Chapter Managerial Accounting and the Business Environment 1 ‘What Is Managerial Accounting (Also Known as Management Accounting)? 2 Planning 2 Directing and Motivs Controlling 5 Decision Making 5 ‘The End Results of Managers’ Activities 6 Emphasis on the Future 6 Relevance of Data 7 Less Emphasis on Precision 7 Segments of an Organization 7 Generally Accepted Accounting Principles (GAAP) 7 Managerial Accounting—Not Mandatory 8 What is Cost Accounting? 8 Management Accounting and Globalization 8 A Strategic View of Management Accounting 11 Value Creation 12 Value Creation—External Perspectives 13 Value Creation—Internal Perspectives 13 A Leadership Perspective 14 Inirinsic Motivation 14 Extrinsic Incentives 15 Cognitive Bias 15 A Caltural Perspective 15 Managerial Accounting: Beyond the Numbers 17 ‘An Bthies Perspective 17 Code of Conduct for Management Accountants 18 Code of Conduct on the International Level 20 A Conporate Governance Perspective 20 The Sarbanes-Oxley Act of 2002 21 ‘An Enterprise Risk Perspective 22 AIudensfying ened Conroting Business Risks 23 A Conporate Social Responsibility and Sustainability Perspective 25 omens Professional Qualifications for Management Accounting 28 Summary 28 i Glossary 28 Questions 29 Exercises 30 Chapter Cost Concepts 35 General Cost Classifications 37 Cost Classifications for Manufacturing Companies 38 Manufacturing Costs 38 Direct Materials 38 Direct Labor 38 Manufacturing overhead, 40 Nonmanufacturing Costs 40 Selling costs 40 Administrative costs 40 Accounting Treatments of Manufacturing versus Nonmanufacturing Costs 40 Cost Classifications for Preparing Financial Statements 41 Product Costs 41 Period Costs 42 Prime Cost and Conversion Cost 43 Cost Classifications on Financial Statements 44 ‘The Statement of Financial Position (or Balance Sheet) 44 ‘The Income Statement 45 ‘Schedule of Cost of Goods Manufactured 48 Product Cost Flows 49 Inventoriable Costs 90. An Example of Cost Flows 50 Cost Classifications for Predicti Variable Cost 50 Fixed Cost 54 Cost Behavior 50 Cost Classifications for Assigning Costs to Cost Objects 56 yoorool Contents Direct Cast 56 The Trend towards Fixed Costs 110 Indirect Cost 56 Js Labora Variable ora Fixed Cost? 112 Fixed Costs and the Relevant Range 113 Differential Cost and Revenue 57 aéiaed Comm. 1S Opportunity Cost 58 ‘The Analysis of Mixed Costs 116 Sunk Cost 59 Diagnosing Cost Beluvior with a Seattergraph Plot 118 ‘Supplement A 59 ‘The High-Low Method 122 Cost of Goods Manufactured 59 “The Least-Squares Regression Method 124 Supplement Bt Multiple Regression Analysis 126 Relationship between Cost of Goods Manufactured and The Contribution Format Income Cost of Goods Sold 61 Statement 126 Why a New Income Statement Format? 126 ‘The Contribution Approach 127 Summary 128 Review Problem 1: Cost Behavior 128 Review Problem 2: High-Low Method 129 Glossary 130 Questions 131 Applying Excel 131 ‘The Foundational 15 133 Exercises 133 Problems 137 Cases 142 Supplement C62 ‘Accounting Entries for Manufacturing Companies 62 Swnmary 65 Review Problem 1: Cost Terms 66 Review Problem 2: Schedule of Cost of Goods Manufactured and Income Statement 67 Glossary 68 Questions 69 Exercises 70 Problems 74 Cases 82 Appendix 2A: Further Classification of Labor Costs 84 srvcndle 2B: Cost of Quality 87 Appendlx 3A: Least Squares Regression ‘Computations 144 Cost Behavior: Analysis and Cua vonne Pron Relationships 151 "The Basics of Cost-Volume-Profit (CVP) Chapter ‘Lypes of Cost Behavior Patterns 101 ‘Variable Costs 101 Analysis 154 ‘The Activity Base 103 Contribution Margin 154 Extent of Variable Costs 104 CVP Relationships in Equation Form 156 ‘True Variable versus Step-Variable Costs 105 CVP Relationships in Graphic Form 157 ‘True Variable Costs 105 Preparing the CVP Graph 157 ‘Step-Variable Costs 105 Contribution Margin Ratio (CM Ratio) 160 The Linearity Assumption and Relevant Range 106 Some Applications of CVP Concepts 161 Fixed Costs 107 ‘Change in Fixed Cost and Sales Volume 161 ‘Types of Fixed Costs 107 Change in Variable Costs and Sales Volume 161 Committed Fixed Costs 108 Change in Fixed Cost, Sales Price and Sales Discretionary Fixed Casts 108 Volume 163‘Change in Variable Cost, Fixed Cost, and Sales Volume 165 Solution 165 Change in Selting Price 165 Break-Even and Target Profit Analysis 166 Break-Even Analysis 166 The Equation Method 166 The Formula Method 166 Break-Even in Dollar Sales 167 ‘Target Profit Analysis 167 The Fquation Method 168 The Formula Method 168 Target Profit Analysis in Terms of Dollar Sales 168 The Margin of Safety 169 Linking Margin of Safety Percentage with Break-Even Percentage 170 CVP Considerations in Choosing a Cost Structure 171 Cost Structure and Profit Stability 172 Operating Leverage 174 Structuring Sales Commissions 176 Sales Mix 177 ‘The Definition of Sales Mix and Break-Even Analysis 177 Using Sales Dollar Ratio and Overall Contribution ‘Margin Ratio to Calculate Breakeven 178 Using Sales Unit Ratio and Weighted Unit Contribution ‘Margin to Calculate Breakeven 180 Break-Even Percentage 181 Summary 183 Review Problem: CVP Relationships 183 Glossary 186 Questions 186 Applying Excel 187 ‘The Foundational 15 188 Exercises 189 Problems 194 Cases 201 Appendix 4A: Margin of Safety Percentage (MoS%), Degree of Operating Leverage (DOL), and Break-Even Percentage (BE‘%) 203 Appendix 4B: Margin of Safety Percentage (MoS%) and Degree of Operating Leverage (DOL) 205 Contents root Chapter Variable Costing: A Tool for Management 207 Overview of Absorption and Variable Costing 209 Absorption Costing 209 Variable Costing 209 Selling and Administrative Expense 209 Summary of Differences 209 Absorption Costing Income Statement 211 ‘Variable Costing Contribution Format Income Statement 212 Reconciliation of Variable Costing with Absorption Costing Income 214 Choosing a Costing Method 216 ‘The Impact on the Manager 216 VP Analysis and Absorption Costing 217 Decision Making 717 Extemal Reporting and Income Taxes 218 ‘Advantages of Variable Costing and the Contribution Approach 219 Variable Costing and the Theory of Constraints 220 Impact of Lean Production 220 Summary 221 Review Problem: Contrasting Variable and Absorption Costing 222 Glossary 224 Questions 224 Applying Excel 224 The Foundational 15 226 Exercises 227 Problems 231 Cases 238 Appendix SA: Details of Absorption Costing—Use of Predetermined Overhead Rate 240 Appendix SB: Absorption Costing with Overapplied/ Underapplied Overhead Adjustments 247 Appendix 5C: Potential Problems of Using Absorption Costing 249oon Contents Chapter 6 Cost Allocations of Service Departments 263 Service Department Charges 265 Charging Costs by Behavior 266 Variable Costs 266 Fixed Costs 266 ‘Should Actual or Budgeted Costs Be Charged? 267 Guidelines for Service Department Charges 267 Example 267 ‘Some Cautions in Allocating Service Department Costs 269 Pitfalls in Allocating Fixed Costs 269 Service Department Allocations 270 Direct Method 271 ‘Step-Down Method 272 Reciprocal Method 274 Comparison of Direct, Step-Down, and Reciprocal Methods 274 Summary 275 Glossary 270 Exercises. 276 Problems 278 Cases 281 Chapter Activity-Based Costing: A Tool to Aid Decision Making 283 Activity-Based Costing: An Overview 284 How Costs Are Treated under Activ Costing 288 Nonmanufacturing Costs and Activity-Based Costing 288 ‘Manufacturing Costs and Activity-Based Costing 288 Cost Pools, Allocation Bases, and Activity-Based Costing 288 Designing an Activity-Based Costing (ABC) System 292 Step 1: Define Activi Activity Measures 2: es, Activity Cost Pools, and. ‘The Mechanism of Activity-Based Costing 296 ‘Step 2: Assign Overhead Costs to Activity Cost Pools 296 Step ¥ Calenlate Activity Rates 300 Step 4: Assign Overhead Costs to Cost Objects 301 ‘Step 5: Prepare Management Reports 303 Comparison of Traditional and ABC Product Costs 307 Proxluct Margins Computed Using the Traditional Cost System 307 The Differences between ABC and Truditional Product Costs 308 Activity-Based Costing and Customer Profitability Analysis 312 Activity-Based Management: Targeting Process Improvements 318 Activity-Based Costing and Kexternal Reports 320 ‘The Limitations of Activity-Based Costing 321 Summary 322 Review Problem: Activity-Based Costing 322 Glossary $24 Questions 325 Applying Excel 325 ‘The Foundational 15 327 Exercises 328 Problems 336 Appendix 7A: ABC Action Analysis 341 Appendix 7B: Using a Modified Form of Activity-Based Costing to Determine Product Costs for External Reports 353 Chapte¥ 8 Job-Order Costing 361 Process and Job-Order Costing 363 Process Costing 363 Job-Order Costing (Also Known as Job Costing) 364Job-Order Costing—An Example 365 Measuring Direct Materials Cost 366 Job Cost Sheet 367 Measuring Direct Labor Cost 367 Applying Manufacturing Overhead by Using the Predetermined Overhead Rate 369 Computation of Unit Costs 371 ‘Summary of Document Flows ‘372 Job-Order Costing—The Flow of Casts 372 ‘The Purchase and Issue of Materials 372 Issue of Direct and Indirect Materials 372 Labor Cost 374 Manufacturing Overhead Costs 376 Applying Manufacturing Overhead 376 The concept ofa Clearing Account 377 Nonmanufacturing Costs 378 Cost of Goods Manufactured 378 Cost of Goods Sold 379 Summary of Cost Flows 379 Problems of Overhead Application 383 Underapplied and Overapplied Overhead 383 Disposition of Underapplied or Overapplied Overhead Balances 384 Closed Out to Cost of Goods Sold 384 Alllocated between Accounts 384 ‘Which Method Should Be Used for Disposing of Underapplied or Overapplied Overhead? 385 Job-Order Costing in Service Companies 385 Use of Information Technology 386 Summary 38% Review Problem: Job-Order Costing 388 Glossary 391 Questions 391 Applying Excel 392 The Foundational 15 393 Exercises. 394 Problems 402 Cases 412 Appendix 8A: Activity-Based Job-Order Costing 415 Contents oor apter Process Costing 419 ‘Comparison of Job-Order and Process Costing 421 Similarities between Job-Order and Process Costing 421 Differences between Job-Onder and Process Costing 421 Cost Flows in Process Costing 422 Processing Departments 423 ‘The Flow of Materials, Labor, and Overhead Costs 424 Materials, Labor, and Overhead Cost Entries 425 Materials Costs 425 Labor Costs 425 Overhead Costs 425 Completing the Cost Flows 426 Equivalent Units of Production 428 Weighted-Average Method 429 Compute and Apply Costs 431 ‘Cost per Equivalent Unit—Weighted-Average Method 431 Applying Costs—Weighted-Average Method 432 Cost Reconciliation Report 433 Operation Costing 433 Supplementary Notes 434 Step 1: Summarize the Physical Flow of Units (the Green Area) 436 ‘Step 2: Compute the Equivalent Units of Production (the Blue Area) 436 ‘Step 3: Summarize the Total Cost Incurred for the Period ‘and then Compate the Cast per Equivalent Unit (the Yellow Area) 437 ‘Step 4: Calculate the Values of Completed Units and Ending Work in Process Inventories (the Peach Area) 438. Step 5: Check Cost Reconciliation (the Black Cells: Total Cost = Total Value) 438 ‘Transferred: in Costs and Materials 439 A Generalized Format 440 Summary 441 Review Problem: Process Cost Flows and Costing Units 442x Contents Glossary 445 Questions 445 Applying Excel 445 The Foundational 15 447 Exercises 448 Problems 452 Cases 456 Appendix 9A: FIFO Method 457 ‘Supplementary Notes 462 Appendix 9B: Losses In Process Costing 472 Appenix 9C: Activity-Based Process Costing 479 Master Budgeting 481 ‘The Basic Framework of Budgeting 483 Advantages of Budgeting 483 Responsibility Accounting 483 Choosing a Budget Period 484 Bottom-Up versus Top-Down of Budgeting 484 Budget Lapsing 487 Incremental versus Zero-Based Budgets 487 ‘Top Management Attitude in Budgeting 488 Stretch Budgets and Rewards 488 ‘The Budget Committee 489 ‘Technical Aspects of Budget Preparation 490 "The Master Budget: An Overview 490 Preparing the Master Budget for a Manufacturing Company 492 The Sales Budget 493 ‘The Production Budget 494 Inventory Purchases—Merchandising Company 496 ‘The Direct Materials Budget 496 ‘The Direct Labor Budget 498 ‘The Manufacturing Overhead Budget 499 ‘The Ending Finished Goods Inventory Budget 501 ‘The Selling and Administrative Expense Rudget 501 ‘The Cash Budget 503 ‘The Budgeted Income Statement 507 ‘The Budgeted Balance Sheet 507 Essential Aspects of Budgeting: A Hypothetical Service Company 510 Costs and Benefits of Budgeting 413 Summary S14 Review Problem: Budget Schedules 514 Glossary S16 Questions 517 Applying Excel 518 The Foundational 15 519 Exercises 520 Problems 524 Cases 536 Chapter Flexible Budgets and Performance Analysis 541 Variance Analysis Cycle and Management by Exception 543 Flexible Budgets 544 Characteristics of a Flexible Budget 544 Deficiencies of the Staie Planning Budget 545 How a Flexible Budget Works 547 Flexible Budget Variances 547 Activity Variances 548 Revenue and Spending Variances 549 ‘A Performance Report Combining Activity and Revenue and Spending Variances 551 Performance Reports in Nonprofit Organizations $53 Performance Reports in Cost Centers 553 Flexible Budgets with Multiple Cost Drivers 554 Some Common Errors 555 Summary 557 Review Problem: Variance Analysis Using a Flexible Budget 558 Glossary 559 Questions 560Applying Excel 560 The Foundational 15 561 Exercises 562 Problems 570 Cases 575 Chapter Standard Costs and Variances 579 Standard Costs—Setting the Stage 580 Setting Direct Materials Standards S81 Setting Direct Labor Standards 582 Setting Variable Manufacturing Overhead Standards 583, ‘Using Standards in Flexible Budgets 984 A General Model for Standard Cost Variance Analysis 584 Using Standard Costs—Direct Materials Variances 586 ‘The Materials Price Variance $87 ‘The Materials Quantity Variance 588 Using Standard Costs—Direct Labor Variances 589 ‘The Labor Rate Variance 590 ‘The Labor kifficiency Variance $90 Using Standard Costs—Variable Manufacturing Overhead Variances 592 ‘The Variable Manufacturing Overhead Rate and Efficiency Variances 592 An Important Subtlety in the Materials Variances 595, International Uses of Standard Costs 596 Standard Costs—Managerial Implications $97 Advantages of Standard Costs 597 Potential Problems with Standard Costs $98 ‘Supplementary Note on Variance Analysis Calculations 598 ‘Ad factors tothe columns: 599 ‘Add factors tothe rows: 600 ‘Add factors to both the columns and rows: 600 Activity Variance 601 Put It into Practice 602 Examples