Managerial Accounting and

the Business Environment

Chapter 1

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Imports into the United States

300
US Imports (billions of $)

250
Canada
200 China
Germany
150
Japan
100 Mexico
United Kingdom
50

-
1990 1995 2000 2004
Years

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Exports from the United States

200
180
US Exports (billions of $)

160
Canada
140
China
120
Germany
100
80 Japan
60 Mexico
40 United Kingdom
20
-
1990 1995 2000 2004
Years

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Internet Usage

The Internet fuels globalization

by providing companies with greater
access to geographically dispersed
customers, employees, and suppliers.

The number of internet users more

than doubled during the first four
years of the new millennium.
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Strategy

A strategy
is a “game plan”
that enables a company
to attract customers
by distinguishing itself
from competitors.

The focal point of a

company’s strategy should
be its target customers.

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Customer Value Propositions

Understand and respond to

Customer individual customer needs.
Intimacy “You should choose us beause we understand and
Respon to your individual needs better
Strategy than our competitor”.

Operational Deliver products and services

Excellence faster, more conveniently,
Strategy and at lower prices.

Product
Leadership Offer higher quality products.
Strategy
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1-7

Work of Management

Planning
Directing and
Motivating

Controlling

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Planning

Identify
alternatives.

Select alternative that does

the best job of furthering
organization’s objectives.

Develop budgets to guide

progress toward the
selected alternative.
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Directing and Motivating

Directing and motivating involves managing

day-to-day activities to keep the organization
running smoothly.
 Employee work assignments.
 Routine problem solving.
 Conflict resolution.
 Effective communications.

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Controlling

The control function ensures

that plans are being followed.

Feedback in the form of performance reports

that compare actual results with the budget
are an essential part of the control function.

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1-11
Exhibit
Planning and Control Cycle 1-2

Formulating long-
Begin
and short-term plans
(Planning)

Comparing actual
Implementing
to planned Decision plans (Directing
performance Making and Motivating)
(Controlling)

Measuring
performance
(Controlling)

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Learning Objective 1

Identify the major

differences and similarities
between financial and
managerial accounting.

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Comparison of Financial and
Managerial Accounting
Financial Accounting Managerial Accounting
1. Users External persons who Managers who plan for
make financial decisions and control an organization
2. Time focus Historical perspective Future emphasis
3. Verifiability Emphasis on Emphasis on relevance
versus relevance verifiability for planning and control
4. Precision versus Emphasis on Emphasis on
timeliness precision timeliness
5. Subject Primary focus is on Focuses on segments
the whole organization of an organization
6. GAAP Must follow GAAP Need not follow GAAP
and prescribed formats or any prescribed format
7. Requirement Mandatory for Not
external reports Mandatory

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Learning Objective 2

Understand the role of

management accountants
in an organization.

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Organizational Structure

Decentralization is the delegation of decision-

making authority throughout an organization.

Corporate Organization Chart

Board of Directors

President

Purchasing Personnel Vice President Chief Financial

Operations Officer

Treasurer Controller

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Line and Staff Relationships
Line positions are directly
related to achievement of
the basic objectives of an
organization.
 Example: Production
supervisors in a
manufacturing plant.
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Staff positions support
and assist line positions.
 Example: Cost
accountants in the
manufacturing plant.
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The Chief Financial Officer (CFO)

A member of the top management team

responsible for:
 Providing timely and relevant data to support
planning and control activities.
 Preparing financial statements for external users.

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Learning Objective 3

Understand the basic

concepts underlying Lean
Production, the Theory of
Constraints, and Six
Sigma.

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Process Management

A business
process is a series of
steps that are followed in order to
carry out some task in
a business.

Product Customer
R&D Design Manufacturing Marketing Distribution Service

Business functions making up the value chain

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Process Management

There are three approaches to

improving business processes . . .
Theory of
Constraints (TOC)
Lean Six
Production Sigma

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Traditional “Push”
Manufacturing Company

Forecast Sales Order components Store Inventory

Make Sales from

Finished Goods Store Produce goods in
Inventory Inventory Anticipation of Sales

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Traditional “Push”
Manufacturing Company

Traditional “push” Large

manufacturing inventories

Raw Work in Finished

materials process goods

Materials waiting Completed products

to be processed. awaiting sale.

