Managerial Accounting and
the Business Environment
Chapter 1
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-2
Imports into the United States
US Imports (billions of $)
300
250
Canada
200
China
Germany
150
Japan
100
Mexico
United Kingdom
50
-
1990
1995
2000
2004
Years
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-3
Exports from the United States
US Exports (billions of $)
200
180
160
Canada
140
China
120
Germany
100
80
Japan
60
Mexico
40
United Kingdom
20
-
1990
1995
2000
2004
Years
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-4
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-5
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-6
Customer Value Propositions
McGraw-Hill/Irwin
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.
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-7
Work of Management
Planning
Directing and
Motivating
Controlling
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-8
Planning
Identify
alternatives.
Select alternative that does
the best job of furthering
organization’s objectives.
Develop budgets to guide
progress toward the
selected alternative.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-9
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-10
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-11
Planning and Control Cycle
Formulating longand short-term plans
(Planning)
Comparing actual
to planned
performance
(Controlling)
Decision
Making
Exhibit
1-2
Begin
Implementing
plans (Directing
and Motivating)
Measuring
performance
(Controlling)
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-12
Learning Objective 1
Identify the major
differences and similarities
between financial and
managerial accounting.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-13
Comparison of Financial and
Managerial Accounting
Financial Accounting
Managerial Accounting
External persons who
make financial decisions
Managers who plan for
and control an organization
Historical perspective
Future emphasis
3. Verifiability
versus relevance
Emphasis on
verifiability
Emphasis on relevance
for planning and control
4. Precision versus
timeliness
Emphasis on
precision
Emphasis on
timeliness
5. Subject
Primary focus is on
the whole organization
Focuses on segments
of an organization
6. GAAP
Must follow GAAP
and prescribed formats
Need not follow GAAP
or any prescribed format
Mandatory for
external reports
Not
Mandatory
1. Users
2. Time focus
7. Requirement
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-14
Learning Objective 2
Understand the role of
management accountants
in an organization.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-15
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
McGraw-Hill/Irwin
Controller
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-16
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.
McGraw-Hill/Irwin
Staff positions support
and assist line positions.
 Example: Cost
accountants in the
manufacturing plant.
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-17
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-18
Learning Objective 3
Understand the basic
concepts underlying Lean
Production, the Theory of
Constraints, and Six
Sigma.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-19
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
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-20
Process Management
There are three approaches to
improving business processes . . .
Theory of
Constraints (TOC)
Lean
Production
McGraw-Hill/Irwin
Six
Sigma
Copyright © 2008, The McGraw-Hill Companies, Inc.
Traditional “Push”
Manufacturing Company
1-21
Forecast Sales
Make Sales from
Finished Goods
Inventory
McGraw-Hill/Irwin
Order components
Store
Inventory
Store Inventory
Produce goods in
Anticipation of Sales
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-22
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-23
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.
McGraw-Hill/Irwin
Exhibit
1-6
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-24
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
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-25
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-26
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-27
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-28
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
Exhibit
1-8
1-29
Six Sigma
Stage
Define
●
●
●
Measure ●
●
Analyze
●
Improve ●
Control
McGraw-Hill/Irwin
●
●
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.
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-30
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-31
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-32
Learning Objective 4
Understand the
importance of upholding
ethical standards.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-33
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-34
IMA Guidelines for Ethical Behavior
Recognize and
communicate professional
limitations that preclude
responsible judgment.
Maintain
professional
competence.
Follow applicable
laws, regulations
and standards.
Competence
Provide accurate, clear,
concise, and timely decision
support information.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-35
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-36
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-37
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
IMA Guidelines for Resolution
of an Ethical Conflict
1-38
• 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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
IMA Guidelines for Resolution
of an Ethical Conflict
1-39
• 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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-40
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
Codes of Conduct on
the International Level
1-42
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-43
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
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-44
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-45
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-46
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:
•
•
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.”
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-47
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-48
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
●
McGraw-Hill/Irwin
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
Copyright © 2008, The McGraw-Hill Companies, Inc.
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.
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.
1-50
End of Chapter 1
McGraw-Hill/Irwin
Copyright © 2008, The McGraw-Hill Companies, Inc.