Gnb 01 12e

Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Chapter 1
Managerial Accounting and
the Business Environment

1-2
Imports into the United States
-
50
100
150
200
250
300
Years
USImports(billionsof$)
Canada
China
Germany
Japan
Mexico
United Kingdom
1990 1995 2000 2004

1-3
Exports from the United States
-
20
40
60
80
100
120
140
160
180
200
Years
USExports(billionsof$)
Canada
China
Germany
Japan
Mexico
United Kingdom
1990 1995 2000 2004

1-4
Internet Usage
The Internet fuels globalization
by providing companies with greater
access to geographically dispersed
customers, employees, and suppliers.
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.
The number of internet users more
than doubled during the first four
years of the new millennium.

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.
The focal point of a
company’s strategy should
be its target customers.

1-6
Customer Value Propositions
Understand and respond to
individual customer needs.
Understand and respond to
individual customer needs.
Customer
Intimacy
Strategy
Operational
Excellence
Strategy
Deliver products and services
faster, more conveniently,
and at lower prices.
Deliver products and services
faster, more conveniently,
and at lower prices.
Product
Leadership
Strategy
Offer higher quality products.Offer higher quality products.

1-7
Work of Management
PlanningPlanning
ControllingControlling
Directing and
Motivating
Directing and
Motivating

1-8
Planning
Identify
alternatives.
Identify
alternatives.
Select alternative that does
the best job of furthering
organization’s objectives.
Select alternative that does
the best job of furthering
organization’s objectives.
Develop budgets to guide
progress toward the
selected alternative.
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.
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.
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)
Formulating long-
and short-term plans
(Planning)
Measuring
performance
(Controlling)
Measuring
performance
(Controlling)
Implementing
plans (Directing
and Motivating)
Implementing
plans (Directing
and Motivating)
Comparing actual
to planned
performance
(Controlling)
Comparing actual
to planned
performance
(Controlling)
Begin
Exhibit
1-2

1-12
Learning Objective 1
Identify the majorIdentify the major
differences and similaritiesdifferences and similarities
between financial andbetween financial and
managerial accounting.managerial accounting.

1-13
Comparison of Financial and
Managerial Accounting

1-14
Understand the role ofUnderstand the role of
management accountantsmanagement accountants
in an organization.in an organization.

1-15
C o r p o r a t e O r g a n iz a t io n C h a r t
P u r c h a s in g P e r s o n n e l V ic e P r e s id e n t
O p e r a t io n s
T r e a s u r e r C o n t r o lle r
C h ie f F in a n c ia l
O f f ic e r
P r e s id e n t
B o a r d o f D ir e c t o r s
Organizational Structure
Decentralization is the delegation of decision-
making authority throughout an organization.
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.

1-18
Understand the basicUnderstand the basic
concepts underlying Leanconcepts underlying Lean
Production, the Theory ofProduction, the Theory of
Constraints, and SixConstraints, and Six
Sigma.Sigma.

1-19
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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Process Management
There are three approaches to
improving business processes . . .
Lean
Production
Theory of
Constraints (TOC)
Six
Sigma

1-21
Traditional “Push”
Manufacturing Company
Forecast Sales Order components
Produce goods in
Anticipation of Sales
Make Sales from
Finished Goods
Inventory
Store Inventory
Store
Inventory

1-22
Traditional “push”
manufacturing
Traditional “Push”
Manufacturing Company
Large
inventories
Finished
goods
Raw
materials
Work in
process
Materials waiting
to be processed.
Materials waiting
to be processed.
Completed products
awaiting sale.
Completed products
awaiting sale.
Partially completed products
requiring more work before
they are ready for sale.
Partially completed products
requiring more work before
they are ready for sale.

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

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4. Recognize that
the weakest link
is no longer so.
4. Recognize that
the weakest link
is no longer so.
1. Identify the
weakest link.
1. Identify the
weakest link.
2. Allow the
weakest link to
set the tempo.
2. Allow the
weakest link to
set the tempo.
3. Focus on
improving
the weakest
link.
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.
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.
Refers to a process that generates no more
than 3.4 defects per million opportunities.
Sometimes associated
with the term zero defects.
Sometimes associated
with the term zero defects.