of More Complicated Labor Variances 605 Generalize the Model to Help Produce the Performance Report in Chapter 1] 606 Contents i Summary 607 Review Problem: Standard Costs 607 Glossary 610 Questions 611 Applying Excel 611 The Foundational 15 613 Exercises 613 Problems 616 Cases 621 Appendix 12A: Predetermined Overhead Rates and (Overhead Analysis in a Standard Costing System 622 Supplementary Note on Overhead Variance Analysis Calculations in a Standard Costing System 628 Appendix 12B: Journal Entries to Record Variances 636 ullliut in Decentralized Organizations 643 Chapter Decentralization in Organizations 645 Advantages and Disadvantages of Decentralization 645 Responsibility Accounting 646 Cost, Profit, and Investment Centers 647 Cost Cemer 647 . Profit Center 647 Investment Center 647 ‘An Organizational View of Responsibility Centers 647 Decentralization and Segment Reporting 649 Building a Segmented Income Statement 650 Levels of Segmented Statements 651 Sales and Contribution Margin 653, ‘Traceable and Common Fixed Costs 653 Heniifying Truceable Fixed casts 654 Activity-Based Costing 654 ‘Traceable Costs Can Become Common Costs 654 Segment Margin 655 ‘Segmented Financial Information in External Reports 657xh Contents Hindrances to Proper Cost Assignment 658 Omission of Costs 658 Inappropriate Methods for Assigning Traceable Costs among Segments 659 Failure 10 Trace Costs Directly 659 Inappropriate Allocation Rase 659 Axbitcarily Dividing Common Costs among Segments 660 Evaluating Investment Center Performance—Return on, Investinent 660 ‘The Rewin on Investment (ROL) Formula 661 Net Operating Income and Operating Assets Defined 661 Understanding ROI 661 Criticisms of ROI 664 Residual Income 65 ‘Motivation and Residual Income 666 Divisional Comparison and Residual Income 668 Operating Performance Measures 669 Delivery Cycle Time 669 ‘Throughput (Manufacturing Cycle) Time 669 Manufacturing Cycle Efficiency (MCE) 669 Balanced Scorecard 672 ‘Common Characteristics of Balanced Scorecards 673 ‘A Company's Strategy and the Balanced Scorecard 676 Derive Key Performance Indicators for a Balanced Scorecard 677 ‘Summary of the Measures and Their Purposes 678 A Balanced Scorecard Example for a Business Division of Media Products Manufacturer 678 ‘Tying Compensation to the Balanced Seorecard 679 Advantages of Timely and Graphic Feedback 680 Summary 682 Review Problem 1: Segmenued Siatements 682 Review Problem 2: Return on Investment (ROI) and Residual Income 684 Glossary 685 Questions 685 Applying Excel 686 The Foundational 15. 687 Exercises 688 Problems 695 Cases 706 Appendix 13A: Transfer Pricing 708 Chapter | A Differential Analysis: The Key to Decision Making 723 Cost Concepts for Decision Making 725 Kdemtifying Relevant Costs and Benefits 725 Different Costs for Different Purposes 727 ‘An Example of Identifying Relevant Costs and Benefits 727 Reconciling the Total and Tneremental Approaches 729 ‘Total versus Incremental Approaches, Which Approach to Use? 731 Adding and Dropping Product Lines and Other Segments 733, An Illustration of Cost Analysis 733 A Comparative Format 735 Beware of Allocated Fixed Costs 736 ‘The Make or Buy Decision 737 Strategic Aspects of the Make or Buy Decision 738 ‘An Example of Make or Buy 738 Opportunity Cost 740 ‘Value to Business (Deprivs Special Orders 744 ‘The Minimum Price 745 falue) 741 Utilization of a Constrained Resource 745 Contribution Margin per Unit of the Constrained Resource 746 Managing Constraints 748 ‘The Problem of Multiple Constraints 750 Joint Product Costs and the Contribs Approach 750 ‘The Pitalls of Allocation 750 Sell or Process Further Decisions 752 Activity-Based Costing and Relevant Costs 754 Summary 754 Review Problem: Relevant Costs 754 Glossary 755 Questions 756Applying Excel 757 The Foundational 15 758 Exercises 759 Problems 767 Cases 775 Chapter Capital Budgeting Decisions 783 Capital Budgeting—Planning Investments 785 ‘Typical Capital Budgeting Decisions 785 Cash Flows versus Net Operating Income 785 Typical Cash Ouyflows 786 Typical Cash Inflows © 786 ‘The Time Value of Money” 786 ‘The Net Present Value Method 787 ‘The Net Present Value Method Illustrated 787 Method 1: Using a Present Value Table to Compute Net Present Value 788 ‘Method 2: Using Spreadsheets to Compute the Net Present Value 789 Method 3: Using an Annuity Table to Compute Net Present Value 789 Recovery of the Original Investment 790 ‘Simplifying Assumptions 791 Choosing a Discount Rate 792 ‘An Extended Example of the Net Present Value Method 792 ‘The Internal Rate of Return Method 794 ‘The Internal Rate of Return Method Ilustrated 794 Salvage Value and Other Cash Flows 795 Using the Internal Rate of Return 795 The Cost of Capital as a Screening Tool 796 ‘Comparison of the Net Present Value and Internal Rate of Rouen Methods 796 Expanding the Net Present Value Method 797 ‘The Total-Cost Approach 797 ‘The Incremental-Cost Approach 799 ‘The Total-Cost Approach versus the Incremental-Cost Approach 800 Least-Cost Decisions 800 Contents vl Uncertain Cash Flows 802 AnExample 802 Real Options 803 Preference Decisions—The Ranking of Investment Projects 804 Internal Rate of Retum Method 804 Net Present Value Method $04 Other Approaches to Capital Budgeting D ‘The Payback Method 805 Evaluation of the Payback Mediod 806 ‘An Extended Example of Payback 807 Payback and Uneven Cash Flows 809 ‘The Simple Rate of Return Method 809 Criticisms of the Simple Rate of Return 811 Postaudit of Investment Projects 811 Summary 813 Review Problem: Comparison of Capital Budgeting Methods 813 Glossary 815 Questions 815 Applying Excel 816 ‘The Foundational 15. 817 Exercises. 818 Problems 822 Cases 828 Appendix ISA: The Concept of Present Value 830 Appendix 15B: Present Value Tables = 836 Appendix 15C: Income Taxes in Capital Budgeting. Decisions 838 — I a ¥ _ Statement of Cash Flows 843 ‘The Statement of Cash Flows: Key Concepts 845 Organizing the Statement of Cash Flows 845 Operating Activities: Direct or Indirect Method? 846 ‘The Indirect Method: A Three-Step Process 847 Step 847 Step 2 848 Step 3 850viv Contents Investing and Financing Activities: Gross Cash Flows 850 Property, Plant, and Equipment 851 Retained Earnings 852 Summary of Key Concepts 853 An Example of a Statement of Cash Flows 854 Operating Activities 856 Step 1 856 Step 2 856 Steps 857 Investing Activities 857 Financing Activities 858 Seeing the Big Picture 859 Interpreting the Statement of Cash Flows 861 Consider a Company's Specific Circumstances 861 Consider the Relationships among Numbers 862 Free Cash Flow 862 Earnings Quality 863 Summary 863 Review Problem 864 Glossary 868 Questions 868 ‘The Foundational 15 868 Exercises 870 Problem 873 Appendix 164: The Direct Method of Determining the ‘NetCash Provided by Operating Activities 881 Financi Analysis 887 Limitations of Financial Statement Analysis 888 ‘Comparing Financial Data across Companies 888 Looking beyond Ratios $88 Statements in Comparative and Common-Size Form 888 Dollar and Percentage Changes on Statements 889 Common-Size Statements 889 Net Profit Margin Percentage 893 Ratio Analysis—The Common Stockholder (Equity Shareholder) 894 Earnings per Share 894 Price-Earnings Ratio 894 Dividend Payout and Yield Ratios 895 The Dividend Payout Ratio 895 The Dividend Yield Kato 890 Return on Total Assets 896 Return on Common Stockholders’ Equity 897 Financial Leverage 897 ook Valuc per Share 898 Ratio Analysis—The Short-Term Creditor 898 Working Capital 898 Current Ratio 898 Acid-Test (Quick) Ratio 899 ‘Accounts Receivable Tumover 900 Inventory Turnover 900 Ratio Analysis—The Long-Term Creditor 901 Times Interest Earned Ratio Interest Cover) 901 Debt-to-Equity Ratio 902 Equity Multiplier 902 ‘Toa Asset Tumover 903 ‘Summary of Ratios and Sources of Comparative Ratio Data 903 Summary 906 Review Problem: Selected Ratios and Financial Leverage 906 Glossary 908 Questions 908 The Foundational 15. 909 Exercises 910 Problems 915Appendix Pricing Products and Services 925 Introduction 926 ‘The Economists’ Approach to Pricing 926 Elasticity of Demand 926 ‘The Profit Maximizing Price 928 ‘The Absorption Costing Approach to Cast-Plus Pricing 931 Setting Target Selling Price Using the Absorption Costing Approach 931 Determining the Markup Percentage 932 Problems with the Absorption Costing Approach 933 Target Costing 934 Reasons for Using Target Costing 935 An Example of Target Costing 935 Summary 936 Glossary 936 Questions 937 Exercises 937 Problems 938 Contents x Appendix Profitability Analysis 943 Introduction 944 Absolute Profitability 944 Relative Profitability 945 Volume Trade-Off Decisions 948 Managerial Implications 948 Summary 951 Glossary 952 Questions 952 Exercises 952 Problems 953 Cases 956 a PRoto Credits 957 ————— Index 959Managerial Accounting and the . Business Environment Management Accounting: It’s More Than Just Crunching Numbers “Creating value through values” is the credo of today's management accountant, It means that manage ment accountants should maintain an unwavering commitment to eth- ical values while using their knowl edge and skills to influence decisions that create value for organizational stakeholders. These skills include managing risks and implementing strategy through. planning, budgeting and forecasting, and decision support. Management accoun- tants are strategic business partners who understand the financial and operational sides of the business. They report and analyze not only financial measures, but also onfinancial measures of process performance and corporate social performance, ‘Think of these responsibilities as profits (Financial statements), process (customer focus and satisfaction), people (employce leaning and satisfaction), and planet (envi- ronmental stewardship). i Source: Conversation with Je Thomson, president and CEO of the Institute of Management Accountants,Chapter 1. his chapter explains why a specialized knowledge of managerial account- ing is important for anyone aspiring wo get ino the level of miyesnent in an organization. It begins by answering these questions: (1) What is managerial fccounting? (2) Why does managerial accounting matter to management? (3) How can managerial accoumting creste value? The chapter also explores leadership nd cultural perspectives which organizations must understand to ensure a proper match between business strategies and processes. Ethics, corporate governance, enterprise risk management, corporate social responsibilty, and sustanabiiy perspectives are also d= Cussed to provide a broader view of their potential influence on the application of ‘management accounting information and practices What Is Managerial Accounting (Also Known as Management Accounting)? Managerial accounting is concerned with providing information to managers—that is, the people inside an organization who direct and control its operations. In contrast, financial ‘accounting is concemed with providing information to stockholders, creditors, and others ‘who are outside the onganization. This contrast in orientation results in a number of major differences between financial and managerial accounting, even though they often rely on the same underlying financial data. Exhibit 1-1 summarizes seven key differences. ‘As shown in Exhibit 1-1, managerial accounting serves the needs of managers ‘employed inside the organization that is, internal management. Every organization—large and small—has managers. Someone must be responsible for formulating strategy, making plans, organizing resources, directing personnel, and controlling operations. This is true of the Industrial and Commercial Bank of China (the largest bank in China and the world in terms of market capitalization between 2010 and 2013), Reliance Industries (one of the leading conglomerates with annual revenue of US$68 4 billion in 2013), the University of Hong Kong, the Red Cross, Singapore Air- lines, as well as the local 7-Eleven convenience store. In this chapter, we will use a par- ticular organization—Esprit—to lustate dhe work of management. What we have to say about the management of Esprit, however, is very general and can be applied to virtually any organization. Esprit engages in the wholesale, retail, and licensing businesses that sell a range of fashion apparel and accessories in the Asia-Pacific region, Europe, and North America. ‘The Group experienced tremendous growth between 1991 and 2008, increasing its revenue from US$0.04 billion to USS4.78 billion, which then slowly stipped to US$3.33 billion in 2013 due to the economic downtum in Europe and the United States started in 2009. Esprit’s fast expansion and achievements would not be possible without proper plan- ning, directing, motivating, controlling, and decision making. Planning involves estab- lishing a basic strategy, selecting a course of action, and specifying how the action will be implemented. Directing and motivating involve mobilizing people to cary out plans ‘and run routine operations. Controlling involves ensuring that the plan is actually carried ‘out and is appropriately modified as circumstances change. Decision-making opportuni ties appear in daily activitics ranging from adding/dropping business divisions or mergers and acquisitions to remuneration adjustments for employees, Management accounting information plays a vital role in these basic management activities—but most particularly in the planning, controlling, and decision-making functions. Planning ‘An important part of planning isto identify alteratives and then to select from among the altematives the one that best fits the organization's strategy and objectives. One of the basic objectives of a company is to eam profits forthe owners of the company by employ- ing the appropriate strategies atthe right time and inthe right market or a country. When faced with the choice of opening new stores, management has to balance the potentialManagerial Accounting and the Business Environment EXHIBIT 1-1 ‘Comparison of Financial and Managerial Accounting Accounting Financial an Operatio id Data benefits against the costs and demands on the company’s resources, and this is especially ‘rue when venturing into new markets oF countries. Management knows from experience that venturing into new markets isa big step ‘that cannot be taken lightly. I requires enormous amounts of time and energy from the company's most