nancial statements for external users. An effective CFO is a key member of the top
management team whose advice is sought in all major decisions. (p. 11)
Constraint Anything that prevents an organization or individual from getting more of what it
wants. (p. 17)
Control The process of instituting procedures and then obtaining feedback to ensure that all parts
of the organization are functioning effectively and moving toward overall company goals.
(p. 5)
Controller The manager in charge of the accounting department in an organization. (p. 5)
Controlling Ensuring that the plan is actually carried out and is appropriately modified as cir-
cumstances change. (p. 4)
Cycle time See Throughput time. (p. 14)
Decentralization The delegation of decision-making authority throughout an organization by pro-
viding managers at various operating levels with the authority to make key decisions relating
to their area of responsibility. (p. 9)
Directing and motivating Mobilizing people to carry out plans and run routine operations. (p. 4)
Feedback Accounting and other reports that help managers monitor performance and focus on
problems and/or opportunities that might otherwise go unnoticed. (p. 5)
Financial accounting The phase of accounting concerned with providing information to stock-
holders, creditors, and others outside the organization. (p. 4)
Finished goods Units of product that have been completed but have not yet been sold to cus-
tomers. (p. 13)
Just-In-Time (JIT) A production and inventory control system in which materials are purchased
and units are produced only as needed to meet actual customer demand. (p. 13)
Line A position in an organization that is directly related to the achievement of the organizations
basic objectives. (p. 10)
Managerial accounting The phase of accounting concerned with providing information to man-
agers for use in planning and controlling operations and in decision making. (p. 4)
Non-value-added activity An activity that consumes resources or takes time but that does not add
value for which customers are willing to pay. (p. 16)
Organization chart A visual diagram of a companys organizational structure that depicts formal
lines of reporting, communication, and responsibility between managers. (p. 9)
Performance report A detailed report comparing budgeted data to actual data. (p. 6)
Planning Selecting a course of action and specifying how the action will be implemented.
(p. 4)
Planning and control cycle The flow of management activities through planning, directing and
motivating, and controlling, and then back to planning again. (p. 6)
Process Reengineering An approach to improvement that involves completely redesigning busi-
ness processes in order to eliminate unnecessary steps, reduce errors, and reduce costs. (p. 16)
Raw materials Materials that are used to make a product. (p. 13)
Segment Any part of an organization that can be evaluated independently of other parts and about
which the manager seeks financial data. Examples include a product line, a sales territory, a
division, or a department. (p. 8)
Setup Activities that must be performed whenever production is switched over from making one
type of item to another. (p. 14)
Staff A position in an organization that is only indirectly related to the achievement of the organi-
zations basic objectives. Such positions provide service or assistance to line positions or to
other staff positions. (p. 10)
Theory of Constraints (TOC) A management approach that emphasizes the importance of man-
aging constraints. (p. 17)
Throughput time The time required to manufacture a unit of product. Throughput time is also
known as cycle time. (p. 14)
Total Quality Management (TQM) An approach to continuous improvement that focuses on
customers and using teams of front-line workers to systematically identify and solve problems.
(p. 15)
Work in process Units of product that are only partially complete and will require further work
before they are ready for sale to a customer. (p. 13)
Questions Questions
11 What is the basic difference in orientation between financial and managerial accounting?
12 What are the three major activities of a manager?
13 Describe the four steps in the planning and control cycle.
14 Distinguish between line and staff positions in an organization.
15 What are the major differences between financial and managerial accounting?
16 Identify the benefits that can result from reducing the setup time for a product.
17 What are the major benefits of a JIT system?
18 Why is Process Reengineering a more radical approach to improvement than Total Quality
Management?
19 How can Process Reengineering undermine employee morale?
110 Where does the Theory of Constraints recommend that improvement efforts be focused?
111 Why is adherence to ethical standards important for the smooth functioning of an advanced
market economy?
Exercises Exercises
EXERCISE 11 The Roles of Managers and Management Accountants [LO1, LO2]
A number of terms that relate to organizations, the work of management, and the role of manager-
ial accounting are listed below:
Budgets Controller
Decentralization Directing and motivating
Feedback Financial accounting
Line Managerial accounting
Nonmonetary data Performance report
Planning Precision
Staff Chief Financial Officer
Choose the term or terms above that most appropriately complete the following statements:
1. A position on the organization chart that is directly related to achieving the basic objectives of
an organization is called a position.
2. When , managers oversee day-to-day activities and keep the organization func-
tioning smoothly.
3. The plans of management are expressed formally in .
4. consists of identifying alternatives, selecting from among the alternatives the one
that is best for the organization, and specifying what actions will be taken to implement the
chosen alternative.
5. A position provides service or assistance to other parts of the organization and
does not directly achieve the basic objectives of the organization.
6. The delegation of decision-making authority throughout an organization by allowing man-
agers at various operating levels to make key decisions relating to their area of responsibility
is called .
7. Managerial accounting places less emphasis on and more emphasis on
than financial accounting.
8. is concerned with providing information for the use of those who are inside the
organization, whereas is concerned with providing information for the use of
those who are outside the organization.
9. The accounting and other reports coming to management that are used in controlling the or-
ganization are called .
10. The manager in charge of the accounting department is generally known as the .
11. A detailed report to management comparing budgeted data with actual data for a specific time
period is called a .
12. The is the member of the top management team who is responsible for providing
timely and relevant data to support planning and control activities and for preparing financial
statements for external users.
EXERCISE 12 The Business Environment [LO3]

