Ch1 - Managerial Accounting and The Business Environment

Contents
1 . Managerial Accounting and the Business Environment 2

2. Cost Terms, Concepts, and Classifications 30
3. Activity-Based Costing: A Tool to Aid Decision Making 69
4. Cost- Volume- Profit Relationships 127
5. Budgeting 173
6. Standard Costs and Overhead Analysis 227
7. Reporting for Control 297
8. Relevant Costs for Decision Making 378
iii
2 Management Accounting
MANAGERIAL ACCOUNTING AND

THE BUSINESS ENVIRONMENT
I THE ROLE OF THE MANAGEMENT ACCOUNTANT

IN VALUE CREATION
The role of management accountants
After studying Chapter 1, has evolved considerably over the past
you should be able to few decades. No longer considered to
be just " bean-counters " who compile
1. Describe the functions and report information internally in orga-
performed by managers. nizations, today 's management accoun-
tant can play a vital leadership role on
2. Identify the major differences the management team. According to
the national body responsible for grant-
and similarities between
ing the certified management accoun-
financial and managerial tant (CMA) designation in Canada, CMA
accounting. Canada:
Certified management accountants (CMAs) do more than just measure value, they create it.
3. Describe the role of As the leaders in management accounting, CMAs actively apply a unique mix of financial exper-
management accountants in tise, strategic insight, innovative thinking and a collaborative approach to help grow successful
an organization . businesses.
Today 's management accountants are required to have competencies in cost manage-
4. Explain the nature and ment, performance measurement (financial and non-financial), process management, and
importance of ethics for risk management, and as a result, play a key role in decision making across the various
accountants. functional areas of an organization . From operational-level decisions related to quality con-
trol to strategic planning decisions about the products to offer and the markets in which the
company will compete, management accountants can add value . Moreover, given the
5. Explain the basic concepts of
growing emphasis on corporate social responsibility and "green" initiatives, management
lean production, Six Sigma, accountants also have to be aware of the needs and concerns of a broader set of stake-
computer technology, and holders than ever before. Identifying, understanding, and addressing the needs of suppli-
risk management. ers, customers, employees, and the communities in which the organization operates are
now central to the role of management accountants.
In fulfilling their complex and challenging responsibilities, management accountants
are expected to adhere strictly to a high standard of professional ethics. Indeed, the ethical
behaviour of accountants in organizations has come under increasing scrutiny in recent
years with the spate of corporate scandals in Canada and the United States. Codes of
professional ethics for management accountants typically contain standards related to
competence, confidentiality, integrity, and credibility. Serious breaches of one or more of
these standards can result in severe consequences, including expulsion from the profes-
sional body that granted the professional accountant's designation.
Given the breadth of responsibilities, the expertise requirements, and the challenge of
working in an increasingly global marketplace, management accounting offers the potential
for a very rewarding career.
Source: Certified Management Accountants, What Is a CMA?www.cma-canada.org/index.cfm?
ci_id=4442&1a_id= 1; and Giuseppe Valiante , "Data Tracker Makes Tracks ," Financial Post,
November 2, 2009
Managerial Accounting, Ninth Canadian Edition 3
Chapter 1 Managerial Accounting and the Business Environment 3
anagerial accounting is concerned with providing information to managers-
M
Managerial accounting
that is, people inside an organization who direct and control its operations. In The form of accounting concerned
contrast, financial accounting is concerned with providing information to with providing information to
shareholders, creditors, and others who are outside an organization. Managerial account- managers for use in planning and
ing provides data that help organizations run more efficiently. Financial accounting pro- controlling operations and for
vides the scorecard by which a company's past performance is judged. decision making.
Managerial accounting is concerned with determining and developing internal
Financial accounting
accounting information as a tool for helping managers make business decisions that satisfy
The form of accounting concerned
customers while continuously monitoring costs and improving efficiencies. This requires
with providing information to
managerial accountants to prepare a variety of reports. Some reports compare actual shareholders, creditors, and
results to plans and to benchmarks focusing on how well managers or business units have others outside the organization.
performed. Other reports provide timely updates on key indicators, such as orders received,
order backlog, capacity utilization, and sales. Reports may also be prepared as needed to
help investigate specific problems such as a decline in profitability of a product line or
help with the decision of whether to outsource some of the business operations. Reports
can also provide an analysis of a developing opportunity such as business acquisition. In
contrast, financial accounting is focused on producing a limited set of specific quarterly
and annual financial statements in accordance with generally accepted accounting princi-
ples (GAAP) and government regulations.
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 exam-
ine these subjects.
THE WORK OF MANAGERS AND THEIR NEED FOR MANAGERIAL

ACCOUNTING INFORMATION
Every organization-large and small-has managers. Someone must be responsible for
making plans, organizing resources, directing personnel, and controlling operations. This LEARNING OBJECTIVE 1
is true of the United Way, the University of Waterloo, the City of Burnaby, Petro-Canada, Describe the functions
and the local Mac' s convenience store. In this chapter, we will use a fictional organization- performed by managers.
Metro Coffee, lnc.-to illustrate the work of management. What we have to say about
the management of Metro Coffee, Inc., however, can be generalized to almost any type
of organization.
Metro Coffee operates a chain of outlets that sell a full range of coffee and fast foods.
The outlets are concentrated in the city of Bromley. The company has found that the best
way to generate sales is to create a clean and pleasant environment. Consequently, the Planning
company puts a great deal of effort into planning the layout, decor, and location of its out- Developing objectives and
lets. Management knows that different types of clientele are attracted to different kinds of preparing budgets to achieve
products and layouts. Some clients like to sit to eat or drink while others prefer to use these objectives.
drive-through services.
Managers at Metro Coffee, Inc., like managers everywhere, carry out three major Directing and motivating
activities-planning, directing and motivating, and controlling. Planning involves select- Mobilizing people to carry out
plans and run routine operations.
ing a course of action and specifying how the action will be implemented. Directing and
motivating involve mobilizing people to carry out plans and run routine operations.
Controlling
Controlling involves ensuring that the plan is actually carried out and is appropriately
Ensuring that the plan is actually
modified as circumstances change. Management accounting information plays a vital carried out and is appropriately
role in these basic management activities-but most particularly in the planning and modified as circumstances change.
control functions.
As a fundamental element of the planning process, more than ever, companies that Strategy
now face global competition must have a viable strategy for succeeding in the market- A game plan that enables a
place. A strategy is a "game plan" that enables a company to attract and retain customers company to attract and retain
by distinguishing itself from competitors. The focal point of a company's strategy should customers by distinguishing itself
be its target customers. A company can succeed only if it creates a reason for customers to from competitors.
4 Chapter 1 Managerial Accounting and the Business Environment
choose it over a competitor. These reasons, or what are more formally called customer
value propositions, are the essence of strategy.
Customer value propositions tend to fall into three broad categories-customer inti-
macy, operational excellence, and product leadership. Companies that adopt a customer
intimacy strategy are in essence saying to their target customers, "The reason that you
should choose us is because we understand and respond to your individual needs better
than our competitors." Cisco Systems, The Keg Steakhouse & Bar, and Dell Computer
Corporation rely primarily on a customer intimacy value proposition for their success.
Companies that pursue the second customer value proposition, called operational
excellence, are saying to their target customers, "The reason that you should choose us
is because we can deliver products and services faster, more conveniently, and at a
lower price than our competitors." WestJet, Walmart, and Canadian National Railways
are examples of companies that succeed first and foremost because of their operational
excellence. Companies pursuing the third customer value proposition, called product
leadership, are saying to their target customers, "The reason that you should choose us
is because we offer higher quality products than our competitors." BMW, SABIAN
Cymbals, and Research in Motion (RIM, the creator of the BlackBerry) are examples
of companies that succeed because of their product leadership. Although one company
may offer its customers a combination of these three customer value propositions, one
usually outweighs the others in terms of importance. 1
Planning
An important part of planning is to identify alternatives and then to select from among the
alternatives the one that best meets the organization's objectives. The basic objective of
Metro Coffee is to earn profits for the owners of the company by providing superior service
at competitive prices in as many markets as possible. To further this objective, every year,
top management carefully considers a range of options, or alternatives, for expanding into
new geographic markets. This year, management is considering opening new outlets in
three suburban areas: Chelton, Harold, and Binham.
When making this and other choices, management must balance the expansion
opportunities against the demands made on the company's resources. Management
knows from bitter experience that opening an outlet in a new market is a big step that
cannot be taken lightly. It requires enormous amounts of time and energy from the com-
pany' s most experienced, talented, and busy professionals. When the company attempted
to open outlets in two locations in the same year, resources were stretched too thinly.
The result was that neither outlet opened on schedule, and operations in the rest of the
company suffered. Therefore, entering new markets is planned very carefully before
proceeding.
Among other data, top management looks at the sales volumes, profit margins, and
costs of the company ' s established outlets 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 outlets. 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 essential in
estimating those effects.
After considering all of the alternatives, Metro Coffee's top management decided to
open an outlet in the burgeoning Chelton market in the third quarter of the year, but to
defer opening any other new outlets 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 Chelton opening. For example, the Personnel Department's travel budget was
Budget increased, since it would be providing extensive on-site training to the new personnel
A quantitative plan for the hired in Chelton .
acquisition and use of financial As in the Personnel Department example, the plans of management are often
and other resources over a expressed formally in budgets, and the term budgeting is generally used to describe this
specified future time period . part of the planning process. Budgets are usually prepared under the direction of the
controller, who is the manager in charge of the Accounting Department. Typically, bud- Controller
gets are prepared annually and represent management's plans in specific, quantitative The manager in charge of the
terms. In addition to a travel budget, the Personnel Department will be given goals in accounting department in an
terms of new hires, courses taught, and detailed breakdowns of expected expenses. organization.
Similarly, the manager of each outlet will be given a target for sales volume, income,
expenses, inventory losses, and employee training. These data will be collected, ana-
lyzed, and summarized for management use in the form of budgets prepared by Metro
Coffee's 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 motivating and directing peo-
ple. Managers assign tasks to employees, arbitrate disputes, answer questions, solve on-
the-spot problems, and make many small decisions that affect customers and employees.
In effect, directing is the part of managers' activities that deals with the routine and the
here and now. Managerial accounting data, such as daily sales reports, 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- Control
lowed. Feedback, which signals whether operations are on track, is the key to effective Those steps taken by
control. In sophisticated organizations, this feedback is provided by detailed reports of management that attempt to
various types. One of these reports, which compares budgeted to actual results, is called a increase the likelihood that the
performance report. Performance reports suggest where operations are not proceeding as objectives developed at the
planning stage are attained and
planned and where some parts of the organization may require additional attention. For
to ensure that all parts of the
example, before the opening of the new Chelton outlet in the third quarter of the year, the
organization function in a manner
store's manager will be given sales volume, income, and expense targets for the fourth consistent with organizational
quarter of the year. As the fourth quarter progresses, periodic reports will be made in policies.
which the actual sales volume, income, and expenses are compared to the targets. If the
actual results fall below the targets, top management is alerted that the Chelton outlet Feedback
requires more attention. Experienced personnel can be sent in to help the new manager, or Accounting and other reports
top management may come to the conclusion that plans will have to be revised. As we will that help managers monitor
see in following chapters, providing this kind of feedback to managers is one of the central performance and focus on
purposes of managerial accounting. problems and/or opportunities
that might otherwise go unnoticed.
The Results ofManagers' Activities Performance report

As a customer enters one of the Metro Coffee's outlets, the results of management's plan- A detailed report comparing
ning, directing and motivating, and control activities will be evident in the many details budgeted data to actual data.
that make the difference between a pleasant and an unsatisfactory experience. The outlet
will be clean, fashionably decorated, and logically laid out. Clerks will be alert, friendly ,
and efficient. In short, what the customer experiences doesn't simply happen: It is the
result of the efforts of managers who must visualize and fit together the processes that are
needed to get the job done. A role of managerial accounting is to inform and
facilitate management decisions throughout these processes so that managers' efforts result
in the efficient achievement of company goals.
The Planning and Control Cycle