Partially completed products

requiring more work before
they are ready for sale.
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1-23 Exhibit
1-6
Lean Production

 Identify value  Identify the

in specific business process
products/services. that delivers value.

The lean thinking  Organize work

arrangements around
model is a five
the flow of the
step approach. business process.

 Continuously pursue  Create a pull

perfection in the system that responds
business process. to customer orders.
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Lean Production
The five step process results in a “pull” manufacturing system
that reduces inventories, decreases defects, reduces
wasted effort, and shortens customer response times.

Customer Places Create Production Generate Component

an Order Order Requirements

Goods Delivered Production Begins Components

when needed as Parts Arrive are Ordered
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Lean Production

Lean thinking may be used to improve business

processes that link companies together.

The term supply chain management refers to

the coordination of business processes across
companies to better serve end consumers.
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Theory of Constraints
A constraint (also called a bottleneck) is anything that
prevents you from getting more of what you want.
The Theory of Constraints is based on the observation that
effectively managing the constraint is the key to success.

The constraint in a system is determined

by the step that has the smallest capacity.

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Theory of Constraints

Only actions 2. Allow the

that strengthen weakest link to
the weakest link set the tempo.
in the “chain”
improve the
process.
3. Focus on
1. Identify the improving
weakest link. the weakest
link.

4. Recognize that
the weakest link
is no longer so.
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Six Sigma

A process improvement method relying on customer

feedback and fact-based data gathering and analysis
techniques to drive process improvement.

Refers to a process that generates no more

than 3.4 defects per million opportunities.

Sometimes associated
with the term zero defects.

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1-29 Exhibit
1-8
Six Sigma
The Six Sigma DMAIC Framework
Stage Goals
Define ● Establish the scope and purpose of the project.
● Diagram the flow of the current process.
● Establish the customer's requirements for the
process.
Measure ● Gather baseline performance data related to
the existing process.
● Narrow the scope of the project to the most
important problems.
Analyze ● Identify the root cause(s) of the problems
identified in the Measure stage.
Improve ● Develop, evaluate, and implement solutions
to the problems.
Control ● Ensure that problems remain fixed.
● Seek to improve the new methods over time.
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E-Commerce

E-commerce refers to business

conducted using the Internet.

In addition to dot.com companies, traditional

businesses, such as banks and retailers,
continue to expand their Internet presence.

The growth in e-commerce is occurring

because the Internet has important advantages
over more conventional marketplaces for many
kinds of transactions.
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Enterprise Systems

A single software system that

integrates data across an organization,
thereby enabling all employees to
have simultaneous access to a
common set of data.

All data are recorded only

once in the company’s
centralized database.

The unique data elements

contained within a database
can be linked together.
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1-32

Learning Objective 4

Understand the
importance of upholding
ethical standards.

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Code of Conduct for
Management Accountants

The Institute of Management Accountant’s (IMA)

Standards of Ethical Conduct for Practitioners
of Management Accounting and Financial
Management have two major parts,
which offer guidelines for:
 Ethical behavior.
 Resolution for an ethical conflict.

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IMA Guidelines for Ethical Behavior

Recognize and
communicate professional
limitations that preclude
responsible judgment.

Maintain Follow applicable

professional Competence laws, regulations
competence. and standards.

Provide accurate, clear,

concise, and timely decision
support information.
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IMA Guidelines for Ethical Behavior

Do not disclose confidential

information unless legally
obligated to do so.

Do not use
confidential
information for Confidentiality
unethical or illegal
advantage.

Ensure that subordinates do

not disclose confidential
information.
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IMA Guidelines for Ethical Behavior

Mitigate conflicts of
interest and advise others
of potential conflicts.

Refrain from
conduct that
would prejudice Integrity
carrying out
duties ethically.
Abstain from activities that
might discredit the
profession.
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IMA Guidelines for Ethical Behavior

Communicate information
fairly and objectively.