A number of terms that relate to Just-In-Time, Total Quality Management, Process Reengineering,
and Theory of Constraints are listed below:
Benchmarking Setup
Constraint Business process
Just-In-Time Frequent
Non-value-added activities Nonconstraint
Process Reengineering Total Quality Management
Choose the term or terms above that most appropriately complete the following statements:
1. is an incremental approach to improvement, whereas tends to be a
more radical approach that involves completely redesigning business processes.
2. A production system in which units are produced and materials are purchased only as needed
to meet actual customer demand is called .
3. Increasing the rate of output of a as the result of an improvement effort is un-
likely to have much effect on profits.
4. involves studying the business processes of companies that are considered among
the best in the world at performing a particular task.
5. The activities involved in getting equipment ready to produce a different product are called a
.
6. The Theory of Constraints suggests that improvement efforts should be focused on the com-
panys .
7. In Process Reengineering, two objectives are to simplify and to eliminate .
8. A is any series of steps that are followed in order to carry out some task in a
business.
EXERCISE 13 Ethics in Business [LO4]

Mary Karston was hired by a popular fast-food restaurant as an order-taker and cashier. Shortly af-
ter taking the job, she was shocked to overhear an employee bragging to a friend about short-
changing customers. She confronted the employee who then snapped back: Mind your own
business. Besides, everyone does it and the customers never miss the money. Mary didnt know
how to respond to this aggressive stance.
Required:
What would be the practical consequences on the fast-food industry and on consumers if cashiers
generally shortchanged customers at every opportunity?
Problems Problems
PROBLEM 14 Preparing an Organization Chart [LO2]
Bristow University is a large private school located in the Midwest. The university is headed by a
president who has five vice presidents reporting to him. These vice presidents are responsible for,
respectively, auxiliary services, admissions and records, academics, financial services (controller),
and the physical plant.
In addition, the university has managers over several areas who report to these vice presidents.
These include managers over central purchasing, the university press, and the university bookstore,
all of whom report to the vice president for auxiliary services; managers over computer services
and over accounting and finance, who report to the vice president for financial services; and man-
agers over grounds and custodial services and over plant and maintenance, who report to the vice
president for physical plant.
The university has four collegesbusiness, humanities, fine arts, and engineering and quan-
titative methodsand a law school. Each of these units has a dean who is responsible to the acad-
emic vice president. Each college has several departments.
Required:
1. Prepare an organization chart for Bristow University.
2. Which of the positions on your chart would be line positions? Why would they be line posi-
tions? Which would be staff positions? Why?
3. Which of the positions on your chart would have need for accounting information? Explain.
PROBLEM 15 Ethics and the Manager [LO4]

Richmond, Inc., operates a chain of department stores located in the northwest that has steadily
grown to its present size of 44 stores. Two years ago, the board of directors of Richmond approved
a large-scale remodeling of its stores to attract a more upscale clientele.
Before finalizing these plans, two stores were remodeled as a test. Linda Perlman, assistant
controller, was asked to oversee the financial reporting for these test stores, and she and other man-
agement personnel were offered bonuses based on the sales growth and profitability of these stores.
While completing the financial reports, Perlman discovered a sizable inventory of outdated goods
that should have been discounted for sale or returned to the manufacturer. She discussed the situa-
tion with her management colleagues; the consensus was to ignore reporting this inventory as ob-
solete, since reporting it would diminish the financial results and their bonuses.
Required:
1. According to the Standards of Ethical Conduct for Practitioners of Management Accounting
and Financial Management, would it be ethical for Perlman not to report the inventory as ob-
solete?
2. Would it be easy for Perlman to take the ethical action in this situation?
(CMA, adapted)
PROBLEM 16 Line and Staff Positions [LO2]