The work of management can be summarized in a model such as the one in Exhibit 1- 1. Planning and control cycle
The model, which depicts the planning and control cycle, illustrates the smooth flow of The flow of management activities
management activities from planning through directing and motivating, controlling, and through planning, directing and
then back to planning again. All of these activities involve decision making, so it is depicted motivating, and controlling, and
as the hub around which the other activities revolve . then back to planning again.
EXHIBIT 1-1 The Planning and Control Cycle
Implementing
plans (Directing
and Motivating)
•
Management accounting can help serve the information needs of managers in all
phases of the planning and control cycle. The management accountant can prepare
detailed reports that managers need to make both day-to-day and long-term decisions,
and also prepare budgets to help direct resources toward the organization's goals. Later,
actual costs and revenues are compared with the budgeted figures, and reports are pre-
pared to inform management about any significant variances from budget. Management
information needs vary from business to business but as you work your way through this
book, you will be introduced to many of the tools that management accountants use to
meet these needs. For example, managerial accountants typically provide reports that
help answer questions such as:
How much does it cost to provide a particular good or service?
How do costs behave when the company operates at different levels of activity?
How can a company reduce costs to help improve profitability?
How many units must be sold to break even?
What will the company's budgets look like at different forecasted levels of activity?
Should the company add or drop a product line?
Should the company outsource some of its operations?
How should management choose when selecting among competing investment
proposals?
In what new projects should the company invest and what projects should be
abandoned?
The Business Plan

New businesses typically formalize their strategic planning in the form of a business plan.
A business plan consists of information about the company ' s basic product or service and
about the steps it will take to reach its potential market. The plan includes information
about production methods, the competition, the management team, and details on how the
business will be financed . It is a key document for the organization ' s internal manage-
ment. It is also valuable for external use in attracting resources from potential creditors
and investors. The answers to many of the questions raised by prospective providers of
funds can be found in the business plan.
Exhibit 1-2 shows a flow chart of the steps taken in developing a typical business
plan. The 16-week time span is for illustrative purposes only. The actual length of the
business plan process varies with the nature and complexity of the venture and could span
anywhere from a few weeks to several months or more. Note from the flow chart that it is
essential for certain steps to be completed before others begin. It makes no sense, for
example, to talk about forecasting sales revenues (step 5) until a product or service has
been picked (step 3) and the market has been researched (step 4). Although some steps
clearly precede others, the process is not entirely linear. Development of the business plan
EXHIBIT 1-2 Flow Chart of the Steps in Developing a Business Plan
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Weeks
Key: I. Decide to go into business. 6. Pick site. II. Explain need for records.
2. Analyze yourself. 7. Develop production plan. 12. Develop insurance plan.
3. Pick product or service. 8. Develop marketing plan. 13. Develop financial plan.
4. Research market. 9. Develop personnel plan. 14. Write summary overview.
5. Forecast sales revenues. 10. Decide whether to incorporate.
Source: From SIROPOLIS. Small Business Management, 6e. © 1997 South-Western, a part of Cengage
Learning Inc. Reproduced by permission, www.cengage.com/permissions.
is an interactive process. In today's dynamic and complex business environment, the

business plan must be flexible enough to adapt in response to market changes that require
new estimates and forecasts. To be effective, the business plan should encourage a shared
vision with clear targets and well-defined performance measures such as those discussed
in later chapters of this text.
A business plan requires a knowledgeable person to write the report. Since most entre-
preneurs are doers rather than report writers, the preparation of the plan required to start,
expand, or downsize a company will usually be done by someone with capabilities in both
financial and business affairs, using a variety of expertise from others. To help in this
regard, all of the major Canadian banks as well as several industrial development organi-
zations such as the Community Business Development Corporations provide templates to
assist entrepreneurs in developing their business plans. These templates are usually avail-
able online, free of charge. A typical plan will include a description of the proposed or
existing company, its products or services, and the marketing plan. Operational plans will
provide details of the financial resources required and forecasted revenues and expenses.
IN BUSINESS
Ultra Electronics Maritime Systems, located in the Halifax Regional Municipality, is an interna-
tional leader in the design, development, and production of advanced electronic, electro-
mechanical and hydro-acoustic sensor systems. Strategically, it operates in various countries,
including the United Kingdom, Japan, and France. To obtain financing for its international
operations, it listed its shares on the London Stock Exchange in 1996. To provide appropriate
management accounting information, it uses an enterprise information system and a broad-
based scorecard reporting of performance. Its vice-president of finance and administration is
a certified management accountant who is extensively involved in strategic planning, planning,
controlling, and directing operations.
Source: Robert Colman, "Navigating Strategic Change," CMA Management, October 2006, pp. 40-42.
• COMPARISON OF FINANCIAL AND MANAGERIAL ACCOUNTING

Financial accounting reports are prepared for the use of external parties such as sharehold-
LEARNING OBJECTIVE 2
ers and creditors, whereas managerial accounting reports are prepared for managers inside
Identify the major differences the organization. This contrast results in a number of major differences between financial
and similarities between financial and managerial accounting, even though both financial and managerial accounting rely on
and managerial accounting. the same underlying financial data. These differences are summarized in Exhibit 1-3.
As shown in Exhibit 1-3, in addition to the reports being prepared for different peo-
ple, financial and managerial accounting also differ in their emphasis between the past and
the future, in the type of data provided to users, and in several other ways. These differ-
ences are discussed in the following sections.
Emphasis on the Future

Since planning is such an important part of the manager's job, managerial accounting
has a strong future orientation. In contrast, financial accounting primarily summarizes
past financial transactions. These summaries may be useful in planning, but only to a
point. The future is not simply a reflection of what has happened in the past. Changes
EXHIBIT 1-3 Comparison Accounting

of Financial and Management
I
Accounting •Recording
•Estimating Financial and
• Organizing Operational Data
•Summarizing
I I
Financial Managerial
Accounting Accounting
• Reports to those outside • Reports to those inside

the organization: the organization for:
Owners Planning
Creditors Directing and motivating
Tax authorities Controlling
Regulators Performance evaluation
• Emphasizes financial • Emphasizes decisions

consequences of past affecting the future.
activities.
• Emphasizes objectivity and • Emphasizes relevance.

verifiability.
• Emphasizes precision. • Emphasizes timeliness.
• Emphasizes summary data • Emphasizes detailed segment

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

are constantly taking place in economic conditions, customer needs and desires, com-
petitive conditions, and so on. All of these changes demand that managers' planning be
based in large part on estimates of what will happen rather than on summaries of what
has already happened.
Relevance ofData
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 outlet of Metro Coffee,
Inc. , but this is exactly the type of information that is most useful to managers in their
decision making. Managerial accounting should be flexible enough to provide whatever
data are relevant for a particular decision .
Less Emphasis on Precision

Making sure that amounts are accurate down to the last dollar or penny takes time and
effort. While that kind of accuracy is desirable for external reports, most managers would
rather have an immediate estimate than wait for a more precise answer. For this reason,
managerial accountants often place less emphasis on precision than do financial accoun-
tants. 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 more weight on non-monetary data. For example, data about customer satisfaction
may be routinely used in managerial accounting reports.
Segments ofan 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 Segment
company. These segments can be evaluated independently from other parts of the organi- Any part of an organization that
zation and may be product lines, customers, sales territories, divisions, departments, or can be evaluated independently
any other categorization of the company' s activities for which management finds it useful of other parts and about which the
to have financial data. Financial accounting does require some breakdowns of revenues manager seeks financ ial data
and costs by major segments in external reports, but this is a secondary emphasis. In man-
agerial accounting, segment reporting is the primary emphasis.
Generally Accepted Accounting Principles

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. Beginning January 1, 2011, Canada joined more than 100 other countries,
including Australia, New Zealand, and European Union member countries, in adopting
International Financial Reporting Standards (IFRS) for publicly accountable enterprises.
As of that date, in Canada, IFRS became GAAP for public companies. The purpose of
IFRS is simple: to enhance the comparability and clarity of financial information on a
global basis. Given the increasing degree of globalization of the economy and the inter-
connectedness of capital markets, accounting standard setters in Canada concluded that it
was crucial to adopt IFRS. 2 Private companies and not-for-profit organizations are not
obligated to adopt IFRS but instead can continue to use Canadian-based GAAP. While the
common ground rules established by IFRS will enhance comparability across external
reporting jurisdictions, they do not necessarily lead to the type of reports that would be
most useful in internal decision making since they are still based on historical information.
Managerial accounting is not bound by GAAP. Managers set their own ground rules
concerning 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 will see in subsequent chapters, it is unde-
niable that financial reporting requirements have heavily influenced management
accounting practice.
Managerial Accounting-Not Mandatory

Financial accounting is mandatory; that is, it must be done. Various outside parties such as
the provincial and territorial securities regulators 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 question
is always "Is the information useful?" rather than "Is the information required?"
• ORGANIZATIONAL STRUCTURE
Management must accomplish its objectives by working with employees. Presidents of
LEARNING OBJECTIVE 3
companies like Metro Coffee, Inc., could not possibly execute all of their companies'
Describe the role of strategies alone; they must rely on other people. This is done by creating an organizational
management accountants structure that permits effective decentralization of management decisions.
in an organization.
Decentralization
Decentralization Decentralization is the delegation of decision making throughout an organization by pro-
The delegation of decision viding managers at various operating levels with the authority to make key decisions relat-
making throughout an ing to their areas of responsibility. Some organizations are more decentralized than others.
organization by providing Because of Metro Coffee's geographic dispersion and the peculiarities of local markets,
managers at various operating the company is highly decentralized.
levels with the authority to make
Metro Coffee's president (often synonymous with the term chief executive officer or
key decisions relating to their
areas of responsibility.
CEO) sets the broad strategy for the company and makes major strategic decisions (such
as those related to opening stores in new markets), but much of the remaining decision-
making authority is delegated to managers on various levels throughout the organization.
Metro Coffee has a number of outlets, each of which has a store manager as well as a
separate manager for each major aspect of the store's operations, such as beverages, food,
and preparation. In addition, the company has support departments, such as a central
Purchasing Department and a Personnel Department that provide services for all outlets.
The organizational structure of the company is depicted in Exhibit 1-4.
Organization chart The arrangement of boxes shown in Exhibit 1-4 is called an organization chart. The
A diagram of a firm 's purpose of an organization chart is to show how responsibility has been divided among
organizational structure that managers and to show formal lines of reporting and communication, or chain of command.
depicts formal lines of reporting , Each box depicts an area of management responsibility, and the lines between the boxes
communication , and responsibility show the lines of formal authority between managers. The chart tells us, for example, that
between managers.
the store managers are responsible to the operations vice-president. In tum, the latter is
responsible to the company president, who in tum 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 Chelton outlet 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
between managers. The informal structure does not appear on the organization chart, but it
is often vital to effective operations.
EXHIBIT 1-4 Organization Chart: Metro Coffee, Inc.
Vice-President
Operations
Manager Manager
Chelton Outlet Barrington Outlet
Other Outlets
Line and StaffRelationships

