Managerial Accounting and the Business Environment

Chapter 1

2010 The McGraw-Hill Companies, Inc.

Learning Objective 1

Understand the role of management accountants in an organization.

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Organizational Structure
Decentralization is the delegation of decisiondecisionmaking authority throughout an organization.

Corporate Organization Chart

Board of Directors

President Purchasing Personnel Vice President Operations Chief Financial Officer Controller
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Treasurer
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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.

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

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Learning Objective 2

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 Design Customer Manufacturing Marketing Distribution Service

R&D

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 Production Six Sigma

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Traditional Push Manufacturing Company

Forecast Sales

Order components

Store Inventory

Make Sales from Finished Goods Inventory

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Store Inventory

Produce goods in anticipation of Sales

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Traditional Push Manufacturing Company Traditional push manufacturing Raw materials

Materials waiting to be processed.

Large inventories Work in process Finished goods

Completed products awaiting sale.

Partially completed products requiring more work before they are ready for sale.
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Lean Production
Identify value in specific products/services. Identify the business process that delivers value.

The lean thinking model is a five step approach.

Organize work arrangements around the flow of the business process.

Continuously pursue perfection in the business process.

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Create a pull system that responds 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 an order

Create Production Order

Generate component requirements

Goods delivered when needed

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Production begins as parts arrive

Components are ordered

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Lean Production
Lean thinking can 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 that strengthen the weakest link in the chain improve the process.

2. Allow the weakest link to set the tempo.

1. Identify the weakest link.

3. Focus on improving 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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Six Sigma
Stage Define The Six Sigma D AIC Framework Goals Establish the scope and purpose of the project. Diagram the flow of the current process. Establish the customer's requirements for the process. Gather baseline performance data related to the existing process. Narrow the scope of the project to the most important problems. Identify the root cause(s) of the problems identified in the easure stage. Develop, evaluate, and implement solutions to the problems. Ensure that problems remain fixed. Seek to improve the new methods over time.
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easure

Analyze Improve Control

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Learning Objective 3

Understand the importance of upholding ethical standards.

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Code of Conduct for Management Accountants

The Institute of Management Accountants (IMA) Statement of Ethical Professional Practice consists of two parts that 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 professional competence.

Competence
Provide accurate, clear, concise, and timely decision support information.

Follow applicable laws, regulations and standards.

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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 unethical or illegal advantage.

Confidentiality

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 carrying out duties ethically.

Integrity
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 timeliness, processing, or internal controls.

Credibility
Disclose all relevant information that could influence a users understanding of reports and recommendations.
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IMA Guidelines for Resolution of an Ethical Conflict

Follow employers established policies. For an unresolved ethical conflict:
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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 supervisors knowledge, assuming the supervisor is not involved.

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IMA Guidelines for Resolution of an Ethical Conflict

Follow employers established policies. For an unresolved ethical conflict:
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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 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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Company Codes of Conduct

BroadBroad-based statements of a companys 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), governs the activities of professional accountants worldwide. In addition to integrity and objectivity, resolution of ethical conflicts, competence, and confidentiality, the IFACs code deals with the accountants ethical responsibilities in: Taxes, Independence, Fees and commissions, Advertising and solicitation, Handling of monies, and Cross-border activities.
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Corporate Governance
The system by which a company is directed and controlled.

Board of Directors

Incentives and monitoring for

Top Management

To pursue objectives of

Stockholders
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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 companys 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

(continued) The Act requires a public companys independent auditor to issue an opinion on the effectiveness of the companys internal control over financial reporting to accompany managements assessment, and both are included in the companys annual 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

Should I try to avoid the risk, share the risk, accept the risk, or reduce the risk?

A process used by a company to 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 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 password-protected barriers that prohibit employees from obtaining information not needed to do their jobs
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