Managerial Accounting and the

Business Environment

Chapter One
1-2

Internet Usage

The
The Internet
Internet fuels
fuels globalization
globalization
by
by providing
providing companies
companies with
with greater
greater
access
access to
to geographically
geographically dispersed
dispersed
customers,
customers, employees,
employees, andand suppliers.
suppliers.

The
The number
number of of internet
internet users
users more
more
than
than doubled
doubled during
during the
the first
first four
four
years
years of
of the
the new
new millennium.
millennium.
1-3

Strategy

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

The
The focal
focal point
point of
of aa
company’s
company’s strategy
strategy should
should
be
be its
its target
target customers.
customers.
1-4

Customer Value Propositions

Customer
Understand
Understand andand respond
respond to
to
Intimacy
individual
individual customer
customer needs.
needs.
Strategy

Operational Deliver
Deliver products
products and
and services
services
Excellence faster,
faster, more
more conveniently,
conveniently,
Strategy and
and at
at lower
lower prices.
prices.

Product
Leadership Offer
Offer higher
higher quality
quality products.
products.
Strategy
1-5

Work of Management

Planning
Planning
Directing
Directing and
and
Motivating
Motivating

Controlling
Controlling
1-6

Planning

Identify
Identify
alternatives.
alternatives.

Select
Select alternative
alternative that
that does
does
the
the best
best job
job of
of furthering
furthering
organization’s
organization’s objectives.
objectives.

Develop
Develop budgets
budgets to
to guide
guide
progress
progress toward
toward the
the
selected
selected alternative.
alternative.
1-7

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.
1-8

Controlling

The
The control
control function
function ensures
ensures
that
that plans
plans are
are being
being followed.
followed.

Feedback
Feedback inin the
the form
form of
of performance
performance reports
reports
that
that compare
compare actual
actual results
results with
with the
the budget
budget
are
are an
an essential
essential part
part of
of the
the control
control function.
function.
1-9
Exhibit
Planning and Control Cycle 1-2

Formulating
Formulating Begin
long-and
long-and short-
short-
term
term plans
plans
(Planning)
(Planning)
Comparing
Comparing Implementing
Implementing
actual
actual Decision plans
plans
to
to planned
planned Making (Directing
(Directing and
and
performance
performance Motivating)
Motivating)
(Controlling)
(Controlling)
Measuring
Measuring
performance
performance
(Controlling)
(Controlling)
1-10

Learning Objective 1

Identify the major

differences and similarities
between financial and
managerial accounting.
Comparison of Financial and Managerial
1-11

Accounting
1-12

Learning Objective 2

Understand the role of

management accountants
in an organization.
1-13

Organizational Structure

Decentralization
Decentralization is
is the
the delegation
delegation of
of decision-
decision-
making
making authority
authority throughout
throughout anan organization.
organization.

C o r p o r a te O r g a n iz a tio n C h a r t
B o a r d o f D ir e c to r s

P r e s id e n t

P u r c h a s in g P e rs o n n e l V ic e P r e s id e n t C h ie f F in a n c ia l
O p e r a tio n s O ffic e r

T re a s u re r C o n tr o lle r
1-14

Line and Staff Relationships

Line positions are directly Staff positions support and

related to achievement of the assist line positions.
basic objectives of an  Example: Cost
organization. accountants in the
manufacturing plant.
 Example: Production
supervisors in a
manufacturing plant.
1-15

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.
1-16

Learning Objective 3

Understand the basic

concepts underlying Lean
Production, the Theory of
Constraints, and Six
Sigma.
1-17

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

1-18

Process Management

There are three approaches to

improving business processes . . .

Theory of
Constraints (TOC)
Lean Six
Production Sigma
1-19
Traditional “Push”
Manufacturing Company

Forecast Sales Order components Store Inventory

Make Sales from

Finished Goods Store Produce goods in
Inventory Inventory Anticipation of Sales
 1-20
Traditional “Push”
Manufacturing Company

Traditional “push” Large

manufacturing inventories

Raw Work in Finished

materials process goods

Materials
Materials waiting
waiting Completed
Completed products
products
to
to be
be processed.
processed. awaiting
awaiting sale.
sale.

Partially
Partially completed
completed products
products
requiring
requiring more
more work
work before
before
they
they are
are ready
ready for
for sale.
sale.
1-21 Exhibit

Lean Production
1-6

 Identify
 Identify value
value  Identify
 Identify the
the
in
in specific
specific business
business process
process
products/services.
products/services. that
that delivers
delivers value.
value.

The
The lean
lean thinking
thinking  Organize
Organize work
work
arrangements
arrangements around
around
model
model is
is aa five
five the
the flow
flow of
of the
the
step
step approach.
approach. business
business process.
process.

 Continuously
 Continuously pursue
pursue  Create
 Create aa pull
pull
perfection
perfection in
in the
the system
system that
that responds
responds
business
business process.
process. to
to customer
customer orders.
orders.
 1-22

Lean Production

The
The five
five step
step process
process results
results in
in aa “pull”
“pull” manufacturing
manufacturing system
system
that
that reduces
reduces inventories,
inventories, decreases
decreases defects,
defects, reduces
reduces
wasted
wasted effort,
effort, and
and shortens
shortens customer
customer response
response times.
times.