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. Line position
A person in a staff position, by contrast, is only indirectly involved in achieving those A job position that is directly
basic objectives. Staff positions support or provide assistance to line positions or other related to the achievement of the
parts of the organization, but they do not have direct authority over line positions. Refer organization 's basic objectives.
again to the organization chart in Exhibit 1-4. Since the basic objective of Metro Coffee is
to sell food and beverages at a profit, those managers whose areas of responsibility are Staff position
directly related to the sales effort occupy line positions. These positions, which are A job position that is only
indirectly related to the
shown in a darker colour in the exhibit, include the managers of the various departments
achievement of the organization's
in each outlet, the outlet managers, the operations vice-president, and members of top
basic objectives. Such positions
management. are supportive in nature in that
By contrast, the manager of the central Purchasing Department occupies a staff posi- they provide service or assistance
tion, since the only function of the Purchasing Department is to support and serve the line to line positions or to other staff
departments by doing their purchasing for them. However, both line and staff managers positions.
have authority over the employees in their own departments.
The Controller
In Canada, the manager in charge of the Accounting Department is usually known as the
controller. The controller, in turn, reports to the chief financial officer (CFO). Both the
controller and CFO are staff positions. The CFO is the member of the top-management
team who is given the responsibility of providing relevant and timely data to support plan-
ning and control activities and of preparing financial statements for external users. The
controller is responsible for the technical details of accounting and finance, provides lead-
ership to other professionals in her or his department, and analyzes new and evolving situ-
ations. An effective controller is able to work well with top managers from other disciplines
and can communicate technical information in a simple and clear manner.
Much of the work under the controller's responsibility involves consulting and busi-
ness analysis. Many managerial accountants engaged in such activities actually identify
themselves as working in finance since very few, if any, of their activities are about debits
and credits or preparing journal entries. As described in the opening Business Focus seg-
ment of this chapter, these managerial accountants are typically key members of cross-
functional teams throughout the organization .
• THE PROFESSIONAL MANAGEMENT ACCOUNTANT

Three professional accounting organizations in Canada have members who make up
the ranks of management accountants . CGA , CA , and CMA are the designations used
by professional accountants who belong to societies and associations such as the
Certified General Accountants Association of Canada, the Canadian Institute of
Chartered Accountants (Ordre des comptables agrees in Quebec), and CMA Canada. 3
Members of these three associations work in various fields-industry , commerce,
government, education, and public practice-after completing their particular pro-
grams of study and passing their professional certification examinations. In the United
States , both CPAs and CMAs are professional management accountants. The CPA
designation is used by members of the American Institute of Certified Public Accountants
or various state CPA associations. CMAs are members of the Institute of Management
Accountants.
Management accounting is not subject to the type of regulation that is evident for
financial accounting. However, CMA Canada issues management accounting guidelines
and management accounting practice statements on fundamental areas of practice.
Adherence to the guidelines is voluntary, but wide acceptance is expected because of the
relevance and expertise used in their preparation. Currently, CMA Canada has issued
78 guidelines and 49 management accounting practice statements on topics such as strategic
management, risk management and governance, performance management and measure-
ment, and financial reporting. The difference between practice statements and guidelines
is that practice statements are more prescriptive in nature and contain less background
discussion and research than the guidelines. New topics are continually being presented to
the accounting community .
• PROFESSIONAL ETHICS
A series of high-profile financial scandals in the public and private sectors have raised
LEARNING OBJECTIVE 4 deep concerns about ethics in business and government. 4 Ethics are important because
Explain the nature and they help keep economies operating efficiently. As James Surowiecki wrote:
importance of ethics
for accountants. Flouri shing economies require a healthy level of trust in the reliability and fairness of everyday
transactions. If you assumed every potential deal was a rip-off or that the products you were buy-
ing were probably going to be lemons, then very little business would get done. More important,
the cost of the transactions that did take place would be exorbitant, since you ' d have to do enor-
mous work to in vestigate each deal and you ' d have to rely on the threat of legal action to enforce
every contract. For an economy to prosper, what' s needed is not a Pollyanni sh faith that everyone
el se has your best interests at heart-"caveat emptor" (buyer beware) remains an important
truth- but a basic confidence in the promi ses and commitments that people make about their
products and services.5
There are good reasons for companies to be concerned about their ethical reputation.
A company that is not trusted by its customers, employees, and suppliers will eventually
suffer. In the short run, virtue is sometimes its own reward but in the long run, business
ethics should be taken seriously because the very survival of the company may depend on
the level of trust held by its stakeholders.
Professional accounting groups are given the right of association and certain rights of
self-government by provincial and territorial governments in Canada. One inherent require-
ment of such rights is an expression of public service in the form of a code of ethics. Each
accounting group is then permitted to operate according to the laws of the country, using its
code of ethics as an operating guideline.6
Typically, these codes contain details of how members should conduct themselves in
their dealings with the public, their association, and other members. For example, accoun-
tants must maintain a level of competence appropriate to their designation. Confidentiality
is essential because of the importance of the information they analyze. Integrity is main-
tained by avoiding conflicts of interest with their employers or clients, by communicating
the limits of professional competence, and by not accepting favours that would compro-
mise their judgment. Objectivity must be present in communications, so that recipients can
receive both favourable and unfavourable information.
Professional accountants must study the full text of their code of ethics because the
rules for competence, confidentiality, integrity, and objectivity are complex in real situa-
tions. In addition, procedures for resolving complex situations should be known.
Some codes of ethics give more extensive guidance than others. For example, the
code developed by CMA Ontario provides clear guidance concerning what professional
ethical standards to follow, as shown in the excerpts provided in Exhibit 1-5. Notice how
the details of this code address the concepts of confidentiality, integrity, and objectivity
discussed above.
Businesses are organizations composed of people pursuing objectives (sometimes
termed missions). These organizations have formal relationships among their members, as
illustrated by the organization chart earlier in this chapter. However, informal relation-
ships and activities are also present that must be focused on the achievement of the objec-
tives of a wide group of people known as stakeholders. Stakeholders are people within and
outside the organization who have an interest in the activities of the organization.
Employees, shareholders, and creditors have an obvious interest in what the organization
does, but so do the customers, the suppliers, the competitors, and the communities in
which the organization operates. All of these stakeholders can benefit from the organiza-
tion's undertakings but they also can be harmed by these activities.
A code of ethics is prepared by an organization to reflect its values and moral system.
The document specifies what is expected of its employees in their dealings with the vari-
ous stakeholders. Thus, the code reflects what the organization stands for when it interacts
through its employees with other stakeholders. For example, the organization may wish to
pursue environmental standards in excess of those specified in local laws and regulations.
The organization may wish to use the standards of conduct present in its home country
rather than those of its host country in its cross-border activities. Through its code of eth-
ics, a business can express what it stands for in its activities as well as provide its members
with a guide as to how their activities should be conducted to reflect the values needed to
achieve the objectives of the organization.
Corporate Governance
Effective corporate governance enhances shareholders' confidence that a company is
being run in their best interests rather than in the interests of top managers. Recent finan-
cial scandals have also increased the emphasis being placed on the development of good
governance practices. Corporate governance is the system by which a company is Corporate governance
directed and controlled. If properly implemented, the corporate governance system should A system by which a company is
provide incentives for the board of directors and top management to pursue objectives that directed and controll ed.
are in the interests of the company' s owners and it should provide for effective monitoring
EXHIBIT 1-5 Certified

All Members, Students and Firms will adhere to the following Code of Professional Ethics of
Management Accountants of
CMA Ontario:
Ontario: Excerpts from the Code
(1) A Member, Student or Firm will act at all times with:
of Professional Ethics
(a) responsibility for and fidelity to public needs;
(b} fairness and loyalty to such Member's, Student's or Firm's associates, clients and
employers; and
(c) competence through devotion to high ideals of personal honour and professional
integrity.
(2) A Member, Student or Firm will:
(a) maintain at all times independence of thought and action;
(b} not express an opinion on financial reports or statements without first assessing her or his
relationship with her or his client to determine whether such Member, Student or Firm
might expect her or his opinion to be considered independent, objective and unbiased by
one who has knowledge of all the facts; and
(c) when preparing financial reports or statements or expressing an opinion on financial
reports or statements, disclose all material facts known to such Member, Student or Firm
in order not to make such financial reports or statements misleading, acquire sufficient
information to warrant an expression of opinion and report all material misstatements or
departures from generally accepted accounting principles.
(a) not disclose or use any confidential information concerning the affairs of such Member's,
Student's or Firm's employer or client unless acting in the course of his or her duties or
except when such information is required to be disclosed in the course of any defence of
himself or herself or any associate or employee in any lawsuit or other legal proceeding or
against alleged professional misconduct by order of lawful authority of the Board or any
committee of CMA Ontario in the proper exercise of their duties but only to the extent
necessary for such purpose;
(b) inform his or her employer or client of any business connections or interests of which
such Member's, Student's or Firm's employer or client would reasonably expect to be
informed;
(c) not, in the course of exercising his or her duties on behalf of such Member's, Student's or
Firm's employer or client, hold, receive, bargain for or acquire any fee, remuneration or
benefit without such employer's or client's knowledge and consent.
(a) conduct himself or herself toward other Members, Students and Firms with courtesy and
good faith;
(b) not commit an act discreditable to the profession;
(c} not engage in or counsel any business or occupation which, in the opinion of CMA
Ontario, is incompatible with the professional ethics of a management accountant.
(a) at all times maintain the standards of competence expressed by the Board from time to
time;
(b} disseminate the knowledge upon which the profession of management accounting is
based to others within the profession and generally promote the advancement of the
profession;
(c) undertake only such work as he or she is competent to perform by virtue of his or her
training and experience and will, where it would be in the best interests of an employer or
client, engage, or advise the employer or client to engage, other specialists.
Source: Certified Management Accountants of Ontario, Professional Misconduct and Code of Professional
Ethics Regulation, updated June 21, 2010. Reprinted by permission of Certified Management Accountants
of Ontario.
of performance.7 Many would argue that, in addition to protecting the interests of share-
holders, an effective corporate governance system also should protect the interests of the
company's other stakeholders- its customers, creditors, employees, suppliers, and the
communities within which it operates.
Unfortunately, history has repeatedly shown that unscrupulous top managers, if
unchecked, will sometimes exploit their power to defraud stakeholders. This unpleasant
reality became all too clear in 2001 when the fall of Enron kicked off a wave of corpo-
rate scandals. These scandals were characterized by financi al reporting fraud and
misuse of corporate fund s at the very highest levels- including CEOs and CFOs .
Collectively, these scandals are estimated to have cost shareholders billions of dollars.
While this was disturbing in itself, it also indicated that the institutions intended to
prevent such abuses weren't working, thus raising fundamental questions about the
adequ acy of the existing corporate govern ance system . In an attempt to respond to
these concerns, the U.S . Congress passed the most important reform of corporate
governance in many decades-The Sarbanes-Oxley Act of 2002 . The Act applies to all
publicly traded companies in the United States, including Canadian companies such
as RIM, whose shares trade on a U.S. stock exchange. Some of the key aspects of the
legislation include:
Requires the CEO and CFO to certify in writing that the finan cial statements fairly
represent the results of operations. Certifying financi al statements known to contain
misrepresentations can lead to jail time for the CEO or CFO.
Places the power to hire, compensate, and terminate the public accounting firm that
audits a company' s fin ancial reports in the hands of the audit committee of the board
of directors.
Restricts the nature and extent of non-auditing services that can be provided by public
accounting firms to companies that are their audit clients. Provision of non-audit ser-
vices such as consulting can impair a public accounting firm's ability to act objec-
tively when auditing the financial statements.
Requires a company' s annual report to contain an internal control report. Internal con-
trols are established by management to provide assurance to shareholders and pro-
spective investors that the financial statements are reliable. The report must contain a
statement by management about the effectiveness of the internal controls.
The hope is that the provisions of the Sarbanes-Oxley Act of 2002 will reduce the
incidence of fraudulent financial reporting that has so seriously shaken the public's confi-
dence in securities markets worldwide over the past decade.
IN BUSINESS
Unfortunately, Canada has not escaped its share of corporate scandals in recent years,
including the ones involving Hollinger, Bre-X, Cinar, and Livent. After a lengthy legal battle,
Garth Drabinsky and Myron Gottlieb, co-founders of Livent Inc., were sentenced in August
2009 to jail for seven and six years, respectively, for their role in an accounting fraud that cost
investors an estimated $500 million . The fraud , which involved misrepresentation of revenues
and expenses in Livent lnc.'s financial statements was perpetrated over several years, from
1993-1998. The fraud came to light beginning in August 1998 after Drabinsky and Gottlieb
lost control of the financially troubled theatre company and the new management team began
conducting an internal investigation. Despite having what appeared to be a strong board of
directors and the fact that its financial statements were audited annually by a reputable
accounting firm, Drabinsky and Gottlieb, both directly, and indirectly through their influence
on company employees, were still able to conceal their wrongdoing for an extended period .
As Ontario Superior Court Justice Mary Lou Benotto noted during the sentencing hearing,
"Mr. Drabinsky and Mr. Gottlieb presided over a corporation whose corporate culture was
one of dishonesty."
Source: Theresa Tedesco, "The Final Act? Garth Drabinsky Faces the Music in Canada's First Major
Prosecution of Al leged Accounting Fraud, " May 3, 2008, Financial Post; Barbara Schecter. "Drab insky
Gets 7 Years, Gottlieb 6 for Fraud ," August 5, 2009, Financial Post; Michel Magnan , Denis Cormi er ,
and Pascale Lapointe-Antunes, "Corporate Fraud 's Red Flag: Arrogance," Decem ber 1, 2009,
Financial Post.
Corporate Social Responsibility