Disclose delays or
deficiencies in information
Credibility timeliness, processing, or
internal controls.

Disclose all relevant

information that could
influence a user’s
understanding of reports
and recommendations.
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IMA Guidelines for Resolution
of an Ethical Conflict
• Follow employer’s established policies.
• For unresolved ethical conflicts:
 Discuss the conflict with immediate supervisor or
next highest uninvolved manager.
 If immediate supervisor is the CEO, consider the
board of directors or the audit committee.
 Contact with levels above the immediate
supervisor should only be initiated with the
supervisor’s knowledge, assuming the supervisor
is not involved.

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IMA Guidelines for Resolution
of an Ethical Conflict
• Follow employer’s established policies.
• For unresolved ethical conflicts:
 Except where legally prescribed, maintain
confidentiality.
 Clarify issues in a confidential discussion with
an objective advisor.
 Consult an attorney as to legal obligations.

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Why Have Ethical Standards?

Ethical standards in business are essential for a

smooth functioning advanced market economy.

Without ethical standards in business, the

economy, and all of us who depend on it for
jobs, goods, and services, would suffer.

Abandoning ethical standards in business would

lead to a lower quality of life with less
desirable goods and services at higher prices.
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1-41

Company Codes of Conduct

Broad-based statements of a
company’s responsibilities to:

Employees Customers Suppliers

And to the communities in

which the company operates.
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Codes of Conduct on
the International Level
The Code of Ethics for Professional
Accountants, issued by the International
Federation of Accountants (IFAC), govern the
activities of professional accountants worldwide.

In addition to competence, objectivity, independence,

and confidentiality, the IFAC’s code deals with
the accountant’s ethical responsibilities in:
Taxes
Independence
Fees and commissions
Advertising and solicitation
Handling of monies
Cross-border activities.
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Corporate Governance

The system by
which a company is directed
and controlled.
Board of Incentives and
Directors monitoring for

Top To pursue
Management objectives of

Stockholders
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Corporate Governance

An effective corporate governance system

should also protect the interests of the
company’s other stakeholders.

Employees Customers Creditors Suppliers

And the communities in

which the company operates.
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The Sarbanes-Oxley Act of 2002

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

 The Act requires that a company’s annual report contain an

internal control report that is accompanied by an opinion from
the company’s audit firm about the fairness of that report.
 The Act establishes severe penalties for certain behaviors,
such as:
• Up to 20 years in prison for altering or destroying any
documents that may eventually be used in an official
proceeding.
• Up to 10 years in prison for retaliating against a
“whistle blower.”

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Enterprise Risk Management

A process used Should I try to avoid the risk,

share the risk, accept the
by a company to risk, or reduce the risk?
proactively identify
and manage risk.

Once a company identifies its risks, perhaps the

most common risk management tactic is to reduce
risks by implementing specific controls.
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Enterprise Risk Management
Examples of Business Risks
● Products harming customers
● Losing market share due to the
unforeseen actions of competitors
● Poor weather conditions shutting
down operations
● Website malfunction
● A supplier strike halting the flow
of raw materials
● Financial statements unfairly
reporting the value of inventory
● An employee accessing
unauthorized information
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Examples of Controls to
Reduce Business Risks
● Develop a formal and rigorous
new product testing program
● Develop an approach for legally
gathering information about
competitors' plans and practices
● Develop contingency plans for
overcoming weather-related
disruptions
● Thoroughly test the website
before going "live" on the Internet
● Establish a relationship with two
companies capable of providing
raw materials
● Count the physical inventory on
hand to make sure that it agrees
with the accounting records
● Create passwords barriers that
prohibit employees from obtaining
information not needed to do their
jobs
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1-49

Certified Management Accountant

A management accountant
who has the necessary qualifications and
who passes a rigorous professional exam earns
the right to be known as a Certified
Management Accountant (CMA).

Information about becoming a CMA and the CMA

program can be accessed on the IMA’s website at
www.imanet.org or by calling 1-800-638-4427.
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End of Chapter 1

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