Customer Places Create Production Generate Component

an Order Order Requirements

Goods Delivered Production Begins as Components

when needed Parts Arrive are Ordered
1-23

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.
1-24

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
The constraint
constraint in
in aa system
system is
is determined
determined
by
by the
the step
step that
that has
has the
the smallest
smallest capacity.
capacity.
 1-25

Theory of Constraints

Only actions 2.
2. Allow
Allow the
the
that strengthen weakest
weakest linklink to
to
the weakest set
set the
the tempo.
tempo.
link in the
“chain”
improve the
process. 3.
3. Focus
Focus onon
1. improving
1. Identify
Identify the
the improving
weakest the
the weakest
weakest link.
link. weakest
link.
link.

4.
4. Recognize
Recognize that
that
the
the weakest
weakest link
link
is
is no
no longer
longer so.
so.
1-26

Six Sigma

AA process
process improvement
improvement method
method relying
relying on
on customer
customer feedback
feedback
and
and fact-based
fact-based data
data gathering
gathering and
and analysis
analysis techniques
techniques to
to
drive
drive process
process improvement.
improvement.

Refers
Refers to
to aa process
process that
that generates
generates no
no more
more
than
than 3.4
3.4 defects
defects per
per million
million opportunities.
opportunities.

Sometimes
Sometimes associated
associated
with
with the
the term
term zero
zero defects.
defects.
1-27 Exhibit

Six Sigma
1-8

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.
1-28

E-Commerce

E-commerce
E-commerce refers
refers to
to business
business
conducted
conducted using
using the
the Internet.
Internet.

In
In addition
addition to
to dot.com
dot.com companies,
companies, traditional
traditional
businesses,
businesses, such
such as
as banks
banks and
and retailers,
retailers,
continue
continue to
to expand
expand their
their Internet
Internet presence.
presence.

The
The growth
growth in
in e-commerce
e-commerce is is occurring
occurring
because
because the
the Internet
Internet has
has important
important advantages
advantages
over
over more
more conventional
conventional marketplaces
marketplaces for
for many
many
kinds
kinds of
of transactions.
transactions.
 1-29

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
All data
data are
are recorded
recorded only
only
once
once inin the
the company’s
company’s
centralized
centralized database.
database.

The
The unique
unique data
data elements
elements
contained
contained within
within aa database
database
can
can be
be linked
linked together.
together.
1-30

Learning Objective 4

Understand the
importance of upholding
ethical standards.
1-31
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.
 1-32

IMA Guidelines for Ethical Behavior

Recognize
Recognize and
and
communicate
communicate professional
professional
limitations
limitations that
that preclude
preclude
responsible
responsible judgment.
judgment.

Maintain
Maintain Follow
Follow applicable
applicable
professional
professional Competence laws,
laws, regulations
regulations
competence.
Competence and
and standards.
standards.
competence.

Provide
Provide accurate,
accurate, clear,
clear,
concise,
concise, and
and timely
timely
decision
decision support
support
information.
information.
1-33

IMA Guidelines for Ethical Behavior

Do
Do not
not disclose
disclose
confidential
confidential information
information
unless
unless legally
legally obligated
obligated to
to
do
do so.
so.
Do
Do not
not use
use
confidential
confidential
information
information forfor
unethical
Confidentiality
Confidentiality
unethical oror
illegal
illegal
advantage.
advantage.
Ensure
Ensure that
that subordinates
subordinates
do
do not
not disclose
disclose
confidential
confidential information.
information.
1-34

IMA Guidelines for Ethical Behavior

Mitigate
Mitigate conflicts
conflicts of
of
interest
interest and
and advise
advise
others
others of
of potential
potential
conflicts.
conflicts.
Refrain
Refrain from
from
conduct
conduct that
that
would
would prejudice
prejudice Integrity
carrying
carrying out
out
Integrity
duties
duties ethically.
ethically.

Abstain
Abstain from
from activities
activities
that
that might
might discredit
discredit the
the
profession.
profession.
1-35

IMA Guidelines for Ethical Behavior

Communicate
Communicate
information
information fairly
fairly and
and
objectively.
objectively.

Disclose
Disclose delays
delays oror
deficiencies
deficiencies inin
Credibility
Credibility information
information timeliness,
timeliness,
processing,
processing, or
or internal
internal
controls.
controls.
Disclose
Disclose all
all relevant
relevant
information
information that
that could
could
influence
influence aa user’s
user’s
understanding
understanding of of reports
reports
and
and recommendations.
recommendations.
1-36
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.
1-37
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.
1-38

Why Have Ethical Standards?