As discussed above, companies are responsible for producing financial results that satisfy
shareholders, but this must be balanced against the need to conduct operations and deal-
ings in an ethical and morally responsible fashion. Organizations have a corporate social
responsibility to serve other stakeholders-such as customers, employees, suppliers, com-
munities, and environmental and human rights advocates-whose interests are tied to the
Corporate social responsibility company's performance. Corporate social responsibility (CSR) is a concept whereby
A concept whereby organizations organizations consider the needs of all stakeholders when making decisions. CSR extends
consider the needs of all beyond legal compliance to include voluntary actions that satisfy stakeholder expectations.
stakeholders when making Numerous companies, such as the Royal Bank of Canada, Unilever Canada, and
decisions.
Tim Hortons prominently describe issues related to corporate social responsibility initia-
tives on their Web sites.
Exhibit 1-6 presents examples of corporate social responsibilities that are of
interest to six stakeholder groups. Many companies are paying increasing attention to
these types of broadly defined responsibilities for four reasons. First, socially respon-
sible investors control more than $2.3 trillion of investment capital. Companies that
want access to this capital must excel in terms of their social performance. Second, a
growing number of employees want to work for a company that recognizes and
responds to its social responsibilities . If companies hope to recruit and retain these
highly skilled employees, then they must offer fulfilling careers that serve the needs
of broadly defined stakeholders. Third, many customers seek to purchase products
and services from socially responsible companies. The Internet enables these cus-
tomers to readily locate competing products, thereby making it even easier to avoid
doing business with undesirable companies. Fourth, non-government organizations
(NGOs) and activists are more capable than ever of tarnishing a company's reputa-
tion by publicizing its environmental or human rights missteps . The Internet has
enabled these environmental and human rights advocacy groups to better organize
their resources, spread negative information, and take coordinated actions against
offending companies. 8
It is important to understand that a company ' s social performance can impact its
financial performance. For example, if a company's poor social performance alienates
EXHIBIT 1-6 Examples of

Companies should provide customers with Companies and their suppliers should provide
Corporate Social Responsibilities
• Safe, high-quality products that are fairly employees with
priced . • Safe and humane working conditions.
• Competent, courteous, and rapid delivery of • Non-discriminatory treatment and the right
products and services. to organize and file grievances.
• Full disclosure of product-related risks. • Fair compensation.
• Easy-to-use information systems for • Opportunities for training , promotion , and
shopping and tracking orders. personal development.
Companies should provide suppliers with Companies should provide communities with
• Fair contract terms and prompt • Payment of fair taxes.
payments. • Honest information about plans such as
• Reasonable time to prepare orders. plant closings.
• Hassle-free acceptance of timely and • Resources that support charities, schools,
complete deliveries. and civic activities.
• Cooperative rather than unilateral actions. • Reasonable access to media sources.
Companies should provide shareholders with Companies should provide environmental and
• Competent management. human rights advocates with
• Easy access to complete and accurate • Greenhouse gas emissions data.
financial information. • Recycling and resource conservation data.
• Full disclosure of enterprise risks. • Child labour transparency.
• Honest answers to knowledgeable • Full disclosure of suppliers located in
questions. developing countries.
customers, then its revenues and profits will suffer. This reality explains why companies
use enterprise risk management, as described later in this chapter, to meet the needs of
all stakeholders.
IN BUSINESS
A recent survey conducted by Hewitt Associates, a human resources consulting and out-
sourcing company, shows that employees who believe their employer has a good record for
corporate social responsibility (CSR) are more engaged in their work and more committed to
their employer. Employers are also aware of this, as results from the same survey indicate that
they believe the top three benefits for undertaking CSR initiatives are a positive organizational
reputation, higher employee engagement, and a positive impact on the environment. A similar
view of the importance of an organization's reputation for CSR to prospective employees is
echoed by Mario Paron, chief human resources officer for KPMG LLG in Canada. He notes
that "When [young recruits] are assessing their choices as to what type of organization they
want to be associated with, the entire (CSR) and green aspects are definitely things they ask
us about."
Sources: Hewitt Associates, "Research from Best Employers in Canada Study Builds Business Case for
Investment in Corporate Social Responsibility," Canada News Wire, Ottawa, January 25 , 2010; and Derek
Sankey, "Jobs Blooming from Companies' Growing Green Focus," National Post, April 22, 2009 .
• PROCESS MANAGEMENT
The past two decades have been a period of tremendous turmoil and change in the busi-
ness environment. Competition in many industries has become worldwide in scope, and LEARNING OBJECTIVE 5
the pace of innovation in products and services has accelerated. This has been good news Explain the basic concepts of
for consumers, since intensified competition has generally led to lower prices, higher qual- lean production, Six Sigma,
ity, and more choices. However, for businesses, intensified global competition has pre- enterprise systems, and
sented serious challenges. More than ever companies are realizing that they must risk management.
complement the functional view of their operations with a cross-functional orientation that
seeks to improve the business processes that deliver customer value.
A business process is a series of steps that are followed in order to carry out some Business process
task in a business. It is quite common for the linked set of steps comprising a business A series of steps that are followed
process to span departmental boundaries. The term value chain is often used when we look in order to carry out some task in
at how the functional departments of an organization interact with one another to form a business.
business processes. A value chain, as shown in Exhibit 1-7, consists of the major business
functions that add value to a company's products and services. The customer's needs are Value chain
most effectively met by coordinating the business processes that span these functions. Consists of the major business
functions that add value to a
This section discusses four different approaches to managing and improving business
company's products and
processes-lean production, Six Sigma, enterprise systems, and risk management. services.
Although each is unique in certain respects, they all share the common theme of focusing
on managing and improving business processes.
EXHIBIT 1-7 Business Functions Making Up the Value Chain
Research
Product Customer
and Manufacturing Marketing Distribution
Design Service
Development
Lean Production
Traditionally, managers in manufacturing companies have sought to maximize pro-
duction so as to spread the costs of investments in equipment and other assets over as
many units as possible. In addition, managers have traditionally felt that an important
part of their jobs was to keep everyone busy, based on the theory that idleness wastes
money . These traditional views , often aided and abetted by traditional management
accounting practices, resulted in a number of practices that have come under criticism
in recent years.
In a traditional manufacturing company, work is pushed through the system in order
to produce as much as possible and to keep everyone busy-even if products cannot be
immediately sold. This almost inevitably results in large inventories of raw materials,
Raw materials work in process, and finished goods . Raw materials are the materials that are used to
Materials that are used to make make a product. Work in process inventories consist of units of product that are only
a product. partially complete and will require further work before they are ready for sale to a cus-
tomer. Finished goods inventories consist of units of product that have been completed
Work in process but have not yet been sold to customers.
Inventories consisting of units of The push process in traditional manufacturing starts by accumulating large amounts
product that are only partially of raw material inventories from suppliers so that operations can proceed smoothly
complete and will require further
even if unanticipated disruptions occur. Next, enough materials are released to work-
work before they are ready for
stations to keep everyone busy. When a workstation completes its tasks, the partially
sale to a customer.
completed goods (i.e., work in process) are "pushed" forward to the next workstation,
Finished goods
regardless of whether that workstation is ready to receive them. The result is that par-
Inventories consisting of units tially completed goods stack up, waiting for the next workstation to become available.
of product that have been They may not be completed for days, weeks, or even months. Additionally, when the
completed but have not yet units are finally completed, customers may or may not want them. If finished goods
been sold to customers. are produced faster than the market will absorb them, the result is high levels of fin-
ished goods inventories.
Although some may argue that maintaining large amounts of inventory has its bene-
fits, it clearly has its costs. According to experts, in addition to tying up money, maintain-
ing inventories encourages inefficient and sloppy work, results in too many product
defects, and dramatically increases the amount of time required to complete a product. For
example, when partially completed goods are stored for long periods of time before being
processed by the next workstation, defects introduced by the preceding workstation go
unnoticed . If a machine is out of calibration or incorrect procedures are being followed,
many defective units will be produced before the problem is discovered. And when the
defects are finally discovered, it may be very difficult to track down the source of the
problem. In addition, units may be obsolete or out of fashion by the time they are finally
completed.
Large inventories of partially completed goods create many other problems that are
best discussed in more advanced courses. These problems are not obvious-if they were,
companies would have long ago reduced their inventories. Managers at Toyota are cred-
ited with the insight that large inventories often create many more problems than they
solve. Toyota pioneered what is known today as lean production.
Lean thinking model The Lean Thinking Model The lean thinking model is a five-step management
A five-step management approach that organizes resources such as people and machines around the flow of
approach that organizes business processes and that pulls units through these processes in response to cus-
resources around the flow of tomer orders. The result is lower inventories , fewer defects, less wasted effort, and
business processes and pulls quicker customer response times . Exhibit 1-8 depicts the five stages of the lean think-
units through in response to ing model.
customer orders.
The first step is to identify the value to customers from specific products and ser-
vices. The second step is to identify the business process that delivers this value to
customers.9 As discussed earlier, the linked set of steps comprising a business process
typically span the departmental boundaries that are specified in an organization chart.
EXHIBIT 1-8 The Lean Thinking Model
Step 2: Step 3: Step4: Steps:

Step 1: Identify the Organize work Create a pull Continuously
Identify value 1n _.b -.r arrangements .,..
system that .,.pursue perfection
spec1f1c usiness process around the flow
products/services that delivers of the business responds to in the business
value customer orders process
process
Source: This exhibit is adapted from James P. Womack and Dan iel T. Jones, Lean Thinking: Banish Waste and Create Wealth in Your
Corporation. Revised and updated (New York, NY: Simon & Schuster, 2003).
The third step is to organize work around the flow of the business process. This is
often accomplished by creating what is known as a manufacturing cell. The cellular
approach takes employees and equipment from departments that were previously sepa-
rated from one another and places them side by side in a work space called a cell. The
equipment within the cell is aligned in a sequential manner that follows the steps of the
business process. Each employee is trained to perform all the steps within his or her own
manufacturing cell.
The fourth step in the lean thinking model is to create a pull system where production
is not initiated until a customer has ordered a product. Inventories are reduced to a mini-
mum by purchasing raw materials and producing units only as needed to meet customer
demand. Under ideal conditions, a company operating under a pull system would purchase
only enough materials each day to meet that day's 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 be shipped immediately to customers. As this sequence suggests, work takes place
"just in time" in the sense that raw materials are received by each manufacturing cell just
in time to go into production, manufactured parts are completed just in time to be assem-
bled into products, and products are completed just in time to be shipped to customers. Not
surprisingly, this facet of the lean thinking model is often called just-in-time production, Just-in-time (JIT) production
or JIT for short. A pull system in the lean thinking
The change from push to pull production is more profound than it may appear. Among model where production is not
other things, producing only in response to a customer order means that workers will be initiated until a customer has
idle whenever demand falls below the company ' s production capacity. This can be an ord ered a product.
extremely difficult cultural change for an organization . It challenges the core beliefs of
many managers and raises anxieties in workers who have become accustomed to being
kept busy all of the time.
The fifth step of the lean thinking model is to continuously pursue perfection in the
business process . In a traditional company, parts and material s are inspected for defects
when they are received from suppliers, and assembled units are inspected as they prog-
ress along the production line. In a lean production system, the company ' s suppliers are
responsible for the quality of incoming parts and materials. And instead of using quality
inspectors, the company's production workers are directly responsible for spotting defec-
tive units. A worker who discovers a defect immediately stops the flow of production .
Supervisors go to the cell to determine the cause of the problem and correct it before any
further defective units are produced. This procedure ensures that problems are quickly
identified and corrected .
The lean thinking model can also be used to improve the business processes that link
companies together. The term supply chain management is commonly used to refer to Supply chain management
the coordination of business processes across companies to better serve end consumers. Th e coordin ati on of business
For example Canadian Tire Corporation and Costco coordinate their business processes processes across companies
with those of key suppliers to ensure that tires, cleaning supplies, and garden supplies are to better serve en d consumers.
on shelves when customers want them.
IN BUSINESS
Tesco, a grocery retailer in Britain, used lean thinking to improve its replenishment process for
cola products. Tesco and Britvic (its cola supplier) traced the cola delivery process from "the
checkout counter of the grocery store through Tesco's regional distribution center (RDC),
Britvic's RDC, the warehouse at the Britvic bottling plant, the filling lines for cola destined for
Tesco, and the warehouse of Britvic's can supplier." Each step of the process revealed enor-
mous waste. Tesco implemented numerous changes such as electronically linking its point-of-
sale data from its grocery stores to its RDC. This change let customers pace the replenishment
process and it helped increase store delivery frequency to every few hours around the clock.
Britvic also began delivering cola to Tesco's RDC in wheeled dollies that could be rolled
directly into delivery trucks and then to point-of-sale locations in grocery stores.
These changes reduced the total product "touches" from 150 to 50, thereby cutting labour
costs. The elapsed time from the supplier's filling line to the customer's cola purchase dropped
from 20 days to 5 days. The number of inventory stocking locations declined from five to two,
and the supplier's distribution centre was eliminated.
Source: Ghostwriter, "Teaching the Big Box New Tricks," Fortune, November 14, 2005, pp . 208B- 208F.
Six Sigma
Six Sigma Six Sigma is a process improvement method that relies on customer feedback and fact-
A process improvement method based data gathering and analysis techniques to drive process improvement. Motorola and
that relies on customer feedback General Electric are closely identified with the emergence of the Six Sigma movement.
and fact-based data gathering Technically, the term Six Sigma refers to a process that generates no more than 3.4 defects
and analysis techniques to drive per million opportunities. Because this rate of defects is so low, Six Sigma is sometimes
process improvement.
associated with the term zero defects.
The most common framework used to guide Six Sigma process improvement efforts
is known as DMAIC (pronounced: du-may-ik), which stands for Define, Measure,
Analyze, Improve, and Control. As summarized in Exhibit 1-9, the Define stage of the
process focuses on defining the scope and purpose of the project, the flow of the current pro-
cess, and the customer' s requirements. The Measure stage is used to gather baseline
performance data concerning the existing process and to narrow the scope of the project to
the most important problems. The Analyze stage focuses on identifying the root causes of
the problems that were identified during the Measure stage. The Analyze stage often
reveals that the process includes many activities that do not add value to the product or
service. Activities that customers are not willing to pay for because they add no value are
EXHIBIT 1-9 The Six Sigma Stage Goals

DMAIC Framework
Define Establish the scope and purpose of the project.
Diagram the flow of the current process.
Establish the customer's requirements for the process.
Measure Gather baseline performance data related to the existing process.

Narrow the scope of the project to the most important problems.
Analyze Identify the root cause(s) of the problems identified in the Measure stage.
Improve Develop, evaluate, and implement solutions to the problems.
Control Ensure that problems remain fixed.

Seek to improve the new methods over time.
Source: Peter C. Brewer and Nancy A. Bagranoff, "Near Zero-Defect Accounting with Six Sigma," Journal of
Corporate Accounting and Finance, January-February 2004, pp. 67-72.
known as non-value-added activities and such activities should be eliminated wherever Non-value-added activities
possible. During the Improve stage, potential solutions are developed, evaluated, and Acti vities that customers are not
implemented to eliminate non-value-added activities and any other problems uncovered in willing to pay for because they
the Analyze stage. Finally, the objective in the Control stage is to ensure that the problems add no value.
remain fixed and that the new methods are improved over time. 10
Managers must be very careful when attempting to translate Six Sigma improvements
into financial benefits . There are only two ways to increase profits-decrease costs or
increase sales. Cutting costs may seem easy-lay off workers who are no longer needed
because of improvements such as eliminating non-value-added activities. However, if this
approach is taken, employees quickly get the message that process improvements lead to
job losses and they will understandably resist further improvement efforts. If improvement
is to continue, employees must be convinced that the end result will be more-secure rather
than less-secure jobs. This can happen only if management uses tools such as Six Sigma to
generate more business rather than to cut the workforce.
Enterprise Systems
Historically, most companies implemented specific software programs to support specific
business functions . The accounting department would select its own software applications
to meet its needs, while manufacturing would select different software programs to sup-
port its needs. The separate systems were not integrated and could not easily pass data
back and forth. The end result was data duplication and data inconsistencies coupled with
lengthy customer response times and high costs.
An enterprise system 11 is designed to overcome these problems by integrating data Enterprise system
across an organization into a single software system that enables all employees to have A software system desi gned
simultaneous access to a common set of data. There are two keys to the data integration to overcome prob lems in data
inherent in an enterprise system. First, all data are recorded only once in the company's inconsistency and duplication
centralized digital data repository known as a database. When data are added to the data- by integrating data across an
base or are changed, the new information is simultaneously and immediately available to organization into a single
software system .
everyone across the organization. Second, the unique data elements contained within the
database can be linked together. For example, one data element, such as a customer iden-
tification number, can be related to other data elements, such as that customer' s address,
billing history, shipping history, merchandise returns history, and so on. The ability to
forge such relationships among data elements explains why this type of database is called
a relational database.
Data integration helps employees communicate with one another and it also helps
them communicate with their suppliers and customers. For example, consider how the
customer relationship management process is improved when enterprise-wide information
resides in one location. Whether meeting the customer' s needs requires accessing informa-
tion related to billing (an accounting function) , delivery status (a distribution function) ,
price quotes (a marketing function), or merchandise returns (a customer service function)
the required information is readily available to the employee interacting with the cus-
tomer. Although expensive and risky to install, the benefits of data integration have led
many companies to invest in enterprise systems.
Enterprise Risk Management

Businesses face risks every day. Some risks are foreseeable. For example, a company
could reasonably be expected to foresee the possibility of a natural disaster or a fire
destroying its centralized data storage facility. Companies respond to this type of risk by
maintaining off-site backup data storage facilities . Other risks are unforeseeable. As an
example, in March 2010, Bauer Hockey Corp. announced a recall of 13 different models
of its junior and youth hockey sticks, most of which were manufactured in China prior to
2008. The reason for the recall was that the yellow paint used on the sticks contains lead in
excess of allowable limits. Lead can cause adverse health consequences if ingested by
children. Estimates indicate that worldwide, as many as 100,000 of these sticks were sold
between 2006 and 2010, including nearly 70,000 in Canada. 12 The financial consequences
of such recalls can be significant and would include Bauer's cost of replacing the sticks
returned by customers, potential lost sales due to consumer concerns about the safety of
the product, and lawsuits arising from health issues related to product use.
Enterprise risk management Every business strategy or decision involves risks. Enterprise risk management is a
A process used by a company to process used by a company to proactively identify and manage those risks.
proactively identify and manage
foreseeable risks. Identifying and Controlling Business Risks Companies should identify foresee-
able risks before they occur rather than react to unfortunate events that have already hap-
pened. The left-hand column of Exhibit 1-10 provides 12 examples of business risks. This
list is not exhaustive; rather its purpose is to illustrate the diverse nature of business risks
that companies face. Whether the risks relate to the weather, computer hackers, complying
with the law, employee theft, financial reporting, or strategic decision making, they all
have one thing in common: If the risks are not managed effectively, they can impair a
company's ability to meet its goals.
Once a company identifies its risks, it can respond to them in various ways such as
accepting, avoiding, sharing, or reducing the risk. Perhaps the most common risk manage-
ment tactic is to reduce risks by implementing specific controls. The right-hand column of
Exhibit 1-10 provides an example of a control that could be implemented to help reduce
each of the risks mentioned in the left-hand column of the exhibit.
In conclusion, a sophisticated enterprise risk management system cannot guarantee
that all risks are eliminated. Nonetheless, many companies understand that managing risks
is a superior alternative to reacting, perhaps too late, to unfortunate events.
EXHIBIT 1-10 Identifying Examples of Controls to Reduce