experienced, talented, and busy professionals. When resources are stretched t0o thinly, the company suffers. After careful evaluation and cost-benefit anal- ysis of the various alternatives, Esprit decided not to open in new markets or countries, ‘ut to Foes its resomrers on a select few markets, In the company’s 2009 annval report, the chairman Explained this decision: “We have in the past, expanded globally using a diffused strategy. However, to-continue ‘expanding our global footprint, we have presently decided not to open in new markets! ‘countries but to focus our resources on a select few markets... We will continue to build the brand's relevance and visibility, thereby increasing customer awareness of our ‘brand through opening stores in prominent shopping locations in these markets.” Source: Extracted from the chairman's letter to shareholders, Esprit 2009 annual reportSane) mo IngaPoeEe ZOO Yourts OuymPic GAMES: RRO Chapter 1 ‘To help make good decisions, management looks at data such as sales volumes, profit ‘margins, and costs of the company’s established stores in similar markets or locations. Data supplied by management accountants are combined with projected sales volume data atthe proposed new locations to estimate the profits that would be generated by the new stores. In general, virtually all important alternatives considered by management in the planning process have impacts on revenues or costs, and management accounting data, are essential in estimating those impacts. Having made the strategic decision, management needs detailed plans forall parts ofthe ‘company that would be involved inthe new stores. For example, travel and training budgets, may increase due to more extensive on-site supervision and on- or off-site training for new recruits of the new stores. The plans of management are often expressed formally in bud- gets, and the term budgeting is generally used to describe this part of the planning process. Tndgers are usally prepared ninder the diseetion ofthe chief Financia officer (CFO), who is in charge of the Accounts (Finance) Department. Typically, budgets are prepared annually and represent managements plans in specific, quantitative terms, In addition tothe training and travel budgets, the company’s Human Resources Department will be given goals in terms of courses or training conducted and detailed breakdowns of expected expenses. Sim- larly, store managers will be given targets for sales volume, profit, expenses, pilferaze losses, and employce traning. All these plans and targets are prepared, summarized, and analyzed in the form of budgets by the Accounts Department, together with relevant departments, PLANNING FOR THE INAUGURAL YOUTH OLYMPIC GAMES In October 2007, when Singapore submited ibid to host the 2010 Youth Olympic Games (YOG), the National University of Singapore (NUS) Unversty Town was presented asthe primary ste forthe Games. The ste was silunder construction, but some ofits feces were slated for completion by August 2010, The Nanyang Technological University (NTU) campus was identified as an alternative, The Youth Oympic Vilage was eventually located atthe NTU campus, which had existing faci ties appropiate forthe Games. Rising construction costs wordide was the reason cited forthe ‘decision by the Singapore YOG Organitng Commitee. The NUS Universty Town was estimated to cost $3500 milion {US$325 milion to construct, but the higher construction costs would have Dushed the actual expeniture far beyond the budget. With the change ofthe Ohmpicvilage ven, there was hope of keeping running costs ator under the budget. The change of venue would be seen as acceptable a the Interaional Oympic Committee (0C) had indicate that no extensive new infrastructure and facies woul he expected rom the hast ety ‘Amonth before the opening of the YOG, the Singapore government announced that even with the change of verue, hosting the YOG would cost Singapore an estimated USS275 milion, way above the original proposed budgets of US$30 milion, dented by the 10, and USS70 milion, by the Singapore YOG Organizing Committe. The significant increase in costs was partly caused by changes in specications and standards forthe YOG events ‘Athough the YOS Organizing Committe exceeded its budget, the 2010 YOG is sil on excel lent example of planing and management with contruous evaluation of ateratves in response to changing projec lans and economic conditions Source: "2010 Summer Youth Oymois, Wikipedia, Directing and Motivating In aditon to planning forthe fture, managers oversee day-to-day activites and try to Keep the organization functioning smoothly. This requires motivating and directing peo- ples Managers assign tasks to employees, arbitrate disputes, answer questions, salve Onrthe-spot problems, and make many small decisions that affect customers and employees. In effect, directing i that part of a manager's jb that deals with the routine and the hee and now, Managerial accounting data, such as daily sles report, ae often used in this type of day-to-day activityManagerial Accounting and the Business Environment Controlling Ii eareying cat ho cumtvol fiction, minagera Sok to ens thit ts plan is being followed, Feedback, which signals whether operations are on tac, isthe key to effective control. In sophisticated organizations, this foodback is provided by various detailed Teports. One of these reports which compares budgeted to actual results, is called a performance report. Performance reports suggest where operations are not proceeding as planned and where some parts of the organization may require additional attention. Kor example, the manager of a new store will be given sales volume, profit, and expense tarp: As te year progieste, performace reports will be consedod that compare felines Volume, profi, and expenses to tha tart Ut aca repli fall low th target, op manager wl be sete tha he store reauies ore siteation. Experienced persue! ean be cw i fi ep the ew snap rp iapenett ny coctls that its plans need to be fevisod. Ax we shal se in later chapters, on ofthe cstral porposes of managerial accounting iso provide this kind of feedback to managers Decision Making Periaps the most basic managerial skis the ability to make intlinnt, data-driven deci sions: Broadly speaking, many of those decisions evolve aroun the following tree ques tions, Whar should we be selling? Who should we be serving? How should we exceute? Exhibit 1-2 provides examples of decisions pertaining to each a these tree categorie, "Tho lichand cokcon of Exhibit 1-2 sougoet thet every ctapenytiust mars doce sions related ro the products and services that sell. For example, each year Procter & Gamble most decide how to allocete Ws macketing budget across 25 beads thet each generates over $1 billion in sales as well as other brands that have promising growth potential Mattel mast decide what new toys to introduce to the market, Southwest Ai lines must decide what ticket prices to establish for each of its thousands of flights per day. General Motors must decide whether to discontinue cercin models of automobiles “The middle column of Exhibit 1-2 indeats that all companies must make decisions related to the customers that thy sve. For examples Scars must Side how to allocate fis matketing budget between prods that tond to appeal to male vers female ccstoneca, Fed ut decide wheter to expand itt servic tot meikets roe ts globe. Hewlett-Packard must decide what price discounts to offer corporate clients that Pfc Lge volumes of ix psn. A Lenk mest cide whether ty lacontions Ce foot ay be apetiable “te right-hand column of Exhibit 1-2 shows tht companies also make decisions related 1o how they execute, For example, Bocing must decide whether to rely on out fide vendors such as Goodrich, Saab, and Rolls Royce to manufacture many ofthe Pats used to make its aeplanes, Cintas must decide whether to expand is laundering foul lensing capecity ina given guograptis rogiou by sing square fostagn eam EXHIBIT 1-2 Examples of Decisions What should we be selling? Who should we be serving? How should we execute? ‘What products and services ‘Who should be the focus of our How should we supply our should be the focus of our marketing efforts? parts and services? marketing efforts? What new products and services Who should we start How should we expand our should we offer? serving? capacity? What prices should we charge ‘for our products and services? What products and services should we discontinue? ‘Who should pay price premiums: or receive price discounts? Who should we stop serving? How should wa reduce our capacity? How should we improve our efficiency and effectiveness?Chapter 1 existing facility or by constructing an entirely new facility. In an economic downturn, a ‘manufacturer might have to decide whether to eliminate One 8-hour shift at unree plants or to close one plant. Recall our example of Esprit which suffered declining revenue alter its peak in 2008. Its management decided to close all its retail stores in North “America and certain loss-making stores in Asia and Europe in 2012 as part of the re- siructuring exercise to help Esprit to regain its position when the company recorded its first annual post-IPO loss of USS0.56 billion in the 2012-2013 financial year. Finally, all companies have to decide among competing improvement opportunities. For exam ple, a company may have to decide whether (o implement a new software system, 10 upgrade a piece of equipment, or to provide extra training to its employees. This portion ofthe chapter has explained tht the three pillars of managerial aecount- ing ae planning, controlling, and decision making. This book helps prepare you to be- come an effective manager by explaining how to make intelligent data-driven decisions, how to create financial plans forthe future, and how to continually make progress toward achieving goals by obtaining, evaluating, and responding to feedback. ‘The earlier sections explored the functionality of managerial accounting to manag- xs. The following section will continue to dferentiate the key characteristics of man- ‘agerial accounting from financial accounting. Exhibit 1 summarizes these diferences The End Results of Managers’ Activities ‘When a custome? enters an Esprit store, the results of management's planning, directing and motivating, and controlling activities will be evident in the many details that make the difference between a pleasant and an irritating shopping experience. The store will be clean, fashionably decorated, and logicaly laid out, Sales assistants will provide custom. crs with thorough information on the products, and will be happy and eager to help. Checkout clerks will be aler, friendly, and efficient. In short, what the customer expeti- {ences does not simply happen; itis the result of the efforts of managers who must visualize and then fit together the processes that are needed to get the job done. ‘The brand positioning of Esprit was based not only on fashion trends but also on offering affordable luxury with an emphasis on quality and newness—an upmarket rather than a premium brand. With this clear focus on strategic positioning, planning, directing ‘and motivating, and controlling, Esprit quietly grew from a husband-and-wife car boot sale apparel business toa billion-dollar company. Similarly, Taiwan's Hon Hai Precision Industry Co., Lid. (2012 revenue: USS128 billion) has become the world's number one electronics manufacturing services (EMS) provider since its inception in 1974 with merely USS7,500 in paid-in capital. Its Hong Kong listed subsidiary, Foxconin Technology Group is one of the main subcontractors for ‘many well-known electronie products, including Apple’s iPhone, iPad, and iPod: Sony's PlayStation; Microsoft's Xbox; Nintendo’s Wii; cellphones for Nokia and Motorola; computers for Dell and Hewlett-Packard; and motherboards for Intel. The success of Frit and Hon Hai, highlights not anly the importance of planning, directing, motivating and controlling, but also the dynamic capability of learning, adapting, and upgrading core ‘competence to deal with the short-term and long-term market changes in order to secure Tong-term success because they are dealing with products with relatively short life cycles. Continnous upgrading and effective use of management accounting information and tech niques for decision making are essential. Emphasis on the Future Because 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 toa point. The future 18 not simply & reflection of what has happened in the past. Changes are constantly taking place in econamic conditions, customer needs and desires, competitive conditions, and so on. All ofthese changes demand that the manager's planning be based in large part on estimates of what will happen rather than on surnmaries of What has already happened.Managerial Accounting and the Busines Relewance of Data Financial accounting data should be objective and verifiable. However, for internal uses man- agers need information that is relevant cven if itis not completely objective or verifiable. By relevant, we mean appropriate for the problem at hand. For example, itis difficult to verify ‘what the sales volume is going to be fora proposed new store at Esprit, but this is exactly the type af information that is most useful to managers. Managerial accounting should be flexi- ble enough to provide whatever data are relevant for a particular deci Less Emphasis on Precision Making sure that dollar amounts are accurate down to the ast dollar or penny takes time and effort. While that kind of accuracy is required for extemal reports, most managers ‘would rather have a good estimate immediately than wait for a more precise answer later. For this reason, managerial accountants often place less emphasis on precision than financial accountants do. For example, in a decision involving hundreds of millions of dollars, estimates that are rounded off to the nearest million dollars are probably zood enough, In addition to placing less emphasis on precision than financial accounting, man- agerial accounting places much more weight on nonmonetary data, For example, data about customer satisfaction may be routinely used in managerial accounting reports. Segments of an Organization Financial accounting is primarily concerned with reporting for the company as a whole. By