Managerialaccountingprovidesinformationtomanagerssothattheycan

effectivelyandefficientlymanageanorganization.Inthisfirstchapter,we
willlookatwhatmanagersdo,theinformationthattheyneed,thegeneral
businessenvironmentinwhichmanagersfunction,andtheimportanceof
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Allmanagerscarryoutthreemajoractivitiesplanning,directingand
motivating,andcontrolling.

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Planninginvolvesselectingacourseofactionandspecifyinghowtheaction
willbeimplemented.Thefirststepinplanningistoidentifythevarious
alternatives.Nextthealternativethatdoesthebestjoboffurtheringthe
organizationsobjectivesisselected.Managementsplansareusually
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expressedinbudgets.Typically,budgetsarepreparedannuallyunderthe

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Inadditiontoplanningforthefuture,managersmustoverseedaytoday
activitiestokeeptheorganizationrunningsmoothly.Muchofamanagers
dailyroutineinvolvesdirectingandmotivatingemployees.Managersmake
workassignments,resolveconflicts,solveonthespotproblems,andmake
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Incarryingoutthecontrolfunction,managersseektoensurethattheplanis
beingfollowed.Feedback,whichsignalswhetheroperationsareontarget,is
thekeytoeffectivecontrol.Onetypeoffeedbackthatisveryhelpfulto
mangersiscalledaperformancereport.Budgetsarecomparedtoactualresults
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Theworkofmanagementissummarizedintheplanningandcontrolcycle
shownonyourscreen.Theprocessisacontinuousloopinmany
organizations.Onceplansaremade,theyareimplemented.Thecontrolling
processstartswithmeasuringactualperformanceandthencomparingthose
resultswithplannedperformance.Correctiveactionmaybenecessaryifactual
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resultsdiffersignificantlyfromtheplan.Insomecases,newinformationmay

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Therearesevenkeydifferencesbetweenmanagerialaccountingandfinancial
accounting:
Financialaccountingreportsarepreparedforexternalusers.Managerial
accountingreportsarepreparedforinternalusers.
Financialaccountingsummarizespasttransactions.Managerialaccounting
hasastrongemphasisonthefuture.
Financialaccountingdatashouldbeobjectiveandverifiable.Managerial
accountingdatashouldberelevantforthedecisionathand,evenifitisnot
completelyobjectiveandverifiable.
Financialaccountingfocusesonprecision.Managerialaccountingaids
decisionmakersbyprovidinggoodestimatesassoonaspossibleratherthan

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Decentralizationisthedelegationofdecisionmakingauthoritythroughoutan
organizationbyprovidingmanagerswiththeauthoritytomakedecisions
relatingtotheirareaofresponsibility.
Anorganizationchart,suchastheoneshownonyourscreen,showshow

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Anorganizationchartalsoshowslineandstaffpositionsinanorganization.A
personinalinepositionisdirectlyinvolvedinachievingthebasicobjectives
oftheorganization.Apersoninastaffpositionisindirectlyinvolvedin
achievingthebasicobjectivesoftheorganization.Staffpositionssupportor
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provideassistancetolinepositions,buttheydonothavedirectauthorityover

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Thechieffinancialofficer(CFO)isamemberofthetopmanagementteam
whoisresponsibleforprovidingtimelyandrelevantdatatosupport
managementplanningandcontrollingactivities.TheCFOisalsoresponsible
forpreparingexternalfinancialstatements.Anorganizationstreasurerand
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Inordertoremaincompetitive,businesseshaveadoptedmanynew
improvementprograms.Whenproperlyimplemented,theseprogramscan
improveprofits,enhancequality,reducecosts,increaseoutput,andreduce
customerresponsetime.Wewilldiscussfoursuchprograms:JustInTime
production,TotalQualityManagement,ProcessReengineering,andtheTheory
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Ajustintimemanufacturerproducesgoodstoshiptocustomersratherthan
producinggoodsforinventory.Productionisinitiatedbyacustomerorder,a
systemreferredtoasdemandpull,ratherthanadesiretobuildinventoryfor
potentialorders.Whenappliedinamanufacturingcompany,JITsystems
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minimizerawmaterials,workinprocess,andfinishedgoodsinventories..

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Severalimprovementsandchangesarenecessaryforsuccessful
implementationofaJITsystem:
Reducethenumberofsupplierstoareliablefewwhocanmakefrequent
deliveriesofdefectfreegoodsinsmalllotsizes.
Improvetheplantlayoutinordertoreducethethroughputtimenecessaryto
makeaproduct.
Reducethemachinesetuptimetomakesmallbatchproductionrunsmore
economical.
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Byreducinginventories,ajustintimemanufacturerreducesthecapital
investedininventoryandreducestheneedforwarehousingspacetostore
inventory.Otherbenefitsincludereducedthroughputtime,morerapid
responsetocustomerdemands,reduceddefectrates,andgreatercustomer
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satisfaction.

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TotalQualityManagement(TQM)improvesproductivitybyencouragingthe
useoffactandanalysisindecisionmakinganddiscouragingcounter
productivedefensivebehavior.Systematicproblemsolvingusingteamsmade
upofemployeesfromalllevelsoftheorganizationisacharacteristicofTQM.
OneproblemsolvingtoolcommonlyusedinTQMisbenchmarking,which
involvesstudyingandlearningfromorganizationsthatareamongthebestin
theworldataparticulartask.
TQMstressescontinuousimprovementwiththerealizationthatifourbusiness
practicesdonotimprove,competitionwillovertakeus.Wemustcontinually
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seekbetterandmoreefficientmethods.Thecentralfocusisalwaysonserving

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PartI
Abusinessprocessisanyseriesofstepsthatarefollowedtocarryoutataskin
abusiness.InProcessReengineering,abusinessprocessisdiagrammedin
detail,everystepintheprocessisquestioned,andthentheprocessis
redesignedtoeliminateallnonvalueaddedactivities.
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ProcessReengineeringradicallyoverhaulsexistingprocesses,whileTQM
tweaksexistingprocessestorealizegradualimprovements.
TQMusesateamapproachinvolvingpeoplewhoworkdirectlyintheprocess,
whileProcessReengineeringismorelikelytobeimposedfromaboveandto
useoutsideconsultants.

