Managerial Accounting and the
Business Environment
Chapter 1
© 2010 The McGraw-Hill Companies, Inc.
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Imports to the US (billions)
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Canada
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China
Germany
Japan
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Mexico
United Kingdom
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$300
Exports from the US (billions)
$250
$200
Canada
China
$150
Germany
Japan
Mexico
United Kingdom
$100
$50
$0
1995
McGraw-Hill/Irwin
2000
2005
2007
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Internet Usage
The Internet fuels globalization
by providing companies with greater
access to geographically dispersed
customers, employees, and suppliers.
As of 2008, more than 78% of
the world's population was still
not connected to the Internet.
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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
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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
Offer higher quality products.
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Learning Objective 1
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
Treasurer
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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 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.
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
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Six
Sigma
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Traditional “Push” Manufacturing Company
Forecast Sales
Make Sales from
Finished Goods
Inventory
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Order components
Store
Inventory
Store Inventory
Produce goods in
anticipation of Sales
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Traditional “Push” Manufacturing Company
Traditional “push”
manufacturing
Raw
materials
Large
inventories
Work in
process
Materials waiting
to be processed.
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.
 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
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.
3. Focus on
improving
the weakest
link.
1. Identify 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.
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Sometimes
associated
with the term zero
defects.
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Six Sigma
Stage
Define
●
●
●
Measure ●
●
Analyze
●
Improve ●
Control
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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.
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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 Accountant’s (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
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.
Credibility
Disclose delays or
deficiencies in information
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 an unresolved ethical conflict:

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 an unresolved ethical conflict:

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
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), governs the
activities of professional accountants worldwide.
In addition to integrity and objectivity, resolution of ethical
conflicts, competence, 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, 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 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
(continued)
 The Act requires a public company’s independent auditor
to issue an opinion on the effectiveness of the company’s
internal control over financial reporting to accompany
management’s assessment, and both are included in the
company’s annual report.
 The Act establishes severe penalties for certain behaviors,
such as:
McGraw-Hill/Irwin
•
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
●
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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 password-protected barriers
that prohibit employees from
obtaining information not needed
to do their jobs
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Corporate Social Responsibility
Corporate social responsibility (CSR) is a concept
whereby organizations consider the needs
of all stakeholders when making decisions.
Customers
Employees
Suppliers
Communities
Stockholders
Environmental
& Human Rights
Advocates
CSR extends beyond legal compliance
to include voluntary actions that satisfy
stakeholder expectations.
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Corporate Social Responsibility
Examples of Corporate Social Responsibility
Companies should provide customers with:
Companies and their suppliers should provide
● Safe, high quality products that are fairly
employees with:
priced
● Safe and humane working conditions
● Competent, courteous, and rapid delivery
● Non-discriminatory treatments and the
of products and services
right to organize and file grievances
● Full disclosure of product-related risks
● Fair compensation
● Easy to use information systems for
● Opportunities for training, promotion,
shopping and tracking orders
and personal development
Companies should provide suppliers with:
Companies should provide communities with:
● Fair contract terms and prompt payments
● Payment of fair taxes
● Reasonable time to prepare orders
● Honest information about plans such as
● Hassle-free acceptance of timely and
plant closings
complete deliveries
● Resources that support charities, schools,
● Cooperative rather than unilateral
and civic activities
actions
● Reasonable access to media sources
Companies should provide stockholders with: Companies should provide environmental
● Competent management
and human rights advocates with:
● Easy access to complete and accurate
● Greenhouse gas emissions data
financial information
● Recycling and resource conservation data
● Full disclosure of enterprise risks
● Child labor transparency
● Honest answers to knowledgeable
● Full disclosure of suppliers located in
questions
developing countries
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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 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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