contrast, managerial accounting focuses much more On the parts, or segments, ofa company. ‘These segments may be product lines, sales territories, divisions, departments, or any other categorization that management finds useful. Financial accounting does require some ‘breakdowns of revenues and costs by major segments in external reports, but this is a secondary emphasis. In managerial accounting, segment reporting isthe primary emphasis, Generally Accepted Accounting Principles (GAAP) Financial accounting statements prepared for external users must comply with the finan- cial reporting standards and generally accepted accounting principles (GAAP) of any «given jurisdiction, External users must have some assurance that the reports have been prepared in accordance with a common set of ground rules. These common ground rules enhance comparability and help reduce fraud and misrepresentation, but they do not necessarily lead to the type of reports that would be most useful in internal decision making, For example, if management at Esprit is considering selling land 0 finance a new store, they need to know the current market value of the land. However, most GAAP in Asia currently allow companies to state their land at their original, historical cost or to revalue their land at # non-specified period, ignoring the most relevant data for the decision—the current market value. ‘Most companies throughout the world are now communicating with their stakeholders using International Financial Reporting Standards (IFRS). To better align U.S. reporting standards with the global community, stock exchanges and stockholders may eventually require all publicly traded companies in the United States to incorporate IFRS into the financial reporting system for U.S. issuers! Regardless of which financial reporting system the companies in various countries adopt, itis important to understand that managerial accounting is not bound by GAAP or IFRS. Managers set their own rules conceming the content and form of internal reports. The only constraint is thatthe expected benefits from using the information should outweigh the costs of collecting, analyzing, and summarizing the data. Nevertheless, as we shall see in subsequent chapters, itis undeniably true that financial reporting requirements have heavily influenved snanayenent accounting practice. " pecording to the SEC Staff paper issued on May 26, 2011, the SEC has not yet made a decision as to ‘whether and ifs, ho, to incorporate IFRS ito the financial reporting system for US. issuers.a Chapter 1 Managerial Accounting—Not Mandatory Financial accounting is mandatory; that is, it must be done. Various outside parties such as stock exchanges and stockholders and the tax authorities in different countries requite periodic financial statements. Managerial accounting, on the other hand, is not manda- tory. A company 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. Because managerial accounting is completely optional, the important question is always, “Is the information useful?” rather than, “Is the information required?” AAs explained earlier, the work of management focuses on planning, which includes, setting objectives and outlining how to attain these objectives, and control, which includes the steps taken to ensure that objectives are realized. To carry out these planning and con trol responsibilities, managers need information about the organization. From an account- ing point of view, this information often relates to the costs of the organization. In ‘managerial accounting, the term cost is used in many different ways. The reason is that there are many types of costs, and these costs are classified differently according to the immediate needs of management. For example, managers may want cost data to prepare ‘external financial reports, to prepare planning budgets, or to make decisions. Each differ- ent use of cost data may demand a different kind of cost, For example, historical cost data are used to prepare external financial reports whereas decision making may require current cost data. What is Cost Accounting? ‘The term cost accounting is sometimes used in place oof management accounting. Cost accounting include, for example, defining costs and Valuating inventories to help managers to run businesses. Management accounting, on the other hand, relates to the provision of appropriate information, including cost infor- ‘mation for decision-making, planning, control, and performance evaluation, These two terms are sometimes interchangeable and their functions are to help companies make better decisions. The close relationship between cost and management accounting. intertwines them. l Management Accounting and Globalization ‘Management accounting is one of the core functions of businesses. In any business, it is important to have good management accounting knowledge and skills in order to be competitive, especially in today's global marketplace. All forms of businesses like ‘manufacturers, hotels, airlines, insurance companies, and construction entities operate to make a profit. A lot of businesses focus on increasing their revenues, but fail to understand and/or manage their costs properly. Hence, they may end up failing their businesses, especially during the economic downturn. As such, effective use of man- agement accounting techniques is critical to the suecess of any business. In the globalization and highly competitive business environment, there are a few fundamental requirements of management accounting information. First, as manage ‘ment accounting helps manage businesses, itis critical that management accounting information is prepared, provided, and used on a timely basis. Late information is no information. For example, if a proposal is required in a bid and it was only completed after the project deadline, the proposal would become totally useless even if it was a ‘well thought out proposal. Second, it is important for managenient accounting information to be relevant, and third, such relevant information needs to be obtained efficiently and effectively. ‘Management accounting work regularly requires forecasting, for example, of customers” future demand, and collecting detailed current and historic information for analyses.Managerial Accounting and the Business Environment 9 However, itis rather impossible to be certain of getting a perfect forecast. Obtaining accurate, detailed historical data may also be difficult and time consuming. Therefore, it is important to strike a balance between time spent in obtaining the information and its accuracy. Cost-benefit evaluation is a key concept in management accounting. There is 1no point in spending a million dollars to analyze information that has an impact of only a thousand dollars. ‘The main objective of decision making is to obtain relevant and materially accurate information that can lead to correct and unbiased decisions. This is especially important with today’s fast changing business environment and strong com petition from companies allover the world ‘The world has become a much smaller place due to the rapid improvements in infor mation technology and transportation systems. Nowadays, through the use of the Internet and other technologies, people in different parts of the world can communicate in real time at low cost. Traveling from one country to another has also become cheaper and easier due to a very competitive airline industry with the onset of low-cost carvers. 1p terms of trade, the world’s economy has been increasingly unified through reduction of trade barriers sich as tariffs, export fees, and import quotas. Unification of the world’s economy enables the division of labor by efficiencies and specialization through skills, Hence, the world has become a fantastic global marketplace that provides us with a lot higher quality and value tor money goods and services compared t0 10 to 20 years ago. Exhibit 1-3 ilustrates the tremendous growth in international merchandise exports ‘The merchanise export values increased from $59 billion to $17,930 billion from 1948 to 2012. The diagram also:shows the shares in terms of percentage in merchanise exports by region. The biggest three regions were Europe, Asia, and North America. In recent years, Asia has been the fastest growing region. It is well-known that China and EXHIBIT 1-3 World Merchandise Exports, 1948-2012 [World Merchandise Exports(eilions) SO 8487579 383877 Percentage of World Merchandise Exports by Region asia i |= = ; = | | * ———— st | ae: te cm tema =) ee | a ae ter ed eins esate oa ip sae aaa | ‘Source: World Trade Organization Stalstics 2013 http//anw.wtoorg/englvres_e/sttis_ets13 word trade_dev_e.pdt10 Chapter 1 India are growing particularly rapidly in industries like manufacturing and information technology. In fact, after China's economic revolt recent years, the following four Chinese companies regularly feature in the list of top 20 companies in the Finan- cial Times Global 500, which ranks companies on a quarterly basis by market capital- ization value: PetroChina, Industrial and Commercial Bank of China, China Construction Bank, and China Mobile, With the exception of China Mobile, these com- panies were also ranked among Forbes Global top 20 firms in May 2013 proof af the increasing influence of Chinese companies in the banking and petroleum sectors. Although globalization leads to greater competition, it also means greater access to ‘more countries, customers, and workers. For example, just the combined population of China and India in 2013 makes up more than a third of the world’s population of 7.1 billion. Many large companies such as Apple, Ford Motor, Starbucks, Coca-Cola, MeDonald’s, Gap, ad Nike are working very hard (o oblain a share of these two enor ‘mous markets. Currently, many jobs are being transferred to these less expensive markets, including basic manufacturing, high-tech, and research and development jobs. ‘What are the implications of globalization on management accounting? Companies and customers have greater access to foreign products, including financial service products all over the world. The main effects of freedom in exchange for goods and services include wider choices for customers, while companies face strong competition from companies in other parts of the world, Globalization has made management accounting information more demanding than ever. Good management accounting information must be timely, up to date, and relevant, Any incorrect action caused by Tag or inaccurate information may lead to loss-making decisions, or loss of business 10 companies within or outside their own countries. ‘The Internet fuels globalization by providing companies with greater access to geo- raphically dispersed customers, employees, and suppliers. While the number of Internet users continues to grow, as of June 2012, about 66% of the world’s population was still ‘not connected (0 the Internet, This suggests that the Internet's impact on global business thas yet to fully develop. ‘More details of the increasing influence of Asis Pacific companies ean be detected from the changes in the composition of the Fortune Global 500 companies over the short period between 2005 and 2012, as shown below: Fortune Global 500 2012 2011 2010 2009 ©2007 2005 Australia 9 8 8 9 8 9 China a oS el asia eae eet India 8 8 3 iF 6 5 Japan GB hd Bae TAgy racine: trite bau Malaysia 1 1 1 1 1 1 Singapore a 2 2 2 1 1 South Korea Cf epee rca nA gee Tawan 6 8 8 6 ° 2 Thailand 4 4 4 4 1 4 ‘Asia Pacific fer 1654 tata United States 132 133=«O139 1st 178 Canada TAD Mlle naraereyn’ = ds. Europe 161 172184188183 178 Others 4 got spss th a a a a aT) ‘Source: Data extracted fom CNN Money webste:hitp//mone.enr.convimagsznes ori lob800/2012 Allis. ‘The number of Fortune Global 500 companies from China increased almost three- fold from 16 to 73 (a gain of 57 companies), wheteas the number of companies from the United States fell from 176 to 132 (a drop of 44 companies). Although the United States is still the dominant economic power, the shift is noticeable and alarming. In 2012, theManagerial Accounting and the Business Environment Asia-Pacific region had 181 top 500 companies, which exceeded the number of such cor- porations in Europe and North America, This made Asia-Pacific the region with the most ‘op Fortune 500 companies. Notably, in the second half of 2010, China officially over- took Japan as the second biggest economy in the world, just behind the United States, According to Jim O'Neill, the chief economist of Goldman Sachs Group, Ine., China may overtake the United States by 2027. MORE OPPORTUNITIES FOR FEDEX AND UNITED PARCEL SERVICES (UPS) IN THIS ERA OF GLOBALIZATION, OUTSOURCING, AND COST CUTTING Analyzing its own proprietary database of 6,398 cases, a consultant fm reported that 86% of the U.S-based Fortune 500 companies outsourced to thiréparty logistics providers (3PLs) their logis tics and supply chain functions including filing orders, determining the best mode of transportation, ‘and realtime information to manage inventory in motion. It found that General Motors, Procter & Gamble, and Walmart each used 50 or mare 3PLs. With emphasis on costeffcient processes and operations, most local and offshore operations of both large and small companies rly heavily on 3PL to handle logistics and supaly cain activities. Logistics giants such as FedEx and UPS, there- fore, are expanding rapidly inthe United States and overseas. China, dubbed ‘the word's factory, osed a good opportunity for their business expansion. Both companies have ested heavily in Chinese hubs for their international business to and from Asia. Before 2012, FedEx and UPS could only work together with local partners or jin ventures when delivering within China. In 2012, China relaxed the regulations and allowed overseas logistics operators ta deliver within major cities. FedEx was granted operating licenses for eight major cities whereas UPS had five. FedEx fore- casted that by 2020, the Chinese local delivery market should grow to USS26.3 bllon Sources: Jenifer Leitz, ‘UPS Leaves Brown! fr New Love” The Wall Steet Journal, September 13, 2010, it /onine es comy/news/arteles/S810001424052748704621204575487840032479922: Bob Secier, "ex, UPS Geta Toehold in Chirals Express Delivery The Wal Steet Journal, September 10, 2012, tto.