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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.
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.
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.
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.
All data are recorded only
once in the company’s
centralized database.
The unique data elements
contained within a database
can be linked together.
The unique data elements
contained within a database
can be linked together.

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Understand theUnderstand the
importance of upholdingimportance of upholding
ethical standards.ethical standards.

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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.

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

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ConfidentialityConfidentiality
Do not disclose confidential
information unless legally
obligated to do so.
Do not disclose confidential
information unless legally
obligated to do so.
Ensure that subordinates do
not disclose confidential
information.
Ensure that subordinates do
not disclose confidential
information.
Do not use
confidential
information for
unethical or illegal
advantage.
Do not use
confidential
information for
unethical or illegal
advantage.

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Mitigate conflicts of
interest and advise others
of potential conflicts.
Mitigate conflicts of
interest and advise others
of potential conflicts.
Abstain from activities that
might discredit the
profession.
Abstain from activities that
might discredit the
profession.
Refrain from
conduct that
would prejudice
carrying out
duties ethically.
Refrain from
conduct that
would prejudice
carrying out
duties ethically.
IntegrityIntegrity

1-37
Communicate information
fairly and objectively.
Communicate information
fairly and objectively.
Disclose all relevant
information that could
influence a user’s
understanding of reports
and recommendations.
Disclose all relevant
information that could
influence a user’s
understanding of reports
and recommendations.
CredibilityCredibility
Disclose delays or
deficiencies in information
timeliness, processing, or
internal controls.
Disclose delays or
deficiencies in information
timeliness, processing, or
internal controls.

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• 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.
IMA Guidelines for Resolution
of an Ethical Conflict

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• 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.
IMA Guidelines for Resolution
of an Ethical Conflict

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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.
Ethical standards in business are essential for a
smooth functioning advanced market economy.

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Company Codes of Conduct
EmployeesEmployees CustomersCustomers SuppliersSuppliers
And to the communities in
which the company operates.
And to the communities in
Broad-based statements of a
company’s responsibilities to:
Broad-based statements of a
company’s responsibilities to:

1-42
Codes of Conduct on
the International Level
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.
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.
The Code of Ethics for Professional
Accountants, issued by the International
Federation of Accountants (IFAC), govern the
activities of professional accountants worldwide.
The Code of Ethics for Professional
Accountants, issued by the International
Federation of Accountants (IFAC), govern the
activities of professional accountants worldwide.

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

1-44
Corporate Governance
And the communities in
And the communities in
An effective corporate governance system
should also protect the interests of the
company’s other stakeholders.
An effective corporate governance system
should also protect the interests of the
company’s other stakeholders.
EmployeesEmployees CustomersCustomers SuppliersSuppliersCreditorsCreditors

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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.
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
 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.
f. 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.”
 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.
f. 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.”

1-47
Enterprise Risk Management
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.
Once a company identifies its risks, perhaps the
most common risk management tactic is to reduce
risks by implementing specific controls.
Should I try to avoid the risk,
share the risk, accept the
risk, or reduce the risk?

1-48
Enterprise Risk Management
Examples of Controls to
Examples of Business Risks Reduce Business Risks
● Products harming customers ● Develop a formal and rigorous
new product testing program
● Losing market share due to the ● Develop an approach for legally
unforeseen actions of competitors gathering information about
competitors' plans and practices
● Poor weather conditions shutting ● Develop contingency plans for
down operations overcoming weather-related
disruptions
● Website malfunction ● Thoroughly test the website
before going "live" on the Internet
● A supplier strike halting the flow ● Establish a relationship with two
of raw materials companies capable of providing
raw materials
● Financial statements unfairly ● Count the physical inventory on
reporting the value of inventory hand to make sure that it agrees
with the accounting records
● An employee accessing ● Create passwords barriers that
unauthorized information 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).
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.
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.

1-50
End of Chapter 1

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Editor's Notes