Chapter 1: Managerial Accounting by Garrison

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Chapter 1
Managerial Accounting and
the Business Environment

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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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Work of Management
Planning
Controlling
Directing and
Motivating

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Planning
Identify
alternatives.
Select alternative that does
the best job of furthering
organization’s 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
Decision
Making
Formulating long-
and short-term plans
(Planning)
Measuring
performance
(Controlling)
Implementing
plans (Directing
and Motivating)
Comparing actual
to planned
performance
(Controlling)
Begin
Exhibit
1-2

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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
1. Users External persons who Managers who plan for
make financial decisions and control an organization
2. Time focus Historical perspective Future emphasis
3. Verifiability Emphasis on Emphasis on relevance
versus relevance verifiability for planning and control
4. Precision versus Emphasis on Emphasis on
timeliness precision timeliness
5. Subject Primary focus is on Focuses on segments
the whole organization of an organization
6. GAAP Must follow GAAP Need not follow GAAP
and prescribed formats or any prescribed format
7. Requirement Mandatory for Not
external reports Mandatory

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Learning Objective 2
Understand the role of
management accountants
in an organization.

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Corporate Organization Chart
Purchasing Personnel Vice President
Operations
Treasurer Controller
Chief Financial
Officer
President
Board of Directors
Organizational Structure
Decentralization is the delegation of decision-
making authority throughout an organization.

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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
Business functions making up the value chain
Product Customer
R&D Design Manufacturing Marketing Distribution Service
A business
process is a series of
steps that are followed in order to
carry out some task in
a business.

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Lean Production
Exhibit
1-6
The lean thinking
model is a five
step approach.
 Identify value
in specific
products/services.
 Identify the
business process
that delivers value.
 Organize work
arrangements around
the flow of the
business process.
 Create a pull
system that responds
to customer orders.
 Continuously pursue
perfection in the
business process.

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Customer Places
an Order
Create Production
Order
Generate Component
Requirements
Production Begins
as Parts Arrive
Goods Delivered
when needed
Components
are Ordered
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.

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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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4. Recognize that
the weakest link
is no longer so.
1. Identify the
weakest link.
2. Allow the
weakest link to
set the tempo.
3. Focus on
improving
the weakest
link.
Only actions
that strengthen
the weakest link
in the “chain”
improve the
process.
Theory of Constraints

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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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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.
Theory of Constraints

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Six Sigma
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.
The Six Sigma DMAIC Framework
Exhibit
1-8

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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 company’s
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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Competence
Follow applicable
laws, regulations
and standards.
Maintain
professional
competence.
Provide accurate, clear,
concise, and timely decision
support information.
IMA Guidelines for Ethical Behavior
Recognize and
communicate professional
limitations that preclude
responsible judgment.

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Confidentiality
Do not disclose confidential
information unless legally
obligated to do so.
Ensure that subordinates do
not disclose confidential
information.
Do not use
confidential
information for
unethical or illegal
advantage.
IMA Guidelines for Ethical Behavior

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Mitigate conflicts of
interest and advise others
of potential conflicts.
Abstain from activities that
might discredit the
profession.
Refrain from
conduct that
would prejudice
carrying out
duties ethically.
Integrity
IMA Guidelines for Ethical Behavior

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Communicate information
fairly and objectively.
Disclose all relevant
information that could
influence a user’s
understanding of reports
and recommendations.
Credibility
IMA Guidelines for Ethical Behavior
Disclose delays or
deficiencies in information
timeliness, processing, or
internal controls.

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Abandoning ethical standards in business would
lead to a lower quality of life with less
desirable goods and services at higher prices.
Why Have Ethical Standards?
Without ethical standards in business, the
economy, and all of us who depend on it for
jobs, goods, and services, would suffer.
Ethical standards in business are essential for a
smooth functioning advanced market economy.

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Corporate Governance
The system by
which a company is directed
and controlled.
Board of
Directors
Top
Management
Stockholders
To pursue
objectives of
Incentives and
monitoring for

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Corporate Governance
And the communities in
which the company operates.
An effective corporate governance system
should also protect the interests of the
company’s other stakeholders.
Employees Customers Suppliers
Creditors

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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