// nine ws} con/news/articles/S8100008723963604445547045776438005 16955324; and Amstrong & ‘esocites ne, "3PL Customers Report Isentfes Servce Trends, JPL Market Segment Sizes and Growth Rates. The Wal Sweet Journal, Juy 11, 2013, htp:/nine ws. comyartile/PRCO-20130711.910501.hi u A Strategic View of Management Accounting l Even more than in the past, companies that now face global competition must have a vie- ble strategy for succeeding in the marketplace. A strategy is a “game plan” that enables a company to attract customers by distinguishing itself from competitors. The focal point ‘of a company’s strategy should be its target customers. A company can only sueceed if it ‘ereates reason for customers to 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—eustomer int macy, operational excellence, and product leadership. Companies that adopt a customer intimacy strategy are in essence saying to their target customers, “You should choose us because we understand and respond to your individual needs better than our competi- tors.” Ritz-Carlton and Starbucks rely primarily on a customer intimacy value proposi- tion for their success. Companies that pursue the second customer value proposition, called operational excellence, are saying to their target customers, “You should choose us because we can deliver products and services faster, more conveniently, and at a lower price than our competitors.” Daiso, Southwest Airlines, Wal-Mart, and ‘The ‘Vanguard Group are examples of companies that sueceed first and foremost because of their operational excellence. Companies pursuing the third customer alue proposition, called product leadership, are saying to their target customers, ‘You should choose us because we offer higher quality products than our competitors.”2 | Vatue creation Chapter 1 Louis Vuitton (LV), BMW, Cisco Systems, and W.L. Gore (the creator of GORE-TEX® fabrics) are examples of companies that succeed because of their product teadership. ‘Although one company may offer its customers a combination of these three customer value propositions, one usually outweighs the others in terms of importance.” ‘Companies stich as Walmart and Amazon that are using the cost leadership strategy. ‘one of Porter's generic strategies, need to pay much attention to their costs and processes ‘management in order to match their chosen strategy. Just like the majority of the Fortune 500 companies, Walmart and Amazon outsource their logistics and supply chain functions to focus on their core businesses and to save costs, ‘On the other hand, Apple applies the differentiation strategy which entails making its products unique and attractive to consumers. Apple's CEO Tim Cook commented in 2013 that: "We never had an objective to sell a low-cost phone. Our primary objective is o sell xsteat phone and provide a great experience, and we figured out a way to do it ata lower cost” In order to maintain its differentiation strategy and image, Apple employs a retail strategy called “minimum advertised price” (or MAP). This policy prohibits resellers or dealers from advertising and selling its products below the minimum advertised price. To enforce this practice, Apple may need to provide marketing subsidies or cash incentives to its resellers and hence increasing the cost of running the business, Th the extreme, Louts Vuntlon, well-known niche lifestyle brand, his wot hada “sake” in its 150-year history. To protect its niche market's leader position, LV has tight control, from production to distribution. It prohibits bargain sales and destroys retired unsold items, aiving the company its product leadership customer value proposition There are other forms of strategy, for example, blue ovean and low pricing. Companies, however. cannot be complacent on their past successes. They need to move forward by incorporating a philosophy of continuous improvement (kaizen). Nintendo's blue ovean strategy ereated the first motion control video game console, Wii, in 2006, giving the ‘company’s market share and financial returns a huge push. However, when Microsoft's Xbox (Xbox 360 and then Xbox One) with Kinect came to the snarket, together with competition from Sony’s PlayStation (PS3 and PS4), Nintendo suffered consecutive huge losses between 2011 and 2013. Its belated Wii U launched in November 201? failed to help the company bounce back from the red. Market condition, customer preference, strategy, and cost ‘management techniques are dynamic in nature; therefore, regular reviews to ensure the correct fit of these factors are important. Regardless of the choices, value creation is the principle underlying all that organizations do to create value for their stakeholders. In order to achieve this objective, companies need to pay attention to value-added activities and processes while reducing, or if possible climinating, non-value-added activities and processes to help save costs and improve efficiency. Activity-based costing and management, lean production, just-in-time inventory ‘management and production, the theory of constraints, Kaizen costing, life-cycle costing, and target pricing and costing are examples of management accounting tools regularly employed together with quality management techniques such as Six Sigma and total quality ‘management to tackle value creation and deliver value-adding propositions. “These three custome value propositions were defined by Michael Treacy and Fed Wiersema in “Cus tomer Intimacy and Other Valve Disciplines" Harvard Business Review, val 71, no. 1, pp. 84-83. Cost leadership is ferent from price leadership. The cost leader focuses on lowering its costs but does not necessarily pass on the savings to customers: hence, it may not be the lowest price seller. An. trample ofa cost leader is Singepore Aisines. Meanstile, price leadership i the determination of prices in an industry by a single frm ora group of leading firs, Competitors have no bargaining power “and have to accept the prices set by the price leaders. The price can be high or low, Walrart and Amazon ‘en be viewed as low-price leaders,Managerial Accounting and the Business Environment Value Creation—External Perspectives Effective value creation processes cover both internal and extemal perspectives. A popular external perspective is the management of a company’s industry value chain, The desired value chain analysis and management lead us to focus on upstream- (e.g., supply chain ‘management including outsourcing and offshoring, read Chapter 14 for details) and downstream-related (e.g., customer profitability analysis, read Chapter 7 for details) Uccision-uhing processes which reyuire common mangement accounting Wools and techniques such as differential analysis, capital budgeting analysis, and activity-based costing (read Chapters 14, 15, and 7, respectively, for details) to help analyze data to provide recommendations and conclusions. Value Creation—Internal Perspectives Most companies organize themselves by functional departments, such as the Marketing Department, the Research and Development Department, and the Accounting Depart- ‘ment, These departments tend to have a clearly defined “chain of command” that spec- ifies superior and subordinate relationships. However, effective managers understand that business processes, more so than functional departments, serve the needs of a com- ‘pany’s most important stakeholders—its customers. A business process is a series of steps that are followed in order to carry out some task in a business. These steps often span departmental boundaries, thereby requiring managers to cooperate across functional departments. The term value’chain is often used to describe how an onganization’s fune- tional departments interact with one another to form business processes. A value chain, as shown in Exhibit 1-, consists of the major business functions that add value to & ‘company’s produets and services. 3 EXHIBIT 1-4 Business Functions Making Up the Value Chain [acd [a [ee [ma [sal [sl ‘Managers need to understand the value chain to be effective in terms of planning, control, and decision making, For example, if a company’s engineers plan to design a new product, they must communicate with the Manufacturing Department to ensure that the predict can actually he produced, the Marketing Department to ensue that customers will buy the product, the Distribution Department to ensure that large volumes of the procluct can be cost-effectively transported to customers, and the Accounting Department to ensure that the product will increase profits. From a control and decision-making standpoint, managers also need to focus on process excellence instead of functional per- formance. For example, if the Purchasing Department focuses solely on minimizing the cost of purchased materials, this narrowly focused attempt at cost reduction may lead to ‘greater scrap and rework in the Manufacturing Department, more complaints in the Cus- tomer Service Department, and greater challenges in the Marketing Department because dissatisfied customers are turning ther attention to competitors. “Managers frequently use a process management method known as fean thinking, or what is called Lean Prodiction in the manufacturing sector. Lean Production isa manage- ‘ment approach that organizes resources such as people and machines around the flow of business processes and that only produces units in response to customer orders. It is often called just-in-time production (or JIT) because products are only manufactured in response ‘o customer orders and they are completed just-in-time to be shipped to customers, Lean4 Chapter 1 thinking differs from traditional manufacturing methods, which organize work departmen- tally and encourage depatuents to astxinize dieit output even if it exceeds customer ‘demand and bloats inventories. Because lean thinking only allows production in response to customer orders, the number of units produced tends to equal the number of units sold, thereby resulting in minimal inventory. The lean approach also results in fewer defects, less Wasted effort, and quicker customer response times than traditional production methods. LOUIS VUITTON IMPLEMENTS LEAN PRODUCTION Louis Witton, headquartered in Paris, France, used lean production to increase its manufactur. ing capacity without having to build 2 new factory It created Usshaped work arrangements for teams of 10 workers, thereby freeing up 10% more floor space in its factories. The company was able to hire 300 more workers without adding any square footage, Louis Vuitton also uses robots and computer programs to reduce wasted leather and the time needed to perform cer- tain tasks. Source: Chistna Passat pp. 81 and B10. At Vutton, Growth in Small Batches" The Wal Sweot Jounal June 27, 201, ‘Two other key determinants driving the success of execution and the appropriateness of strategy are “leadership” and “culture: A Leadership Perspective An organization's employees bring diverse needs, beliefs, and goals to the workplace. Therefore, an important role for organizational leaders is to unite the behaviors of their fellow employees around two common themes—pursuing strategie goals and making ‘optimal decisions. To fulfill this responsibility, leaders need to understand how intrinsic ‘motivation, extrinsic incentives, and cognitive bias influence human behavior. Intrinsic Motivation Intrinsic motivation refers to-motivation that comes from within us. Stop for a moment and identify the greatest accomplishment of your life. Then ask yourself what motivated you to achieve this goal? In all likelihood, you achieved it because you wanted to, not because someone foreed you to do it. In ier ‘words, you were intrinsically motivated. Similarly, an organization is more likely 10 prosper when its employees are intrinsically motivated to pursue its interests. A leader, ‘who employces perceive as credible and respect of their value tothe organization, can inerease the extent 10 which those employees are intrinsically motivated to pursue stra- tegic goals. As your career evolves, to be perceived as a credible leader you'll need to possess three aitributes—technical competence (that spans the value chain), personal integrity (in terms of work ethic and honesty), and strong communication skills (includ- ing oral presentation skills and writing skills). To be perceived as a leader who is respectful of your co-workers’ value to the organization, you'll need to possess three more attibutes—strong mentoring skills (Co help others realize their potential), strong listening skills (C0 learn from your co-workers and be responsive to their needs), and personal humility (in terms of deferring recognition to all employees who contribute to the organization's success). If you poséess these six trait, then you'll have the potential to become a leader who inspires others to readily and energetically channel thei efforts toward achieving organizational goalsManagerial Accounting and the Business Environment Extrinsic Incentives Many organizations use exirinsic incentives to highlight Jmportant goals and to mexivate employees to achieve them. For example, assume a company «sablishes the goal of reducing the time needed to perform ask by 20%é. In addin, assume the company agrees to pay bonus compensation to its employees if they achieve the goal ‘within thee months. n this example, the company is using a type of extrinsic incentive known sa bonus to highligh a particular goal and wo presumably motivate employees to achieve it While proponents of extrinsic incentives rightly assert that these types of rewards can have a powerful influence on employee behavior, many eitics warn that they can also pro- duce dysfunctional consequences. For example, suppose the employees mentioned above eared their bonuses by achieving the 20% time reduction goal within three months. How- ever, let’ also assume that during those three months the quality of the employees” output plummeted, thereby causing a spike in the company’s repair costs product returns, and customer defections. In this instance, did the extrinsic incentive work properly? The aneser is yes and no. The bonus system did motivate employees to attain the time reduction goal; however, it also had the unintended consequences of causing employees 10 neglect product duality, thereby increasing repair costs, prxluct returns, and customer