and Controlling Business Risks Examples of Business Risks Business Risks
• Intellectual assets being stolen from • Create firewalls that prohibit computer
computer files hackers from corrupting or stealing
intellectual property
• Products harming customers • Develop a formal and rigorous new product
testing program
• Losing market share due to the • Develop an approach for legally gathering
unforeseen actions of competitors information about competitors' plans and
practices
• Poor weather conditions shutting • Develop contingency plans for overcoming
down operations weather-related disruptions
• A Web site malfunctioning • Thoroughly test the Web site before going
"live" on the Internet
• A supplier strike halting the flow of raw • Establish a relationship with two
materials companies capable of providing needed
raw materials
• A poorly designed incentive compensation • Create a balanced set of performance
system causing employees to make bad measures that motivates the desired
decisions behaviour
• Financial statements inaccurately reporting • Count the physical inventory on hand to
the value of inventory make sure that it agrees with the
accounting records
• An employee stealing assets • Segregate duties so that the same
employee does not have physical custody
of an asset and the responsibility of
accounting for it
• An employee accessing unauthorized • Create password-protected barriers that
information prohibit employees from obtaining
information not needed to do their jobs
• Inaccurate budget estimates causing • Implement a rigorous budget review
excessive or insufficient production process
• Failing to comply with equal employment • Create a report that tracks key metrics
opportunity laws related to compliance with the laws
Summary
Managerial accounting assists managers in carrying out their responsibilities , which include
planning, directing and motivating, and controlling. [LOI]
Managerial accounting differs substantially from financial accounting in that it is oriented more
toward the future; places less emphasis on precision; emphasizes segments of an organization
(rather than the organization as a whole); is not governed by generally accepted accounting
principles; and is not mandatory. [L02]
Most organizations are decentralized to some degree. An organization chart depicts who works
for whom in the organization, and which units perform the various staff and line functions.
Accountants perform a staff function-they support and provide assistance to others inside the
organization. [L03]
Ethical standards serve a very important practical function in an advanced market economy.
Many organizations prepare a code of ethics to reflect their values and the moral system under
which they operate. Professional accounting groups, such as CMA Canada, also have their own
code of professional ethics to provide operating guidelines for their members. As an extension
of the concept of organizational ethics, many companies have embraced corporate social
responsibility whereby the needs of numerous stakeholders are considered when making deci-
sions. [L04]
Lean production organizes resources around business processes and pulls units through those
processes in response to customer orders. The result is lower inventories, fewer defects, less
wasted effort, and quicker customer response times. [LOS]
Six Sigma uses the DMAIC (Define, Measure, Analyze, Improve, and Control) framework to
eliminate non-value-added activities and to improve processes. [LOS]
An enterprise system integrates data across the organization in a single software system that
makes the same data available to all managers. Enterprise risk management involves proac-
tively identifying and managing key risks faced by an organization. [LOS]
Glossary
Review key terms and definitions on Connect.
a connect
Questions
1-1 What are the major differences between financial and managerial accounting?
1-2 What is a business plan and by whom is it used?
1-3 Describe the three broad categories of customer value propositions.
1-4 Describe the three major activities of a manager.
1-S What are the four steps in the planning and control cycle?
1-6 Describe the responsibilities of the controller.
1-7 Distinguish between line and staff positions in an organization.
1-8 What is decentralization?
1-9 What are the three main categories of inventories in a manufacturing company?
1-10 What are the five steps in the lean thinking model?
1-11 What are the major benefits from successful implementation of the lean thinking model?
1-12 Describe what is meant by a "pull" production system.
1-13 Briefly describe Six Sigma.
1-14 Why is corporate social responsibility becoming increasingly important to organizations?
1-lS What is an enterprise system supposed to accomplish?
1-16 Why do companies prepare a code of ethics?
1-17 What are the four key aspects of the Sarbanes-Oxley Act of2002?
1-18 Briefly describe what is meant by enterprise risk management.
Exercises~
EXERCISE 1-1 The Roles of Managers and Management Accountants [LOI, L03]
A number of terms that relate to organizations, the work of management, and the role of managerial
accounting are listed below:
budgets controller
decentralization directing and motivating
feedback financial accounting
line managerial accounting
non-monetary data planning
performance report staff
precision chief financial officer
Choose the term or terms above that most appropriately complete the following statements.
I. is concerned with providing information for the use of people inside the
organization, whereas is concerned with providing information for the use
of people outside the organization.
2. 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.
3. When , managers oversee day-to-day activities and keep the organization
functioning smoothly.
4. The accounting and other reports coming to management that are used in controlling the orga-
nization are called _ _ _ _ _ __
5. The delegation of decision-making authority throughout an organization by allowing manag-
ers at various operating levels to make key decisions relating to their area of responsibility is
called _ _ _ _ _ __
6. A position on the organization chart that is directly related to achieving the basic objectives of
an organization is called a position.
7. A position provides service or assistance to other parts of the organization
and does not directly achieve the basic objectives of the organization.
8. The manager in charge of the accounting department is generally known as the
9. The plans of management are expressed formally in _ _ _ _ _ __

10. A detailed report to management comparing budgeted data to actual data for a specific time
period is called a _ _ _ _ _ __
I I. 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.
12. Managerial accounting places less emphasis on _ _ _ _ _ _ _ and more emphasis on
_ _ _ _ _ _ _ than financial accounting.
EXERCISE 1-2 Professional Ethics and the Business Environment [L04, LOS]
A number of terms are listed below:
value chain work in process enterprise risk management
Sarbanes-Oxley Act Six Sigma business risks
lean thinking model code of professional ethics corporate social responsibility
customer value proposition business process enterprise system
corporate governance non-value-added activity just-in-time
Required:
Choose the term or terms from the above list that most appropriately completes each of the follow-
ing statements:
1. Inventory consisting of units of product that are only partially complete at the end of a period is
known as _ _ _ _ _ __
2. is a method that relies on customer feedback and objective data gathering
and analysis techniques to drive process improvement.
3. A(n) is a series of steps that are followed to carry out some task in a
business.
t./kmugcriul Accounting, Ninth Canudiun ::dition
Chapter 1 Manager a! Accounting and t!">e Business Environment 25
4, The \ysrcm hy which J. company h; dirccrc:d and c0mrntkd is :.:.a1~;:i.1 _

5, Th~ lo l1dp !he ri:sl;, ttu\ il C1r:<> aud l•J .Jevdup f>:Sf-'"-JHSt:;,
to the compcmy i;; c·,ssuJ-e<l uf meeting 1ts goal& l:s kno"vn ih
6. t\ pn1ducrion and inventory ET•nfn)l ;;y<fum in which rnateria1;; are prrcha<;ed ::md unit!< are ~>rf0
:1uce:1 only a~ needed :o mei:t actnal cttstorrter J0:r;;1nJ is known'''··········································
7. Pnorly de;;!gned ·.woducrn that cause health pro-blems tbr :.:u'ltnrnen; and financial stateni-cnH
thot 0vcrstotc: rhc ;;J;11J1)Unt of 1\'.'.Vt-r:nc- gene-roted by tJ::- org~utiz;irion ore- cx:lr:ipks 0t:
S. [ncmasing :he ratz of output of a(n-1 a;; the n:s:ul! of an itnJJovcmcnt effort
ic; unlikely '_c have- llltch c-!T0c:t or:. profit>.
9. Afn) consi'i!S of b:u<;ine;::s: functmni> :hat add va:ue to a <'<>m<m»v''
md ~eT\'kb;::, ;:uch m-; res<o'ardt m1J 4ieveJ0pment ;)r•«<lncl JesigJL 1mm11ltewtri11g.
di<itrib:nion. and c.u<immcr ;.1crvicc
1():, i-\(n/ .. it1<g1·•11's darn tl\>in <X:toss 1l:fi-Ofg11nix::.ti0J i11to a s.nglv centt'<tLz-.'\l
Jatah:tse tlnl nnbl-eis al! 1u acres;; ii wmmon ~el 0::' data,
I :l. Profe;;!'iona: accn:inting _groups c;uch as CY1A Canada have- a(n} that
:ont:iins- details of how it;; members shonld sorrdnct them<;elve;; in their dea1ings with
thepubll..:.
LL !~v.: ----------------------------------------ha five~ste·J manage;nenr approach tlrnt organize'! re;:ources: around
the r10w of !:11Jsi1\CS':i 1Y<ICC-SS<:$ 0:11ct tbot pn11~ u11it$ thi:ongh those fll'.(<'Cs~cs in response t0- cus-
tomer orde-rn.
13. A company can succeed nn!_y if it creates- a reas-011 fr;,;- cus:rnnen; to e-.hocse itov:;a acon1petitor;
in short.a _______
J..+. The rej)J"esenb nn i111por~au-, and
m1ciug other the CEO LnJ CFO t0 cert1fy in writing ;:rntent';Jtt;;.
fairly <'.•f opcrariomt
15, L'1¢ ¢•>J)ctr-t of •>1ganiA1ltio-:u.. cci:H-ldering the ilt'eds of all iititkeholdt!'s 'vhc1) 1naki11g dU'.'11iJl'.:rb
Is knuwa a ; ; - - - - - - -
EXERCISE -1-3 Ethics in Bnsiues~ ft04l

GaHu Wtlli hired: by a popular h;.,,tJ<>o<l r0"6t:mrant a;; an o:<lcr,.t<1kcr and cm;hmr. Shortly after
the Joh, he was shoc-k~d to overhear are employee bragging tv a friend about shone-hanging
cuxt<)mcrs:. He collfn.•nt;:d rlw 0mployee ""h:> then snapped hack: "ti.find your own bnsine;;;.,.. Be;;irle~,
0vcryl'+1e dues tt amJ th:< eu.;torners H\:'!d;r nns)>. t::K» nMncy.'" fony didn·i km.>w :tO\Y to respond to
thl~ aggre,c.;~h:e ;;mncc,
Ke quired:
\'\1rat 'Nrni!J be the pracrical cnn~cq-,1c1~c-.:::; OI' the fast-food inrlustJ y and nn consi1rnc::r:; if cas-hkrs.
g_c:n;.::;ully ::ihw~<:!::umgi::J custo1uvn i>t <:very oppo-nmti:\y 7
l}-R<>BlJ.=!"'·l .1.---4 Ethk5 in B•1-,~b-i.~~ fl {)4l

JohnBr;g)>;>y. Cl\1A. ls tie ccnirvlforof B,ltlen f'oodi,, d large privately cwned food JXO-.<'li&ing c<>tn-
pac.y located in sz1uthcrn Ontario. John :·c'CciVl'"d his <lcs-ignation as- a CL~rtificd managcmc~nt ac::oun-
tant several years ago nnd lus b0cn_ working: h;s way up the .:orporatc ladder a\ Baden_ Foods .'\:>.
contro!!er, Johu i~ responsib.e of the annual 0perm:iug bndg:e! that
include~ p-roj&..:t!c-rH c,f te.venues and c,>ming year, Once th-c budget fa a-ppnwed by
Jam\'.$. D.:ivis, the- prtsi<lc-nt of R&dcn it I\ w;cd !11th::- monthly J1C-rfr1.nnan.:.:: •cporr, which
<n1c1purnsw:tval Mt>l!:. tu "'0tw11g01 im•i<C'fons.
m1mcg¢1mont tea:n 1u m01ke decisions that benefit the
company a; a v,hn!c, las.t yew· Jame; Davis- csfai)Ji\hcd a hnnns rlan. Jr. nry month thm the com-
pany's <Ktual 1uconre Cteve1mes minus expci:ses:1 is better than the bu<igeted an::ount
±II n;e1nber~ lhe se:nior nmnagement tearr1, inciulling the CFO, the ;;ontrui!er, lhe: vke-
pn::$l<ler1t of Productlor<, <t1d rhe vke-pt~~ide:nt 0~ :vfarketlng receive a M1ru;;, LaAt y~u_; was the
f\;5l fl\,':\\' btn;u& plan\\ ;;5 u0ed, a;i<l b•>nus<:~ were pt3.d Qtlt in five qf the l\vdve m<:•nths
of
M0nJgcmcnt Accounting
26 Cha::iter 1 Managerial Accounting and trre Bustness Environment
,,.. Foncwafr.-::.monn, u;; Jo'.rn wa\ wrrrking <:·n rinalirhg ~he operating b1:dger thr th.: up.::orr-
<tt'4tl iJvmJ;u1 Rvl\">•J1J. lLv CFO a! J3+iJ¢n FuoJ&, Thv ;;vuv~t><l'.iun w~nl
j{)hn: Really \Ydt Jan, rmju~t f'-c!tt!rig oh: final t:'lul'.hc<. 6!'r th"' h-c1dgct p.rojccli6!h an.I. ;vill have d
draft vers1un for your tt'Vli:W _;:in;\ thing tv1o-n<lay 1L0n1lng.
,Ian: finutL, glad 1u hear it How Un the operating incn".Tle nul!b:?n; lonk co1npnred to kst year's
actual n::f'u !fa'!
Jahn: They of our new p:r1)duct) ~(h-l yc~tr. 0rrm"vm\tr~diJ1g
campdgn, the u.tm;Xf food s:cundaJ that has -plJ,b'1'.iXI one oi o-ttr key i'frmpctitors., 1' m
g:cting ;;ign!flca.-:it i11c1'Ca<::::.t hi oper.acing foco:ne ;;3ch n'.011".h oomp:t.-"C<l to Ja>.t ~/car,
}(In; Signifi-eanJ inct'l.';<s-e~ evfr:i rnonth" Are you ">Uf\". ~hout thl;;"
J1t/Jn: \¥ell. a;; Mire m; nae can ever be when projetting v.:tml revenue;; and ex?ense-s will be in lhe
fururc. Bm rn l~onfidcm that fhc hurlget is based on rca<:rnablc c>:p:crntinns. rve1alkcC mall
t1tc k:cy rnumrg_cis iu prndunion aud rnurkctiug, arnJ they 2grc2 t!rnt ury cstiumti:s .me 1'cty
rea<;onab.t'.
Jan: S61ffid;. n;::c you've done yo-U:f homcv;ork i:B usuaL I'ri1 thinking th.:1ugb lhttt ffiaybc. l~i11g a
bit niori: cnm<crvativc Iii oµr hudget cqim:ltc;; mtgh1 he a hertcr way t<:'J- go,
John: 1 iJ1..'n·1 quit(O ;:<.>UO'A« lCs nul !lwl nw <J>'.i1naie~ :nr a;1g1:e~siYe. As I :>-<!:d, ,,11 thi: k<:J' ttunagers
think ib'.l hudi;ct ;s rea.,onah· e-. a~d attainable if "Ve •vork hmtl.
Jan: Right, I understand that I'n1just: saying tilat given the new bonus pfan that Davis- introduced
ksl maybe \\C ~lwu:JJ be <levduµing ;nvrnltly buJ_g.elt !hat we ru:e :.-u:rc we c~o.t beat. Du
yon
J&iut: W&it 11 miniu:o ate y(1U Kuggcstl11g: that w,;;, lntent!<t1111lly lo-wlnfl ".he budg,ct 11urnlx:ts ju>.t so-
\\'O- c.111 get-0n: OOm1~'" c,wh mon1:1·:
Jan: J preler to ~.hink nfi! a;; 0<in!'eTYillive- hudgeking :t'- opposed !"1 hrwb1!1n~g~ Pin;;. i:'s no! !ike
rm ;;)-king ynu tn mi:;.&ratc the actual revenue<> aml cxpcn<>eo: that get rqx:oi;:c~ each: month.
Th.1t would be uni;th,cal since the actual nonltk'.JS. _get usOO ty our credii0rs and bv the taK
au1horiiies,
John: ! don't kti&W', Jan. lnrc-11!0-r;ally dc.vclop;ng hudg-cn. tbnr w.:: knov;-' we can beat Just to get o-t\r
bimu;;:e;; ~;m; ;ud a,; unethical O'> m!~<;tating th; actun11e~nlt1.
}(tfl: 1 disagree, Tlw. budgets ;u:i; os<Al <)nly for J1iternaJ p-vrpose;;, \VTml's \he bann in ~jng ~I ~it\le,
cnn:;_e-rva1ive? !3es:ide". ·.ve all \Hlrk hard and we deserve fhe rrnnlh!y hcnust-s-. !Jr.vis will never
know lx:cause he's. so t>usy with hfa ::hnritablc foundations :hcs:c days: that !1c really d,;csn't
have a good idea of wl:a:' s realistic when i"E cou1es to the budget eilch yeru:. /\,:;; you know he
ba.'ika!ly approves wi:a:ever we recommend without much dis:cussion.
}&Jut: R:u1 woii't he g,:;-t !IU;tpl·::io-tn '.VhC1i acmti· ;c;,,u!t1 ili'C hctt:o.t than the
}an: Heck no, fo:'Hju;-1 he delighted thaJ we're do-Ing be!!t:r than expedt:cl'
ti•.i·Jt, John. \Ve'!! get our bo1tt+s~~ and Da\'ls \Vi!! be happy the- co·mp2-D:y is doi:::Jg M) v,eJL I've
gc11 ro run hut. I 1nok tflrvrard re ;ccrng those cnn;crv-nti\""C hudgct prnjcctinn; first C1ing
::dnnday nrornin.g.
Required:
J, !n doc1d:ing 1vhether to rornp.ly \Yi th Jan's request fer a '"cortservatlve budget," \Vh:tt a;;.pect;; of
the code ofpmfc1si0n& ethic:;; featured !n Exh-iO!t 1-5 sbnuld guidcJoh1:'s bcbrrvl:onr?
2 \V'bat woald you rccomrr;ond that Joh:-i rl<), and why?
PR.OBI,EJ\.f J-5 Preparing an Organization Chart [L<Jl]