Special Alloys Corporation manufactures a variety of specialized metal products for industrial use.
Most of the revenues are generated by large contracts with companies that have government
defense contracts. The company also develops and markets parts to the major automobile compa-
nies. It employs many metallurgists and skilled technicians because most of its products are made
from highly sophisticated alloys.
The company recently signed two large contracts; as a result, the workload of Wayne Wash-
burn, the general manager, has become overwhelming. To relieve some of this overload, Mark
Johnson was transferred from the Research Planning Department to the general managers office.
Johnson, who has been a senior metallurgist and supervisor in the Research Planning Department,
was given the title assistant to the general manager.
Washburn assigned several responsibilities to Johnson in their first meeting. Johnson will
oversee the testing of new alloys in the Product Planning Department and be given the authority to
make decisions as to the use of these alloys in product development; he will also be responsible for
maintaining the production schedules for one of the new contracts. In addition to these duties, he
will be required to meet with the supervisors of the production departments regularly to consult
with them about production problems they may be experiencing. Washburn expects to be able to
manage the company much more efficiently with Johnsons help.
Required:
1. Positions within organizations are often described as having (a) line authority or (b) staff au-
thority. Describe what is meant by these two terms.
2. Of the responsibilities assigned to Mark Johnson as assistant to the general manager, which
tasks have line authority and which have staff authority?
3. Identify and discuss the conflicts Mark Johnson may experience in the production departments
as a result of his new responsibilities.
(CMA, adapted)
PROBLEM 17 Ethics in Business [LO4]

Consumers and attorney generals in more than 40 states accused a prominent nationwide chain of
auto repair shops of misleading customers and selling them unnecessary parts and services, from
brake jobs to front-end alignments. Lynn Sharpe Paine reported the situation as follows in Man-
aging for Organizational Integrity, Harvard Business Review, March-April, 1994:
In the face of declining revenues, shrinking market share, and an increasingly competitive
market . . . management attempted to spur performance of its auto centers. . . . The automotive
service advisers were given product-specific sales quotassell so many springs, shock ab-
sorbers, alignments, or brake jobs per shiftand paid a commission based on sales. . . . [F]ail-
ure to meet quotas could lead to a transfer or a reduction in work hours. Some employees
spoke of the pressure, pressure, pressure to bring in sales.
This pressure-cooker atmosphere created conditions under which employees felt that the
only way to satisfy top management was by selling products and services to customers that
they didnt really need.
Suppose all automotive repair businesses routinely followed the practice of attempting to sell
customers unnecessary parts and services.
Required:
1. How would this behavior affect customers? How might customers attempt to protect them-
selves against this behavior?
2. How would this behavior probably affect profits and employment in the automotive service
industry?
PROBLEM 18 Ethics; Just-In-Time (JIT) Purchasing [LO3, LO4]

(The situation described below was adapted from a case published by the Institute of Management
Accountants Committee on Ethics.*)
WIW is a publicly owned corporation that makes various control devices used in manufactur-
ing mechanical equipment. J.B. is the president of WIW, Tony is the purchasing agent, and Diane
is J.B.s executive assistant. All three have been with WIW for about five years. Charlie is WIWs
controller and has been with the company for two years.
J.B.: Hi, Charlie, come on in. Diane said you had a confidential matter to discuss. Whats on your
mind?
Charlie: J.B., I was reviewing our increased purchases from A-1 Warehouse Sales last week and
wondered why our volume has tripled in the past year. When I discussed this with Tony he
*Neil Holmes, ed., Ethics, Management Accounting 73, no. 8 (February 1992), p. 16. Used with per-
mission from the Institute of Management Accountants (IMA), Montvale, N.J., USA, www.imanet.org.
seemed a bit evasive and tried to dismiss the issue by stating that A-1 can give us one-day de-
livery on our orders.
J.B.: Well, Tony is right. You know we have been trying to implement just-in-time and have been
trying to get our inventory down.
Charlie: We still have to look at the overall cost. A-1 is more of a jobber than a warehouse. After
investigating orders placed with them, I found that only 10% are delivered from their ware-
house and the other 90% are drop-shipped from the manufacturers. The average markup by A-
1 is 30%, which amounted to about $600,000 on our orders for the past year. If we had ordered
directly from the manufacturers when A-1 didnt have an item in stock, we could have saved
about $540,000 ($600,000 90%). In addition, some of the orders were late and not com-
plete.
J.B.: Now look, Charlie, we get quick delivery on most items, and who knows how much we are
saving by not having to stock this stuff in advance or worry about it becoming obsolete. Is
there anything else on your mind?
Charlie: Well, J.B., as a matter of fact, there is. I ordered a Dun & Bradstreet credit report on A-1
and discovered that Mike Bell is the principal owner. Isnt he your brother-in-law?
J.B.: Sure he is. But dont worry about Mike. He understands this JIT approach. Besides, hes
looking out for our interests.
Charlie (to himself): This conversation has been enlightening, but it doesnt really respond to my
concerns. Can I legally or ethically ignore this apparent conflict of interests?
Required:
1. Would Charlie be justified in ignoring this situation, particularly since he is not the purchas-
ing agent? In preparing your answer, consider the IMAs Standards of Ethical Conduct.
2. State the specific steps Charlie should follow to resolve this matter.
Group and Internet Exercises Group and Internet Exercises