defections. In other words, what may have seemed like a well-intended extrinsic incentive actually produced dysfunctional results forthe company. This example highlights an important leadership challenge that you ar likoly to face comeday designing financial compensation systems that fel reward employees fr their efforts without inadvertently creating extrinsic incen- tives that motivate them to take actions that harm the company. Cognitive Bias Leaders need to be aware that all people (including themselves) pos- sess cognitive biases, or distoried thought processes, that can adversely affect planning, controlling, stud decision staking. To illustrave how cognitive bias works, le’s consider the scenario of a television “infomercial” where someone is selling a product with a pro- claimed value of $200 for $19.99 if viewers call within the next 30 minutes. Why do you think the seller claims that the product has a $200 value? The seller is relying on a cogni- tive bias called anchoring bias in an effort to convince viewers that a $180 discount is simply too good to pass up. The “anchor” is the false assertion thatthe product is actually ‘worth $200. If viewers erroneously attach credibility to this contrived piece of informa- tion, their distorted analysis of the situation may cause them to spend $19.99 on an item ‘whose true economic value is much les than that amount. White cognitive biases cannot be eliminated, effective leaders should take two steps to reduce their negative impacts First, they should acknowledge their own susceptibility to cognitive bias. For example, a leader's judsment misht be clouded by optimism bias (being overly optimistic in assessing the likelihood of future outcomes) or sel-enhancement bias (overestimating ones strengths and underestimating ones weaknesses relative to others), Second, they should acknowledge the presence of cognitive bias in others and introduce techniques to minimize their adverse consequences. For example, to reduce the risks of confirmation bias (a bias where people pay greater attention to information that confirms their preconceived nations, while devalning information that contradicts them) or groupthink bias (a bias where some group members support a course of action solely because other group members do), a leader may routinely appoint independent teams of employees to assess the credibility of recommendations set forth by other individuals and groups A Cultural Perspective National and organizational cultures play important roles in determining the success of corporate strategies and planning and controlling processes. In different cultures, different strategies, leadership and performance evaluation, and reward approaches should be considered to ensure success and smooth implementation of tho strategies and processes. There are many forms of eulture measures. In this chapter, we employ Hofstede’s five dimensions uf culture measures that way affect national and organizational cultures: (1) power distance, (2) individualism, (3) uncertainty avoidance, (4) masculinity, and (5) long-term orientation. 15Chapter 1 1, Power distance: In a culture with high power distance, power in institutions and organizations 1s unevenly distributed. Individuals readily accept that privileges are given to people with power, position, wealth, or status. The other extreme signifies that individuals accept the need for hierarchies for administrative pur- poses but reject the existence of inequalities and privileges due to position, wealth, or status. Individualism; In a culture with high individualism, individuals in general view themselves as independent of collectives (e.., family, co-workers, tribe, or nation) and are more motivated by their own preferences, needs, rights, ete. They tend to give priority to their own personal goals over the goals of others. The other extreme is collectivism which links individuals who see themselves as part of one or more col- lectives, These individuals are primarily motivated by the norms of, and duties imposed by, the collectives. They ure willing w ive priority w Ue puals of the collectives over their own, 3. Uncertainty avoidance: In a culture with high uncertainty avoidance, individuals are ‘uncomfortable with uncertainty and hence seek avenues including regulations, legis Jations, and investment in technology to reduce it. In contrast, individuals in a low ‘uncertainty avoidance culture accept uncertainty as part of life and will not actively spend time and money to try to reduce uncertainty. Countries with high uncertainty avoidance index tend to maintain rigid codes of belief and behavior and are more resistant to unorthodox ideas and behavior. 4, Masculinity: In a culture with high masculinity, men are the dominant force. This culture values competitiveness. aggressiveness, success, and materialistic achieve ‘ments. At the other end of this spectrum is femininity which emphasizes close per- sonal relationships, supportiveness, and quality of lie. 5, Long-term orientation: In a culture with high long-term orientation score, the empha sis is on long-term planning and results, therefore, individuals are more willing to save and invest for the future. In contrast, a culture that scores low on long-term ori entation tends to focus on immediate results, therefore, individuals are walling to spend to fulfill their immediate needs, Many Asian countries have high power distance, low individualism, low/middle uncertainty avoidance, high masculinity, and high long-term orientation scores, a distinct contrast to many developed countries in Europe and North America. Therefore, strategies (e.g. value-added propositions), leadership style, control processes, pet furnace ‘measures, and reward systems for employees may need to be considered carefully in order to have effective processes and desired results. Furthermore, in response to external and internal changes, cultures evolve and change; therefore they are dynamic in nature. Corporate strategies and value creation processes therefore must be reviewed on a regular basis to ensure their relevance and appropriateness. THE WORLD'S LOCAL BANK HSBC started operations in March 1865 in Hong Kong, and became a significant presence in Europe after acquting the United Kingdom's Wicland Bank in 1992. in April 2010, it wes ranked eighth on the list of Forbes Global 2000 companies. With 66% ofits nancial year 2010 profits ‘generated from the Asia-Pacific region, HSBC announced that some ofits key executive members \Would relocate te Hong Kang in 2010, causing frequent speculation that HSBC may be relocating its headquarters from London to Hong Kong. Since 2002, the HSBC logo has been accompanied by the tagin, ‘the words local bank,” highiigtig the bank's emphasis on experience and understanc- ing ofthe diverse markets and cultures across the globe, ‘Sources: HSBC Hakiings, Pe, "HSBC Brit History and "The Global 2000," Forbes, Api 21,2010.Managerial Accounting and the Business Environment v7 Managerial Accounting: Beyond the Numbers | Exhibit 1-5 summarizes how each chapter ofthe book teaches measurement skills that ‘managers use on the job every day. For example, Chapter 10 teaches you the measure- rent skills that managers use to answer the question—how should I create a financial plan for next year? Chapters 11 and 12 teach you the measurement skills that managers use to answer the question—how well am I performing relative to my plan? Chapter 7 teaches you measurement skis related to product, service, and eustomer profitability However, itis vitally important that you also understand managerial aecounting involves ‘more than just “crunching numbers." To be successful, managers must complement their ‘measurement skills wth various business management perspectives that “go beyond the numbers” to enable intelligent planning, contro, and decision making. Chapter Number ‘The Key Question from a Managers Perspective Chapters 2 & 3 ‘What cost classifications do | use for diferent ‘management purposes? Chapter 4 How will my profits change if | change my selling price, sales volume, or costs? Chapter 5 How can the income statement be presented for better control purposes? Chapter 6 How can we have a fair cost allocation to avoid arguments? Chapter 7 How profitable is each of our products, services, and customers? Chapters 8 & 9 \Whatis the value of our ending inventory and cost of {goods sold for extemal reporting purposes? Chapter 10 How should | create a financial plan for next year? (Chapters 11 8.12 How well am | performing relative to my plan? Chapter 13) \What performance measures should we monitor to ensure that we achieve aur strategic goals? Chapter 14 How do | quantify the profit impact of pursuing one course of action versus anather? Chapter 15 How do | make long-term capital investment decisions? Chapter 16 What cash inflows and outflows explain the change in fir cash halance? ‘Chapter 17 How can we analyze our financial statements to better understand our performance? EXHIBIT 1-5 Measurement Skil: Alanager’s Perspective An Ethics Perspective Ethical behavior is the lubricant that keeps the economy running. Without that lubricant, the economy would operate much less efficiently —less would be available to consumers, quality would be lower, and prices would be higher. In other words, without fundamental trust in the integrity of business, the ceonomy would operate much less efficiently. Thus, for the good of everyone—including profit-making companies—it is vitally important that business be conducted within an ethical framework that builds and sustains trust18 Chapter 1 Code of Conduct for Management Accountants The Institute of Management Accountants (IMA) ofthe United States has adopted an ethical code called the Statement of Ethical Professional Practice that describes in some detail the ethical responsibilities of management accountants. Even though the standards were developed spe- cifically for management accountants, they have much broader application. The standards. consist of two parts that are presented in full in Exhibit 1-6 (page 19). The first part provides: ‘general guidelines for ethical behavior. In a nutshell, a management accountant has ethical ‘esponsbilties in four broad areas ist, to maintain a high level of professional competence; second, to treat sensitive maters with Confidentiality; thir, to maintain personal integrity; and fourth, to disclose information in a credible fashion. The second part of the standards specifies what should be done if an individual finds evidence of ethical misconduct. "The ethical standards provide sound, practical advice for management accountants ‘and managers. Most of the rules in the ethical standards are motivated by a very prac- cal consideration—if these rules wer8 not generally followed in business, then the economy and all of us would suffer. Consider the following specific examples of the ‘consequences of not abiding by the standards: + Suppose employees could not be trusted with confidential information. Then top managers would be reluctant to distribute such information within the company and, as a result, decisions would be based on incomplete information and operations ‘would deteriorate + Suppose employees accepted bribes from suppliers. Then contracts would tend to 0 10 the suppliers who pay the highest bribes rather than to the most competent suppliers. Would you like to fly in aircraft whose wings were made by the subcon- tractor who paid the highest bribe? Would you fly as often? What would happen to the airline industry if its safety record deteriorated due to shoddy workmanship on contracted parts and subassemblies? ‘+ Suppose the presidents of companies routinely lied in their annual reports and finan- cial statements. If investors could not rely on the basic integrity of a company’s financial statements, they would have little basis for making informed decisions, Suspeering the worst, rational investors wold pay less far secniites iganedd hy com- panies and may not be willing to invest at all, AS a consequence, companies would have less money for productive investments—leading fo slower economie growth, fewer goods and services, and higher prices. ‘Not only is ethical behavior the lubricant for our economy, itis the foundation of manage- rial accounting. The numbers that managers rely on for planning, control, and decision making are meaningless unless they have heen competently, objectively, and honestly gathered, analyzed, and reported. As your career unfolds, you will inevitably face decisions TOYOTA ENCOUNTERS MAJOR PROBLEMS When Toyota Motor Corporation failed to meet its profit targets, the company set an aggressive {0a of reducing the cost of its auto pats by 30%. The quality and safety ofthe company’s automo- biles eventually suffered mightily resulting in recalls, litigation, incentive campaigns, and marketing efforts that analysts estate wil cost the company more than $5 bition. The car makers presk dent, Akio Teyod, blamed his company’s massive quality lapses on an excessive focus on profits and marketshare, Similar, Jim Press, Toyotas former top U.S, execute, said the problems were caused by “financial orented pirates who didnt have the character to maintain a customertirst focus” Sources: Yoshio Takata, “Toyota Accelerates its Cost Cn Efrts," The Wal Sweet Jounal, December 23, 2008, . 84; Marko Sanchanta and Yoshio Takahash, “Toyotas Recall May Top $5 Bllon* The Wal Steet “our, March 10, 2010, p. 62; 3nd Noriko Shruzu, “Toyoda Rues Excessive Prof Focus” The Wal Steet “outa, March 2, 2010, p. 83,Managerial Accounting and the Business Environment 19 EXHIBIT 1-6 IMA Statement of Ethical Professional Practice ‘Members of IMA shall behave ethically. A commitment to ethical professional practice includes: overarching principles that express our values, and standards that guide our conduct. PRINCIPLES IMA\s overarching ethical principlee include: Honosty, Fairness, Objectivity, and Rospenabiliy: Momboro chall act in accordance with these principles and shall encourage others within their organizations to adhere to them. ‘STANDARDS. ‘A member's failure to comply with the following standards may result in disciplinary action. |. COMPETENCE Each member has a responsibilty to: 1. Maintain an appropriate level of professional expertise by continually developing knowledge and skills. 