:"1ain!<1nd L nivt<r;,..il)- ){'-a large univer':!.it)- lo::aw-d in British Co!umt:i<:, The n-niver{>ity is headed by
a -pres:i<lent V/ho has five vire-pre..;;!dent.~ !'epr;rting_ re hiirt Thes;:o v!c;:o·p1"6-.\idenm are re:.rx1111ibie f<w
ainitta1y \CP:icc;, i!.<lrnis;;ion':l and n;:cor<};, a;;:\1dcmics, finandal ~r>.·]i;c;; (cnntif!\k-r}, 1ind the phy<;"
kal pfanc
ln mJditiun. !be lmivc-rsity £.as manager;;. who report to lhcre vk:c-pn.-s!dcnis, These lndadc mac-
agrrs for c:cntrnl pnrchnstnz, the 1:niYcrsiry prc1.;,, and the nnivtr.+ty bookstore. 211 nf v;:hrrn rqwrr rn
the vki>president f•Jr auxiliary services; ma11ag_eis for ccrnpnter sen:~ces and for acconutmg: and
fina1Y:c. wht~ repon w ~he v'.i:c1>:B.'1ide1:l fur financial serYice:s~ and managers fnr grotmtlli aridcuswtlfaJ
ilct"vice,<,, lii!d frrt pli:l!!t :md niui11t~-l!ancc, pl1rnt,
111e 1mivex:5ily h<.;; five foculties------bµ:5iness, lwm1mi1ier,.,
metho:h. and a faw sdmoL Ed:h of these ur.ifu ha.'-i ;:, dean In
pr:::sid::·nt. Each faculty has s.:"';cntl departments-.
t./kmugcriul Accounting, Ninth Canudiun ::dition
!'"''"'" ":ut ga,w;,<\H'n dmst fv: '.tvf1UnL1w;_~ t!nJvt:l ~11;,

of !he po'>!tkms on your chn1i wonlJ be Jinc po~itbnis? \Vhy wonkl they be Hee posi-
tinns? \Vhkh would be c;f:uff positions:'.' \Vhy?
\Yhich ff" rhe positions on ynur chai1 \Vo1:1d ha~·e: a 11e0d for accounting :rfnrmatiGn?
l::.::plain,
PROilLEYI l~EUrlcs in Il:u:siness fI.04l

Adam \VH!i:tt:l>L C.'.'dA, was rc'C-<"nLy hi:"tcd a;; ::is.>:.i;;r;;mt contro-!ler of GroChetn Inc .• \Vhkh pro-
CCi'.i'.C1' chcmk'ah frw u;.;::. in fcttih7Ct1'. \Vtlifam;; tv:E s.dccr~rl tnr rhk p.0;;irin11 hct-mNc nf hi~ _ra;;r
ex._perLn1;:e !11 chemical processing. D1~ring his first mo-ath C-Jl the 10-b. \'.\.'Lln::m;, nrnde a _po-irt of
g:_eHing ~o know the pecpk re-spon;;ib!e f~1r lhe- _p!anl operaliom; am.'.. IC<l!ning how 1hmg;; an:: llone-
at Ginr:'.hcm
asked
for SUJ><r'tfa<ff replied tiw1 he wus n0t wilh tho;;
and ;:uggcsred that Wi!HailH be; \Vfac t('.:< ignore thiii it:~W.:\ Thfa rt:Sj)(>ic!-IC
d,•tto1nii'lilt ,on to prohr th!" ar'e:1 fnrt!wr to- he ;;ure th;lf tii<' ('pn<pany wt." nor
im e>ti"±tiocm, \.Vil Ham;; dcscovered evidence that c:roChcrn wa"- tn!ng a nearhy re:;-
idcntlaI landfill to drrnp toxii.:: WD.'itC'i-an activity. ft appea~cd that som.c m-:inbcrs. of
CroCh.;:m- o. nm:nag'°':nk"nt te-arn situmio:n ru:d rnuy have- bf~ involv-ed i1t arrnng·
!n_g for this dusn"Jing; however, \:V!l!iams was unable t0 d-ctt.:1m!nc wh-cthcr hii; superior, tile contro-!-
lcr. w:1~ iiwol-vcd.
Un£erlain how· lte c;ho-uld pnxeed, \\'i!Ha:u& began to >:ons-kier hi& option,; hy out;ining th!'.' fo-!~
!owi11g l\1::u a1ter:r-.a!ive .:onfhl!;; of a.:tin:r.:
Seek !hr- ad-..·k2" ofhi'i f.-upciio-:-, the crnmuller.
Almn:ymfJusly rdca::,i: the inf-orn:iailon to the local ncws:_x1p.::r.
Requina-L-
1. Di::;cu::;::; \vhy A<larn V\'i1J-imns has an ethical ri'i!'ponsibi!ity to take some actinn in the matter of
GroChcm Inc. and the <lumpi11g nfroxic waste'>. Refer t::i foe code of pn•fc'>Sfm:ia·· l'.tlics es-t:lb-
CfvfA Onwriu lo yvur ;:til\i\vl4".
1. co-ur'i.Cs of ru:con that \Vil!iurns: ha;; o-utiim.:d, z-x.plaiu whether
tir n\\t rh,,: :.crto-n !;: a_rrr"hJWinJc at-tttrd 11g th the gnidcHril'.K in Exhih.r !-'L
.'.. i\b-~nme that J\dam YVHHairt>- sought the- ;id,.-ke of his the \'OJ:troller. and dhcovexed
thal the contro1kr wa1>- invnived in . he <l:un1ph1i;_ uC De-.'>f.'.rite lhe- step;.; tl:ml
Williams should ta:Cc tn r,:;;;.,1lvc this- siruafi,1n.
(Ch-fA. ml.aptoU)
PRO.B-LE:VI 1-7 ('Qrporate Governance and Corporate Social Responsibility fIA)41

The rcc-ent by ; illu:>t:i\tte how irr.portJ.nt it is to
klc~n!fy risks:,. even compru1!es:. There has beer: cc-n"idcr~
ab.le ;;pcquhtlo-n in the hus.in"'"" pre.~~ <lll In aGtcd quick1y cno.-J:gh in rce.alTng vchi-
.;:]e\-, whii:b S1J:ne e;,_Jirwtes placi:- «t 8 Also, :teP~'liS sn:;ge~'1l !b::<t Tu-yott Jid not
ie-Il feJ.en:J regulat1:1n: in Canada abnut a ro.;.c.ibb prnh~em w1th the acce-leratorpedal whe:1 the cnm-
karned nf the is;;nc. l1s-tcad Toyota waited nut:J after the recall notice ·1ad been iss-ued to
f4\%Vfal0r'.> about the probkn;, Other am1!ys1:>. haH'. o,ug.ge;;U;:tJ that ToyoLl''.> rapiJ gruwl'.r ln
wo.:ridwide p:·-od'Jctcott and sales co-mpro-miszd its focus ~in maintaining ~;igh standards-of quaEty. 1n
ret;po1se to the .:.:r'i1'!s., Toy(lfa h;s rc-mporarlly do;;cd ::;on-1c ir. Britain and P'ance as a re-<:ulr of
lower dernand beGil~'>Z'" of lbe recau ... TI:e Gompany has offered 'i-ignific-11n! dis-~mmts to win
ha.ck tnst :.:-u<:!111nen; m Norh Anieric-a
R1u-;ui1'i!il:
I_ hlcntify l':takeh,,lders theit prnl-ub-ly were neg11~ve1y 3ffccted b-y the prohform: 6:\pCr!enced b-y
l'uyuta.
\.\'hat rnJ:e dne,,_ effective corporate gnvema.n.:e p~ay in reducing the likd!hnnd that compawe'>
wilt cxpcrievc-: the type;; of p16:Jlcms fac::xi 0~· Toy..:,ta?
M0nJgcmcnt Accounting
28 Cha::iter 1 Managerial Accounting and trre Bustness Environment
PROBLE!\.f l-8 Linc 311d St.aff Pn<;itlttns; {)ru3nir,ati"n Ch;art ILOlJ