Ethical
Ethical standards
standards in
in business
business are
are essential
essential for
for aa
smooth
smooth functioning
functioning advanced
advanced market
market economy.
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.
1-39

Company Codes of Conduct

Broad-based
Broad-based statements
statements ofof aa
company’s
company’s responsibilities
responsibilities to:
to:

Employees
Employees Customers
Customers Suppliers
Suppliers

And
And to
to the
the communities
communities in
in
which
which the
the company
company operates.
operates.
 1-40
Codes of Conduct on
the International Level

The
The Code
Code of
of Ethics
Ethics for
for Professional
Professional
Accountants,
Accountants, issued
issued by
by the
the International
International
Federation
Federation ofof Accountants
Accountants (IFAC),
(IFAC), govern
govern the
the
activities
activities of
of professional
professional accountants
accountants worldwide.
worldwide.

In
In addition
addition to
to competence,
competence, objectivity,
objectivity, independence,
independence,
and
and confidentiality,
confidentiality, the
the IFAC’s
IFAC’s code
code deals
deals with
with
the
the accountant’s
accountant’s ethical
ethical responsibilities
responsibilities in:
in:
Taxes
Taxes
Independence
Independence
Fees
Fees and
and commissions
commissions
Advertising
Advertising and
and solicitation
solicitation
Handling
Handling ofof monies
monies
Cross-border
Cross-border activities.
activities.
1-41

Corporate Governance

The
The system
system by
by
which
which aa company
company is
is directed
directed
and
and controlled.
controlled.

Board
Board of
of Incentives and
Directors
Directors monitoring for

Top
Top To pursue
Management
Management objectives of

Stockholders
Stockholders
 1-42

Corporate Governance

An
An effective
effective corporate
corporate governance
governance system
system
should
should also
also protect
protect the
the interests
interests of
of the
the
company’s
company’s other
other stakeholders.
stakeholders.

Employees
Employees Customers
Customers Creditors
Creditors Suppliers
Suppliers

And
And the
the communities
communities in
in
which
which the
the company
company operates.
operates.
1-43

The Sarbanes-Oxley Act of 2002

The
The Sarbanes-Oxley
Sarbanes-Oxley Act Act of
of 2002
2002 waswas intended
intended to to protect
protect the
the
interests
interests of
of those
those who
who invest
investin in publicly
publicly traded
traded companies
companies by by
improving
improving thethe reliability
reliability and
and accuracy
accuracy of of corporate
corporate financial
financial
reports
reports and
and disclosures.
disclosures. Six Six key
key aspects
aspects of of the
the legislation
legislation include: 
include: 
 The
 The Act
Act requires
requires both
both the
the CEO
CEO andand CFO
CFO toto certify
certify in
in writing
writing
that
that their
theircompany’s
company’sfinancial
financial statements
statements andanddisclosures
disclosures
fairly
fairly represent
represent the
the results
results of
of operations.
operations.
 The
 The Act
Act establishes
establishes the
the Public
Public Company
Company Accounting
Accounting Oversight
Oversight
Board
Boardto to provide
provide additional
additional oversight
oversight of
of the
the audit
audit profession.
profession.
 The
 The Act
Act places
places the
the power
power toto hire,
hire, compensate
compensate and and terminate
terminate
public
public accounting
accounting firms
firms in
in the
the hands
hands of of the
the audit
audit committee.
committee.
 The
 The Act
Act places
places restrictions
restrictions onon audit
audit firms,
firms, such
such as
as prohibiting
prohibiting
public
public accounting
accounting firms
firms from
from providing
providing aa variety
variety of
of non-audit
non-audit
services
services toto an
an audit
audit client.
client.
1-44

The Sarbanes-Oxley Act of 2002

 The
The Act
Act requires
requires that
that aa company’s
company’s annual
annual report
report contain
contain an
an
internal
internal control
controlreport
report that
that isis accompanied
accompanied by by an
an opinion
opinion from
from
the
the company’s
company’s audit
audit firm
firm about
about the the fairness
fairness of
of that
that report.
report.
⑥⑥ The
The Act
Act establishes
establishes severe
severe penalties
penalties forfor certain
certain behaviors,
behaviors,
such
such as:
as:
•• Up
Up to
to 20
20 years
years in
in prison
prison for
for altering
alteringorordestroying
destroying anyany
documents
documents thatthat may
may eventually
eventually be be used
usedin
in an
an official
official
proceeding.
proceeding.
•• Up
Up to
to 10
10 years
years in
in prison
prison for
for retaliating
retaliatingagainst
against aa
“whistle
“whistle blower.” 
blower.” 
1-45

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
Once aa company
company identifies
identifies its
its risks,
risks, perhaps
perhaps the the
most
most common
common risk risk management
management tactic tactic is
is to
to reduce
reduce
risks
risks by
by implementing
implementing specific
specific controls.
controls.
1-46
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
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
1-47

Certified Management Accountant

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

Information
Information about
about becoming
becoming aa CMACMA and
and the
the CMA
CMA
program
program can
can be
be accessed
accessed onon the
the IMA’s
IMA’s website
website at
at
www.imanet.org
www.imanet.org oror by
by calling
calling 1-800-638-4427.
1-800-638-4427.
1-48

End of Chapter 1