2. Perform professional duties in accordance with relevant laws, regulations, and technical standards, 3. Provide decision support information and recommendations that are accurate, clear, concise, and timely. 4. Recognize and communicate professional imitations or other constraints that would preclude responsible judgment or successful performance of an activity. 1. CONFIDENTIALITY Each member has a responsibility to: 4. Keep information confidential except when disclosure is authorized or legally required 2. Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates’ activities to ensure compliance. 3. Rofain from using contidential information for uncthical or illegal advantage. lL INTEGRITY Each member has a responsibilty to: 1. Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent con- flcts of interest. Advise all parties of any potential conticts. 2, Refrain from engaaina in any conduct that would prejudice carying out duties ethically. 53. Abstain from engaging in or supporting any activity that might discredit the profession. IV. CREDIBILITY Each member has a responsibilty to: ‘1. Communicate information fairty and objectively. 2, Disclose al relevant information that could reasonably be expected to influence an intended usér's understand- ing of the reports, analyses, or recommendations, 8, Disclose delays or deficiencies in information, timeliness, processing, or intemal controls in conformance with, ‘organization policy and/or applicable law. RESOLUTION OF ETHICAL CONFLICT In applying the Standards of Ethical Professional Practice, you may encounter problems identifying unethical bbchavior er resolving an cthical contlict. When faced with ethical issues, you should follow your organization's ‘established policies on the resolution of such conflict. If these policies do not resolve the ethical conflict, you should consider the following courses of action: 1, Discuss the issue with your immediate supervisor except when it appears that the supervisor is involved. in that ‘case, present the issue to the next level. If you cannot achieve a satisfactory resolution, submit the issue to the next management level. If your immediate superior is the chief executive officer or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, bboard of trustees, or owners. Contact with levels above the immediate superior should be initiated only with your superior's knowledge, assuming he or she is not involved. Communication of such problems to author- ities or individuals not employed or engaged by the organization is not considered appropriate, unless you believe there is a clear violation of the law. 2, Clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethics Counselor or other impartial advisor to obtain a better understanding of possible courses of action, 4. Consult your own attomey as to legal obligations and rights concerning the ethical conflict,Chapter 1 vith ethical implications, Before making such decisions, consider performing the follow- ing steps. Fist, define your altetwative courses of action. Second, identity all of the parties that will be affected by your decision. Third, define how each course of action will favor- ably or unfavorably impact each affected party. Once you have a complete understanding ‘of the decision context, seek guidance from external sources such as the IMA Statement of Ethical Professional Practice, the IMA Ethics Helpline at (800) 245-1383, or a trusted confidant, Before executing your decision ask yourself one final question—would I be ‘comfortable disclosing my chosen course ot action on the front page ot Zhe Wall Street Journal? A seties of scandals involving accounting frauds, embezzlement, and forgery by company management from around the world have raised deep concems about ethics in business. Examples are Enron, Tyco International, WorldCom., and Global Crossing from the West; Alibaba, Lonatop, and China Aviation Oil from China; and Telgi and Satyam from India, The managers and companies involved in these scandals have suffered mightily—from huge fines to jail terms and financial collapse. And the recognition that ethical behavior is absolutely essential for the functioning of our economy has led to numerous regulatory changes. Code of Conduct on the International Level _ The Cede of Ethies for Profes- sional Accountants, issued by the International Federation of Accountants (IFAC), 20v- ems the activities of all professional accountants throughout the world, regardless of Whether they are practicing as independent CPAs, employed in government service, of ‘employed as internal accountants.* In addition to outlining ethical requirements in matters dealing with integrity and Lbjectivity, sesolution of ethical conflicts, competence, and confidentiality, the ITAC’s code outlines the accountants ethical responsibilities in other matters such as those relat- ing to taxes, independence, fees and commissions, advertising and solicitation, the han- dling of monies, and cross-border activities. Where cross-border activities are involved, the IFAC ethical requirements must be followed if they are stricter than the ethical requirements ofthe country in which the work is being performed. A Corporate Governance Perspective Effective corporate governance enhances stockholders’ confidence that a company is ‘being run in their best interests rather than in the interests of top managers. Carpo- rate governance is the system by which a company is ditected and controlled. If properly implemented, the corporate governance system should provide incentives for the board of directors and top management to pursue objectives that are in the interests of the company's owners and it should provide for effective monitoring of performance.’ Unfortunately, history has repeatedly shown that unscrupulous top managers, if unchecked, can exploit their power to defraud stockholders. This unpleasant reality bbecame all too clear in 2001 when the fall of Enron kicked off a wave of comporate sean- dals. These scandals were characterized by financial reporting fraud and misuse of corporate funds at the very highest levels—ineluding CEOs and CFOs. While this was disturbing in itself, it also indicated that the institutions intended to prevent such abuses "were not working, thus raising fundamental questions about the adequacy ofthe existing corporate governance system. In an attompt to respond to thexe concerns, the U.S. Con- ‘gress passed the most important reform of corporate governance in many decades—The Sarbanes-Oxley Act of 2002. + copy ofthis cde canbe cbtined onthe International Federation of Aceountans’ website wwii org, 5 This definition of corporate governance was adapted from the 2004 repor tiled “OECD Principles of Corporate Governaneo” published by the Organization for Economic Co-Operation and Development.Managerial Accounting and the Business Environment In Asia Pacific, all countries have their own set of corporate governance codes and standards, to ensure the board of directors has sufficient independent views and controls to protect the interests of shareholders and stakeholders, The principles and fundamental ‘concepts are mostly based on Organization for Economie Co-operation and Development (OECD) principles of comporate governance which are similar to the United States’, but the details vary to fit local requirements and business conditions. The Sarbanes-Oxley Act may also have implications for Asia-Pacific companies that supply U.S. listed compa- nies, as they may also capture the U.S. authorities” attention and be forced to follow some Of the guidelines to help ensure their U.S. customers stay on the right side of the law, HUGE FRAUD: SATYAM COMPUTER SERVICES Satyam Computer Services, a leatng outsourcing company in India, was found to have significantly inflated its earings and assets for yeas, Satyam’ clents ncuded large banks, manufactures, heath car, and media companies rom al over the word, as well as more than thd ofthe For tune 500 companies, Mer posting proft margins of more than 20% every yea, the chairman, Re mainga Raj, aly admitted thatthe company's accounts had been systematcally fasted to provide such impressive results. Ie aitted thatthe US51.04 bilon, or 98% ofthe cash/bank tance atthe end of the company's second quarter in September 2008, didnot exit. News of this scandal, wich was labeled as “nda Enron,” has badly shaken investors’ confidence in Ida's compares Source: Heather Tinnons and Betina Wessener, “Satyam Chel Admits Huge Fraud tan FF Outsourcer CEO ‘ries the Books," The New York Times, January 7, 2008. ‘The Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of2002 was intended to protect the interests of those who invest n publily taded companies by improving the e- Tiaity ad scour of onions real soit ana enosine Wh a ket igh light six key aspects of the legislation. First, the Act requires that both the CEO and CFO ceri in writing that their compa- y's financial statements and accompanying disclosures fairly represent the results of ‘operations —vwith posible ail time if a CEO or CFO cenifis results that they know are false This eeates very powerful incentives forthe CEO and CFO to ensure that he finan- Second, the Act established the Public Company Accounting Oversight Board to pro- vide additional oversight over the audit profession. The Act authorizes the Board to con- duet investigations, to take discipfinary aetions against audit firms, and to enact various Standards and roles concerning the preparation of audit reports “Third, the Act places the poser o hire, compensate, and terminate the public account- ang tm that audits company's financial reports inthe hands ofthe audit committe ofthe board of directors, Previously, management often had the power to hire and fre its aud- tors. Furthermore, the Act specifies that ll members ofthe audit committee must be ine- pendent, meaning that they donot have an affiliation with the eompany they are overseeing, nor do they receive any consitin or advisory compensation from the compan), Fourth, the Act places important restrictions on audit firms. Historically, public accounting firms earned a large part of their profits by providing consulting services to the companies that they audited. This provided the appearance ofa lack of independence because a client that was dissatisfied with an auditors stance on an accounting issue might threaten to stop using the auditor as a consultant, To avoid this possible conflict of interests, the Act prohibits a public accounting frm from providing a wide variety of nonanditng services to an anit cient. © A summary ofthe Sarbanes-Oxley Act of 2002 can be obtained from the American Insitute of Ceti fied Public Aceountans (AICPA) website hp/tneeagsicpaonp/Resources/Sarbunes Oxley. aChapter 1 Fifth, the Act requires that a company’s annual report contain an internal control re Port. Inemal controls are put in place by management to provide assurance t0 investors that financial disclosures are reliable. The report must state that its management's responsibil- ity to establish and maintain adequate internal controls and it must contain an assessment ‘by management of the effectiveness of its internal control structure. The intemal control report is accompanied by an opinion from the company’s auclt firm as to whether manage- ‘ment has maintained effective internal control over its financial reporting process. Finally, the Act establishes severe penalties of as many as 20 years in prison for alter- ing or destroying any documents that may eventually be used in an official proceeding and as many as 10 years in prison for managers who retaliate against a so-called whistle- blower who goes outside the chain of command to report misconduct. Collectively, these six aspects of the Sarbanes-Oxley Act of 2002 should help reduce the incidence of fraud- Ulent financial reporting, IMPLICATIONS OF SARBANES-OXLEY ACT ON ASIAN COMPANIES ‘Sarbanes Oxley Act of 2002 (SOX) was implemented after the high orafle fnancial scandals of Em ron and WorldCom, While the act was meant to protect sharehoklers av tke general publ trom ‘accounting errors and fraudulent practices, the sulfocating clauses and significant costs ofimple- ‘menting the act have caused many businesses to steer away fram the United States, ‘Take for instance Air China, which went publc in December 2004 with an inital public offering of $1 billion. it would have been a logical choice forthe airne tobe listed on the word's largest stock exchange—the New York Stock Exchange. But Air Cina preferred not to deal wth the hassle of fling SOX requirements, and so had the IPU onthe Landn Stock Exchange, ‘Let us take look at the costs of complying with SOX to better understand Air China's decision. tt ‘has been estimated that compliance would cost the company an additional US$1-S2 milion ann: aly. Furthermore, the dramatic increase in employee workload and stress due to tedious compl ‘ance and certification procedures could mean higher staff turnover. Since the implementation of ‘SOK, it has been fiercely debated whether its benefits autweigh its costs Source: Cheng Pe Fong and Sanjay Anand, “Sarbanes Oey and ts infcations on Asian Companies,” SearehCl0.com, 2005, An Enterprise Risk Perspective Businesses face risks every day. Some risks are foreseeable. For example, a company could reasonably be expected to foresee the possibilty ofa natural disaster ora fre destroying its centralized data storage facility. Companies respond to this typeof tsk by maintaining off site backup data storage facilities. Other risks are unforeseeable. For example, in 1982 Johnson & Johnson never could have imagined that «deranged killer would insert poison into bottles of Tylenol and then place these tainted bostles on retail shelves, ultimately kill ing seven people.” Johnson & Johnson—responded to this crisis by acting to reduce the risks faced by its customers and itself. First, it immediately recalled and destroyed 31 mil- lion hotles of Tylenol with a retail value of $100 million to reduce the risk of addtional fatlitios. Second, it developed the tamper-resistant packaging that we take for granted today to reduce the risk thatthe same type of esime could be repeated in the future. In February 2011, the chief exccutive officer and chief operating officer of Alibaba.com, one of China’s most successful Internet start-up