TIJe Att;,(rt;JAchrn uf ;vtnliv;il PeJ:>u1w•d (Abfi') b 4 :nK1nbt1:;hip-<Jur:fdvn v;g;tui1a1i1x1 tb;Jl :>vrv<i; a
Whle 'an;" of indiY!dnd~ who "q1rk for nitxlkal: lnstitntion;s mdndlng ho:splhtb, clhik:s, and medi·
'l11c mcmbcrs.Clp is composed of doctor:;, nurses,. medical assistants, nnd pcofossionrrl
ad''"'''''"'"" The: pnrp0se: of the organ;zatton is tn piuvi::lc ·miividua1<; in :he medical field with a
p,uf0hl>irmal organi/"''ltion bat off:xs t'<lucational at<l trnini:ni; oppcctrmi1ie\: through loc01 chapten, ;i
monthly ma,razine (AA!P RtTii'h'J, cont!nuing-ed:i.c.atiun p:rogr<:mi<, senina.rn, :>elf-srn<ly 4.:our-:e.:;.,
and (C~c<itch publfoarion~,
lry a lKfottl .v( dln.:i.:tuts wi10 ;1r~ att:1nb1:1;; clcrtcd tu !llGH.:- JXJS1tiua" by !h<
chairperson of the boar<l: is the highe;;t~ranking vo!ume;.,-r rnembe-r and presides
over th.:: hoa-<l; fhc ton.rd cst_'thfishcs policy fDr the organization. Th.:: pol ides nrc- adrnink;,:_crcd and
caJTietl om hy profe;,tlonal :.1aJL The preside:11's chief responsibility i> 10 n1:lnage Jhe
(Ypentlio11s or the ~ta[[ Lib:e ar.y orgarri:talivu, lhe pro:essiorm! i:ilarf o[ Ari.JP i0 ('.OU:-
l'XHCd <lf~inc £nd ,;ra+'fpositit•n:< A partial organi7arion dtmi ofrhc A1'r1? profo,;i;ional ;;:rnff fa ;;hown
in Exl:ihit 1 A,
EXHIBIT Partial Organiz:at'.on Chari for :he Association of Medical Persor>'lel
Boardnt
Directors
Sl<lff Lmlwn
lo lh•
Cha.!rp:e:rson - - - - - - - r------ Mootings
Coordinator
Jere felcton
Vi~Pres:idem, Vice.,Pres:ident, Vice,.Pre:sidem, Vice:.,Pres:ide:m, Vice· Presi:.ktnt,

Fl!V.search Publfcations Educallona I Pro9••mo:; Mernbersh ip Adminis1ration
Jere Feldon, Stal'f Liaison ID the Chairperson

Fe!clo1: i;; a~\.i&<H:'-d to wnrk wllh !!te dnurpmon ol A~VIP hy serving :is an mtetr::J{:)(Iirtry between lht'
ch,airpcrsor. ai;d rhc prnfcssivm;l staff. A!l corrcspomlcncc to the ctnirpcrsf.1n }s funnc~kd thrnngh
Fe:Jd<)Ji. Feldon nlsn V:o:rks ...-e:y ciosety 1vith lhe pres~dent of AA1P. espednJly on any mattNS that
have. to be bro'Jght to the at rem ion of the chairper8.on and t1e bo-ar<l.
Lana Dkkson. Director ot Self-Study Programs
Dl<lks,,n ics ;1cspMs.Jl>J,oJrw dewlo1>ing :1rtz' rt)at'kcting the ittlf.study ptogti'.t)JS offered by l\1v1J:, Self.
~twJy cul.rr,e;,, n1;t;,bl of JJVLh a wu:kbo<1L tvlu;,l of the •:our~c-, arc Uevdupet: by c11.thide
co-r;tractors wt:o ;vor'.<:: under her direction. D:i:cksor relies on the director of me:nbership marketing
to assist her in marketing theSD cour';(',,; .
.I~ Paige, Edit1t1• f)f S)W(;fal Pu&fi«:ations
Paige !;; pdtt&~"i!y reo.po-:;;;lble for the publicttlon ru;d ;;ale of any re'leru"th 11K;11og;:aph;; that itre gen-
>;:r<1~cd by thG n;:'>'.;'..1rGh dcpiirtmcnt 7n 11ddirl~m, he GQt)itlinatc~ the p:.1hli('atinn 0f 11:iy
tha~ u1u;: be prepure;J by any o!her 1\'."'viP comr;tiHees er departments, Pdge dso
Publication Commi.tlci.'. whicl: sets policy on th.: types of pub;icatmJt'i that A5,1P should puhlish.
lrt>orgt: Ati<:ers:, l\-ianagcr of Personnel:
1\i:ker;; \.\Ork;; with uil uf ihe d<>panments of 1\,\1.P in hiringprofosskw.nJ and c::wi:::al ;,tnJl The inJi-
viduaJ dcpartm<.'nf'i. o.crccn and interview pro-&pcctivc employee!' f-0r prot'c;;io:!onal position,;, bm
Ackei>t is. n:-:>::rx)11sibk frw advcrt;s:11gnpe11 p<>s:rin1u, AckcN pln.y-. a more active r:ilc 111 :he hiring of
rlenca! persnnnel by ;;;;ieening individuals before t:1ey c>se 1wnt 1o the !Jvpartment;, (or mteniew;« In
:tdclit.ion. Acken; coorrlin<lle;,. lhe en1pluyee perfonnillH.:e eva!ua.tion prograrn ttlld adminlsLt:rs A;:\-1.P' s
;afar} ;;cbci:luk dJK'. friHgr hcnc-iiprc1gnrni.
Reqttirrd:
L Di,Jingai;h bi;!Y/\'Vn lini:r in: ;Jn urg'iniza!lo:; by de-fining >;";ii;h,
In your d:b-r:u,;;,.ion of each
!\liany times. contli:ts vdl! arise bc-twc.:n !in<: managers irr organizations. Discuss thc-
:JU1radcristlcs: oflirn: and stuff nunagers that may caus:r conflicts between the two.
For each of the f1Jur indlvidna!s idemL-it'd by narn: in the IC>-.t,
:t, !d~-mlfy whether 1he- lndivlduars position is a :ine i.>r o.taff pos.idt1.1 and exp-bin w\y,
ff, kkn-tify p<J!G1tial pr\<hkrn'> that i;:i)U1d "'11sc in G"'\:h i'ldlv\d')::t1'1> po">lfl(m, Gil her dm: ff) !ht;:;
ty;w of po'.lilton (i-e., line or ;;t<>fl) or to the h)t>Hion 0f tlw 1niJJyJtiun-l':; p~;i,,iti~)\t within !he
org1.mization.
(CMA. adapted)
Jl 1--9 Ethics and Cor1;orate. Go'\enmnc:e fI.04-1

Got•) the \Veb c.;ite of the (www,cibc.com/ca/abouLhun!f
:1n<i ffrrd th,' b-1111<' ~ ~filk111<:rit .nnvc1~rnncc prncrk:c'l'., Dt;'l'.."'ribt: thl' rrnnHc :.-md \'Xtt:lit 0f
the pnKt:ces Jt use:::. it~ cod£ -0f ethics fo1 dirl"ctor::. and code -0f conc~ncl for
emcpk'Y'''' lJihl:tbS !be cuntenl -01 lhese 0,;Ue-s. \(.; hy du crnnpanb;; make their crnJ:e;; of condm:l/
ethics puhlically aYailahk?
It 1-10 Strnti:gics IL01J

lJi"!ng t~1c :mr.ua~ of a majnr such a; or
their >tcaleglc'> as: presented in their Mar,:igcn1e:ftt DixcL\ision and
Ar1<1!ysfa. l)1scm-;;; \vhether Y''u believe are rnecuvr agirnst major 1,,on1peiitor,~,
R 1-11 Corporate Social Responsibility [LOS]

Di.; to tht' Web "ite lor ;, >>. , ,, ;- ~v, w>,v,uni!ever,ca) aml use the '-su~lainabHlly". link to-exaJnine how
the-company ;, ar.cmpti ;g rn cdJcatt. tnlhlllti!C!''< ahoot warer ctrucrvat!oiL Locat<: and d<:'.Mtnlo-:±d iH
'»Sl-1">t<>in~1bfo Ro:po-1t'' f,,,. 2010 DL~ut>~ the .;onle-nl of lhe repcr1 with to the
type-& the-y Uniliwerii; doing a gmxl.jub
its gnr>Yit: objective:; with its d'--sire to be rcspon&ibi;:'! \:\-'hy or why not?

Ch1 - Managerial Accounting and The Business Environment

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Contents

1 . Managerial Accounting and the Business Environment 2

MANAGERIAL ACCOUNTING AND

I THE ROLE OF THE MANAGEMENT ACCOUNTANT

Chapter 1 Managerial Accounting and the Business Environment 3

anagerial accounting is concerned with providing information to managers-

THE WORK OF MANAGERS AND THEIR NEED FOR MANAGERIAL

4 Chapter 1 Managerial Accounting and the Business Environment

Chapter 1 Managerial Accounting and the Business Environment 5

Directing and Motivating

The Results ofManagers' Activities Performance report

The Planning and Control Cycle

6 Chapter 1 Managerial Accounting and the Business Environment

EXHIBIT 1-1 The Planning and Control Cycle

The Business Plan

Chapter 1 Managerial Accounting and the Business Environment 7

EXHIBIT 1-2 Flow Chart of the Steps in Developing a Business Plan

is an interactive process. In today's dynamic and complex business environment, the

8 Chapter 1 Managerial Accounting and the Business Environment

• COMPARISON OF FINANCIAL AND MANAGERIAL ACCOUNTING

Emphasis on the Future

EXHIBIT 1-3 Comparison Accounting

• Reports to those outside • Reports to those inside

• Emphasizes financial • Emphasizes decisions

• Emphasizes objectivity and • Emphasizes relevance.

• Emphasizes precision. • Emphasizes timeliness.

• Emphasizes summary data • Emphasizes detailed segment

•Must follow GAAP. • Need not follow GAAP.

• Mandatory for external reports. •Not mandatory.

Chapter 1 Managerial Accounting and the Business Environment 9

Less Emphasis on Precision

Segments ofan Organization

Generally Accepted Accounting Principles

10 Chapter 1 Managerial Accounting and the Business Environment

Managerial Accounting-Not Mandatory

Chapter 1 Managerial Accounting and the Business Environment 11

EXHIBIT 1-4 Organization Chart: Metro Coffee, Inc.

Line and StaffRelationships

12 Chapter 1 Managerial Accounting and the Business Environment

• THE PROFESSIONAL MANAGEMENT ACCOUNTANT

Chapter 1 Managerial Accounting and the Business Environment 13

14 Chapter 1 Managerial Accounting and the Business Environment

EXHIBIT 1-5 Certified

Chapter 1 Managerial Accounting and the Business Environment 15

16 Chapter 1 Managerial Accounting and the Business Environment

Corporate Social Responsibility

EXHIBIT 1-6 Examples of

Chapter 1 Managerial Accounting and the Business Environment 17

EXHIBIT 1-7 Business Functions Making Up the Value Chain

18 Chapter 1 Managerial Accounting and the Business Environment

Chapter 1 Managerial Accounting and the Business Environment 19

EXHIBIT 1-8 The Lean Thinking Model

Step 2: Step 3: Step4: Steps:

20 Chapter 1 Managerial Accounting and the Business Environment

EXHIBIT 1-9 The Six Sigma Stage Goals

Measure Gather baseline performance data related to the existing process.

Improve Develop, evaluate, and implement solutions to the problems.

Control Ensure that problems remain fixed.

Chapter 1 Managerial Accounting and the Business Environment 21

Enterprise Risk Management

22 Chapter 1 Managerial Accounting and the Business Environment

EXHIBIT 1-10 Identifying Examples of Controls to Reduce

Chapter 1 Managerial Accounting and the Business Environment 23

24 Chapter 1 Managerial Accounting and the Business Environment