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Aconstraint(alsocalledabottleneck)isanythingthatpreventsyoufrom
gettingmoreofwhatyouwant.Theconstraintinasystemisdeterminedby
thestepthathastheleastcapacity.
TheTheoryofConstraintsisbasedontheobservationthateffectively
managingtheconstraintisthekeytosuccess.Thegoalistomanagethe
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TheTheoryofConstraintsapproachtoprocessimprovementinvolvesfour
steps:
Identifytheweakestlinkinthechainwhichistheconstraint.
Donotplaceagreaterstrainonthesystemthantheweakestlinkcan
handle.
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Focusimprovementeffortsonstrengtheningtheweakestlink.

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Overthelastseveraldecades,competitionhasbecomeworldwideinmost
industries.Theprimarycausesfortheincreasedworldwidecompetitionare:
Reductionsintariffs,quotas,andotherbarrierstofreetrade.
Improvementsinglobaltransportationsystems.
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Increasingsophisticationininternationalmarkets.

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Inrecentyears,manydot.combusinessesfailed.Thesebusinessesmayhave
benefitedfromtheapplicationofmanymanagerialaccountingtoolsthatare
discussedindetailinlaterchapters:
Costconcepts(Chapter2)
Costestimation(Chapter5)
Costvolumeprofit(Chapter6)
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Activitybasedcosting(Chapter8)

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TheInstituteofManagementAccountantsStandardsofEthicalConductfor
PractitionersofManagementAccountingandFinancialManagementhavetwo
mainpartsguidelinesforethicalbehaviorandguidelinesforresolutionfor
anethicalconflict.
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Managementaccountantshaveresponsibilityforethicalbehaviorinfourbroad
areas.Thefirstareaisprofessionalcompetence.Managementaccountantsare
expectedto:
Maintaintheirprofessionalcompetence.

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Thesecondareaisconfidentiality.Managementaccountantsmust:
Notdiscloseconfidentialinformationunlesslegallyrequiredtodoso.
Notuseconfidentialinformationforpersonaladvantage.

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Thethirdareaisintegrity.Managementaccountantsmust:
Avoidconflictsofinterestandadviseothersofpotentialconflicts.
Notsubvertorganizationslegitimateobjectives.
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Recognizeandcommunicatepersonalandprofessionallimitations.

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Additionalguidelinesintheareaofintegritythatmanagementaccountants
mustfolloware:
Avoidactivitiesthatcouldaffecttheirabilitytoperformduties.
Refrainfromactivitiesthatcoulddiscredittheprofession.
Communicateunfavorableaswellasfavorableinformation.
Refusegiftsorfavorsthatmightinfluencebehavior.

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Thefourthareaisobjectivity.Managementaccountantsmust:
Communicateinformationfairlyandobjectively.
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Discloseallinformationthatmightbeusefultomanagement.

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Whenfollowingtheguidelinesforethicalbehaviorintheareasofcompetence,
confidentiality,integrity,andobjectivity,managementaccountantsmayfind
themselvesinethicalconflictswithothers.Whenfacedwithethicalconflicts
theemployersestablishedpoliciesforconflictresolutionshouldbefollowed.
Iftheconflictcannotberesolvedwithinestablishedpolicies,management
accountantsshould:
Discusstheconflictwiththeirimmediatesuperiorornexthighestuninvolved
manager.

MakereferencetotheSarbanesOxleyActpassedbyCongressin 2002inpartto

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Additionalguidelinesforunresolvedethicalconflictsare:
Exceptwherelegallyprescribed,maintainconfidentiality.
Clarifyissuesinaconfidentialdiscussionwithanobjectiveadvisor.
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Consultanattorneyastolegalobligations.

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Ethicalstandardsaremotivatedbyaverypracticalconsiderationifthe
standardsarenotfollowedinbusiness,thentheeconomyandallofuswould
suffer.Abandoningethicalstandardswouldleadtoalowerstandardofliving
withlowerqualitygoodsandservices,lesstochoosefromandhigherprices.
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Inshort,ethicalstandardsareessentialforthesmoothfunctioningofan

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TheGuidelinesonEthicsforProfessionalAccountants,issuedinJuly1990by
theInternationalFederationofAccountants(IFAC),governtheactivitiesofall
professionalaccountantsthroughouttheworld.Inadditiontooutliningethical
requirementsinmattersdealingwithcompetence,objectivity,independence,
andconfidentiality,theIFACscodedealswiththeaccountantsethical
responsibilitiesin:
Taxes
Feesandcommissions
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Amanagementaccountantwhohasthenecessaryqualificationsandwho
passesarigorousprofessionalexamearnstherighttobeknownasaCertified
ManagementAccountant(CMA).Managementaccountantswhobecome
CMAsareoftengivengreaterresponsibilitiesandhighercompensationthan
othermanagementaccountantswhoarenotCMAs.Informationabout
becomingaCMAandtheCMAprogramcanbeaccessedontheIMAs
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Toeffectivelyoperateabusiness,managersoftenneedinformationina
differentformatandfrequencythanfoundinfinancialreports.Managerial
accountingprovidesthatinformationtomanagersandotherinternaldecision
makerswhofindthemselvesinanincreasinglycompetitive,complex,and
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changingbusinessenvironment.

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