GROUP EXERCISE 19 Ethics on the Job
Ethical standards are very important in business, but they are not always followed. If you have ever
held a jobeven a summer jobdescribe the ethical climate in the organization where you
worked. Did employees work a full day or did they arrive late and leave early? Did employees hon-
estly report the hours they worked? Did employees use their employers resources for their own
purposes? Did managers set a good example? Did the organization have a code of ethics and were
employees made aware of its existence? If the ethical climate in the organization you worked for
was poor, what problems, if any, did it create?
INTERNET EXERCISE 110

As you know, the World Wide Web is a medium that is constantly evolving. Sites come and go, and
change without notice. To enable periodic updating of site addresses, this problem has been posted
to the textbook website (www.mhhe.com/garrison11e). After accessing the site, enter the Student
Center and select this chapter. Select and complete the Internet Exercise.

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Managerial Accounting Text The McGrawHill

After studying Chapter 1, you should be able to:

LO2 Understand the role of management accountants in an organization.

LO3 Understand the basic concepts underlying Just-In-Time (JIT), Total

LO4 Understand the importance of upholding ethical standards.

Making Fact-Based Decisions in Real Time

4 Chapter 1 Managerial Accounting and the Business Environment

The Work of ManagementTheand theofNeed

Chapter 1 Managerial Accounting and the Business Environment 5

Directing and Motivating

6 Chapter 1 Managerial Accounting and the Business Environment

control. In sophisticated organizations, this feedback is provided by detailed reports of

The End Results of Managers Activities

The Planning and Control Cycle

Comparison of Financial and Managerial

Chapter 1 Managerial Accounting and the Business Environment 7

Formulating long- and

Comparing actual to Implementing

Reports to those outside Reports to those inside

Emphasis is on summaries Emphasis is on decisions

Objectivity and verifiability Relevance is emphasized.

Precision is required. Timeliness is required.

Only summarized data for Detailed segment reports

Must follow GAAP. Need not follow GAAP.

Mandatory for external reports. Not mandatory.

8 Chapter 1 Managerial Accounting and the Business Environment

IN BUSINESS WHY DO YOU ASK?

Less Emphasis on Precision

Chapter 1 Managerial Accounting and the Business Environment 9

Generally Accepted Accounting Principles (GAAP)

Managerial AccountingNot Mandatory

Organizational Structure Organizational Structure

10 Chapter 1 Managerial Accounting and the Business Environment

Purchasing Personnel Vice President Chief Financial

Manager Manager Manager Manager

Line and Staff Relationships

Chapter 1 Managerial Accounting and the Business Environment 11

BEYOND THE NUMBERS IN BUSINESS

12 Chapter 1 Managerial Accounting and the Business Environment

IN BUSINESS WHAT DOES IT TAKE?

The Changing BusinessThe Changing Business Environment

Chapter 1 Managerial Accounting and the Business Environment 13

CHOPPING INVENTORIES AT PORSCHE IN BUSINESS

Under ideal conditions, a company operating a Just-In-Time system would purchase

14 Chapter 1 Managerial Accounting and the Business Environment

IN BUSINESS CANON GOES CELLULAR

Chapter 1 Managerial Accounting and the Business Environment 15

THE DOWNSIDE OF JIT IN BUSINESS

Source: Toyota to Recalibrate Just-in-Time, International Herald Tribune, February 8, 1997, p. 9.

16 Chapter 1 Managerial Accounting and the Business Environment

Chapter 1 Managerial Accounting and the Business Environment 17

because of the elimination of non-value-added activities. However, employees quickly get

The Theory of Constraints (TOC)

18 Chapter 1 Managerial Accounting and the Business Environment

IN BUSINESS WATCH WHERE YOU CUT COSTS

IN BUSINESS THE CONSTRAINT IS THE KEY

Chapter 1 Managerial Accounting and the Business Environment 19

GLOBAL FORCES IN BUSINESS

E-Commerce Suggested Reading

20 Chapter 1 Managerial Accounting and the Business Environment

Professional Ethics Professional Ethics

Chapter 1 Managerial Accounting and the Business Environment 21