partly owned by Yahoo and listed on the Hong Kong Exchange, resigned amid an internal investigation of * Tamara Kaplan, “The Tylenol Crisis; How Efectve Public Relations Saved Johnson & Jonson,” in Glen Broom, Allen Center, and Scott Cut, Ejecive Public Relations, Peace all, Upper Sade River, Usa.Managerial Accounting and the Business Environment fraud. The probe investigated claims that 100 of its sales officers allowed fake compa: nies in China to register and sell products on Alibaba’s website as "Gold Supphers,” a listing for the most trustworthy suppliers. These fake companies defaulted on their cus- tomers and hence damaged the reputation of Alibaba.com, which handled billions of dollars worth of transaction every month. Since then, Alibaba has tried to set up an authentication process to verify its suppliers, an endeavour that has proven to be a chal- lenge due to the large number of suppliers to be handled. But this isa part of enterprise risk Alibaba needs to take on in order to regain the goodwill ofits customers. Every business strategy or decision involves risks, Enterprise risk management is ‘a process used by a company to proactively identify and manage those risks Identifying and Controlling Business Risks Companies should identify fore- ceeahle risks hefore they occur rather than react to unfortunate events that have already happened. The lefi-hand column of Exhibit 1-7 provides 12 examples of business risks. While this list is not exhaustive, its purpose is to illustrate the diverse nature of bbusiness 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. Ifthe risks are not managed effectively, they ‘can compromise a company’s ability to mect its goals. Examples of Examples of Controls:to Reduce Businans Risks Business Risks: t + Intellectual assets being stolen from + Greate firewall that prohibit computer fles ‘computer 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 approael fr legally unforeseen actions of competitors ‘gathering information about ‘compatitors’ plans and practices ‘+ Poorweather conditions shutting + Develop contingenoy plans for down operations: ‘overcoming weather-related disruptions + A.website maifunetinning + Thoroughly test the website before ‘going “lve” on the Internet + Asupplier strike halting the flow of + Establish a relationship with two raw materials ‘companies capable of providing | needed raw materials | + Apoorly designed incentive + Create a balanced set of performance | ‘compensation system causing measures that motivates the desired ‘employees to make bad decisions behavior + Financial statements inaccurately + Gout the physical inventory on hand reporting the value of inventory to mako sure that it agrees with the ‘accounting records + An employee stealing assets ‘+ Segregate duties so that the same ‘employee does not have physical ccustudy of a asset atid the esponsibility of accounting for it + An employee accessing + Create password-protected barriers unauthorized information that prohibit employees from | ‘obtaining information not needed to do theirjobs | + Inaccurate hurt estimates causing + Implement a rigorous budget review | excessive of nsufficientprodetion process | + Failing to comply with equal + Grae sri bale my eli | ‘employment opportunity laws related to compliance with the laws EXHIBIT 1-7 Identiying and Controting Business Risks24 Chapter 1 Once a company identifies its risks, it can respond to them in various ways such as accepting, avoiding, of reducing the risk. Perhaps the most common risk management tactic is to reduce risks by implementing specific controls. The right-hand column of Exhibit 17 provides an example of contol that ould be implemented to help reduce ‘each of the risks mentioned in the left-hand column of the ex! ————— MANAGING THE RISK OF DRAMATIC OIL PRICE CHANGES For most industries, ol isa significant cost component, Prices for erude oll were increasing steadily uring the periad from 1998 to 2008, for reasons such as rising demand and controlled release oo supply by ci-producing nations, Drastic increases in oll prices are big business risks for companies For aifines, fuel costs constitute around onethird ofthe operating costs, Many aiines manage the fuel cost risk by entering into hedging contracts. These contracts enable airlines to buy fuel at ‘an agreed price for an agreed time period. In ly 2008, Ai China decided to enter into fue! hedging ‘contracts when international crude ol prices were around USS147 per barrel. However, the world ‘wide economic crisis in 2009 caused international demand for crude ol to drop ike @ stone andthe rice per barrel of crude oil fel to about USSAO, As a rest, ir China suffered a massive loss of RMB6 8 bilion or about USS1 bilion setting is fuel hedging contracts, ea Eee Noro ke eset) — waicnideat chiro ‘Source Kent Marketing Services. i Ai China make a bat decision in engaging in fue! hedging? If uel prices were to increase rapidly, Air China would have avoided an increase in fuel costs through hedging, But inthis case, Air Cina didnot benefit from the Iower fuel prices and instead incured a huge hedging loss, as it stil had to pay for fuel tthe pices stated in the contracts As such, it coud be said that Air China paid a large price trying to prevent the business risk of rising fuel cost. ‘Seuece: Lu Haoting ‘hr Chine Rooks 6 lb Yion Fuse” China Daly, January 20,2009. SSManagerial Accounting and the Business Environment 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. A Corporate Social Responsibility and Sustainability Perspective Companies are responsible for producing financial results that satisfy stockholders. However, they also have a conporate soctat responsiblity to serve other stakeholders—such as custom- rs, employees, suppliers, communities, and environmental and human rights advocates— ‘whose interests are tied to the company's performance. Corporate social responsibility (CSR) is a concept whereby organizations consider the needs of all stakeholders when making decisions. CSR extends beyond Jegal compliance to include voluntary actions that satisfy stakeholder expectations. Numerous companies, such as Procter & Gamble, 3M, Eli Lilly and Company, Starbucks, Microsoft, Genentech, Johnson & Johnson, Baxter Inter: tional, Abbott Laboratories, KPMG, National City Bank, Deloitte, Southwest Airlines, and (Caterpillar, prominently describe their corporate social performance on their websites. Exhibit I-8 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 responsible investors con- twol 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 25 Companies should provide customers with: ‘+ Safe, high-quality products that are fairly priced. * Competent, courteous, and rapid delivery of products and services. + Fulldisclosure of product-related tisks. + Easy-to-use information systems for shopping and tracking orders. ‘Companies should provide suppliers wth ‘+ Fair contract terms and prompt payments. + Reasonable time to prepare orders, + Hassle-free acceptance of timely ‘and complete deliveries. + Cooperative rather than unilateral actions. Companions show provide stoototders wit: ‘Competent management, + Easy access to complete ‘and accurate financial information, ‘+ Full disclosure of enterprise risks. + Honest answers to knowledgeable questions. exniBiT 18 crated aes — Eslbepmtely rlescandd zal of oporte Sc ‘+ Safe and humane working conditions. + Nondiscriminatory treatment ‘and the right to organize and file grievances. . + Fair compensation, . + Opportunities for training, promotion, and personal development. Companies should provide ‘communities with: Payment of fair taxes. + Honest information about plans such as plant closings. + Resources that support charities, schools, and civic activities, + Reasonable access to media Companies should provide ‘environmental and human rights advocates with Greenhouse gas emissions data. * Recycling and resource conservation data, + Child labor transparency. + Fulldisclosure of suppliers Jocated in developing countries.Chapter 1 customers seek,to purchase products and services from socially responsible companies. ‘The Invernet enables these customers to readily locate competing prods, thereby making iteven easier to avoid doing business with undesirable companies. Fourth, nongoverament ‘organizations (NGOs) and activists are more capable than ever of tarnishing a company’s ‘reputation 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.” It is important to understand that a company’s social performance ean impact its financial performance. For example, if a company’s poor social performance alienates cus- tomers, then its revenues and profits will suffer. This reality explains why companies use ‘enterprise risk management, as previously described, to meet the needs of all stakeholders, In order to promote a systematic approach to corporate social respansihility and ‘embed it in corporate culture, rather than have companies put in a token effort for Publicity only, the Global Reporting Initiative (GRI) has been promoting a standardized approach to reporting—benefitting both the reporting organizations and report users. The GRI has gained support by partnering the Organization for Economic Cooperation and Development (OECD), the United Nations Environment Programme (UNEP), and the United Nations Global Compact (UNGC). I 2008, the GRI signed an agreement with the United Nations Conference on Trade and Development (UNCTAD) to work together to promote and inerease participation by developing countries and economies in transition in the development of sustainability reporting standards Subsequently, the Intemational Federation of Accountants (IFAC 2009) highlighted {that the role of professional accountants has expanded beyond the preparation and assur- ance of financial reports. It ssued the IFAC Sustainability Framework to help accountants {grasp important aspects of sustainability and highlighted that professional accountants should take the leadership role in this initiative. Organizations should achieve a “Triple Bottom-Line”—financial, social, and environmental goals (or 3Ps: Profit, People, and Planet) and should 1. promote a sound corporate governance and ethical responsibility to ensure financial success through ethical operations and transactions; 2. promote cultural diversity and equality; 3. provide opportunities for social and economic development of the communities; and 4. minimize environmental damages, and provide a safe working and living environ ‘ment for the communities, ‘Some may comment that this initiative places an additional compliance cost on cor- porate governance. However, paying attention to sustainability and corporate social responsibilities ean be beneficial to companies—DuPont saved $2 billion through better energy practices and McDonald’s reduced wastage by 30% by changing packaging ‘materials, GRI registered companies that produce sustainability reports in accordance with GRI standards? increased from [1 in 1999 to 3,718 in 2012, with Asian companies the second highest group behind European companies. Examples of companies producing sustainability report framework include accordance with the GRI ‘The insights Irom this paragraph and many of the examples in Exhibit 1-8 were drawn from Ronald W. Clement, “The Lessons from Stakeholder Theory for U.S. Business Leaders.” Business “Horizons, May/hune 2005, p, 255-264; and Terry Leap and Misty L. Loughry, “The Stkeboer-Frienly Firm,” Business Hlorizons, Maretv April 2008, pp. 27-32. "The GRI reporting framework can be obtained from its website fom its website: htps:vww global reporting org/repoting/repoting-framework-overview/Pageslefaulsp,Managerial Accounting andthe Business Environment 27 GRI Registered Companies in 2012 1,500 1,368 Latin North America veg Oreania Asia ‘Air China, AsusTek, Canon, Reliance Industries, Samsung Securities, SingTel Europe: Air France-KLM, BP, Daimler, Nestle, Nokia United States: AT&T, Dell, ExxonMobil, Intel, Johnson & Johnson ‘The GRI guidelines offer practical guidance for sustainability reporting and cover: eco- nomic, environment, human rights, labor, product responsibility, and society. Sustainability reports based ou the GRI framework can be used w demoustiate ‘organizational commitment to sustainable development, to compare organizational per- formance over time, and to measure organizational performance with respect to laws, norms, standards, and voluntary initiatives. GRI promotes a standardized approach to reporting to stimulate demand for sustain- ability information, thus benefitting both reporting organizations and report users. ‘The development is to have an integrated report tor the triple bottom line together with the financial statements, Preparation for the sustainability report or integrated report for the tiple bottom-line requires details of operating data and key performance indica tors which are all within boundaries of management accounting. DLs one of mary companies that have embraced the concept af ging back othe community via volunteerism, a form of Corporate Social Responsiiy (CSR). n 2008, the company launched its Volunteer Day in Asia, during wich employees took ime off work to engage in social and com ‘munity activites, It was So successful that the event has subsequently been expanded grealy to include about 15,000 DHL emplayees from over 40 countries. While the programms ae customized to the needs of each country or area, they al ake on DHL's corporate social responsiity (CSR) themes: “Go Help "Go Green,” and “Go Teach.” Examples of DH's annual Vunteer Day actives range from blood and goods donation dives to marine ecology tous. ‘Why are so many companies, DHL included, embracing the concent of CSR? Apart from the fact that CSR allows companies to demonstrate their concern for society, a survey of 1,800 youths aged 13-25 revealed that 79% would ike to work for employers wo care about contbut. ing to society. The resus underscore the vale of CSR as an employee recruiting and retention tool. Furthermore, employees who have done voluntary work wil gain valuable skis which can be very useful when they return to their regular jobs, . Sources: Suse Lunt, Nohnieers Make a Oterence, lasied Post efober 9, 2010; and Sarah. Needleman, “The LaiestOffee Pek: Getting Paid to Votre,” The Wl Steet Journal Ari 29,2008, pp, Dl and 05. Bn tt RR RS