Managerial Accounting and the Business Environment

Chapter 1

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Imports into the United States

300 US Imports (billions of $ ) 250

Canada
200 150 100 50 -

China Germany Japan Mexico United Kingdom

1990

1995
Years

2000

2004

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Exports from the United States

200 US Exports (billions of $) 180 160 140 120 100 80 60 40 20 -

Canada China Germany Japan Mexico United Kingdom

1990

1995
Years

2000

2004

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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 companys strategy should be its target customers.
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Customer Value Propositions

Customer Intimacy Strategy Understand and respond to individual customer needs.

Operational Excellence Strategy

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

Product Leadership Strategy

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Offer higher quality products.

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Work of Management

Planning

Directing and Motivating

Controlling

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Planning

Identify alternatives.

Select alternative that does the best job of furthering organizations 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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Planning and Control Cycle

Formulating longand short-term plans (Planning) Comparing actual to planned performance (Controlling)

Exhibit 1-2

Begin

Decision Making

Implementing plans (Directing and Motivating)

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
Managers who plan for and control an organization Future emphasis Emphasis on relevance for planning and control Emphasis on timeliness Focuses on segments of an organization Need not follow GAAP or any prescribed format Not Mandatory
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1. Users 2. Time focus 3. Verifiability versus relevance 4. Precision versus timeliness 5. Subject 6. GAAP 7. Requirement

External persons who make financial decisions Historical perspective Emphasis on verifiability Emphasis on precision Primary focus is on the whole organization Must follow GAAP and prescribed formats Mandatory for external reports

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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 decisionmaking authority throughout an organization.

Corporate Organization Chart

Board of Directors President Purchasing Personnel Vice President Operations Chief Financial Officer Controller

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:
 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.

R&D

Product Design

Customer 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 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

Large inventories Work in process Finished goods
Completed products awaiting sale.

Traditional push manufacturing Raw materials

Materials waiting to be processed.

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.

Exhibit 1-6

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 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 that strengthen the weakest link in the chain improve the process.

2. Allow the weakest link to set the tempo. 3. Focus on improving the weakest link. 4. Recognize that the weakest link is no longer so.

1. Identify the weakest link.

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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 DMAIC 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 Measure stage. Develop, evaluate, and implement solutions to the problems. Ensure that problems remain fixed. Seek to improve the new methods over time.

Exhibit 1-8

Measure

Analyze Improve Control

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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 companys centralized database. The unique data elements contained within a database can be linked together.
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Learning Objective 4

Understand the importance of upholding ethical standards.

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Code of Conduct for Management Accountants

The Institute of Management Accountants (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 professional competence.

Competence

Follow applicable laws, regulations 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 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 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 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 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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Company Codes of Conduct

Broad-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), govern the activities of professional accountants worldwide. In addition to competence, objectivity, independence, and confidentiality, the IFACs code deals with the accountants 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 Directors

Incentives and monitoring for

Top Management

To pursue objectives of

Stockholders
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Corporate Governance
An effective corporate governance system should also protect the interests of the companys 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 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

The Act requires that a companys annual report contain an internal control report that is accompanied by an opinion from the companys 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 by a company to proactively identify and manage risk.
Should I try to avoid the risk, share the risk, accept the risk, or reduce the 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 passwords barriers that prohibit employees from obtaining information not needed to do their jobs
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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 IMAs website at www.imanet.org or by calling 1-800-638-4427.
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End of Chapter 1

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