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Chapter

Managerial Accounting
and the Business
Environment

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Learning Objectives
After studying this chapter, you should be able to:
1. Describe what managers do and why they
need accounting information
2. Identify the major differences and similarities
between financial and managerial accounting.
3. Explain the basic characteristics of just-in-time
(JIT).
4. Describe the total quality management (TQM)
approach to continuous improvement.

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Learning Objectives
After studying this chapter, you should be able to:
5. Explain the basic ideas underlying process
reengineering.
6. Describe how the theory of constraints (TOC)
can be used to focus improvement efforts.
7. Discuss the impact of international competition
on businesses and on managerial accounting.
8. Describe the role the controller plays in a
decentralized organization.
9. Explain the importance of ethical standards in
an advanced market economy.
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Managerial Accounting and

Financial Accounting
Managerial accounting
provides information
for managers of an
organization who
direct and control
its operations.

Financial accounting
provides information
to stockholders,
creditors and others
who are outside
the organization.

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Work of Management
Planning

Directing and
Motivating

Controlling

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Planning and Control Cycle

Formulating Long-and
Short-Term Plans
(Planning)

Comparing Actual
to
Planned Performance
(Controlling)

Decision
Making

Begin

Implementing
the Plans
(Directing and
Motivating)

Measuring
Performance
(Controlling)
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Differences Between 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. Requirements

Must follow GAAP

and prescribed formats

Need not follow GAAP

or any prescribed format

1. Users
2. Time focus

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Expanding Role of Managerial

Accounting
Increasing complexity and
size of organizations
Regulatory
environment

World-wide
competition

Factors that
increase the need for
managerial accounting
information

Increased
emphasis
on quality

Rapid development and

implementation of technology
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The Changing Business

Environment

A more competitive
environment emphasizing:

Higher quality products

Lower prices and costs
Global competition
Meeting and anticipating
customer needs

Business environment
changes in the past
twenty years
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The Changing Business

Environment
New tools for
managers!

Just-In-Time
Total Quality
Management
Process Reengineering
Theory of Constraints
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Just-in-Time (JIT) Systems

Receive
customer
orders.

Complete products
just in time to
ship customers.

Schedule
production.
Receive materials
just in time for
production.

Complete parts
just in time for
assembly into products.

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Key Elements for a Successful

JIT System
Improved
Improved
plant
plant layout
layout
Reduced
Reduced
setup
setuptime
time

Zero
Zero production
production
defects
defects

Flexible
Flexible
workforce
workforce

JIT
JIT purchasing
purchasing
Fewer,
Fewer, but
but more
more ultra-reliable
ultra-reliable suppliers.
suppliers.
Frequent
Frequent JIT
JIT deliveries
deliveries in
in small
small lots.
lots.
Defect-free
Defect-free supplier
supplier deliveries.
deliveries.
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Benefits of a JIT System

Reduced
Reduced
inventory
inventory
costs
costs

Higher quality
products

Less
Less warehouse
warehouse
space
space needed
needed

Greater
Greater
customer
customer
satisfaction
satisfaction

More
More rapid
rapid
response
response to
to
customer
customer orders
orders

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Total Quality Management

Where are we?

Benchmarking

Where do we want to go?

Plan
Do we need
to change
the plan?

Act

is
Check

Do

How do
we start?

Continuous
Improvement

How are we doing?

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Process Reengineering
A business process
is diagrammed
in detail.

Every step in

The process is

the business
process must
be justified.

redesigned to include
only those steps that make
our product more valuable.
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Process Reengineering
A business process
is diagrammed
in detail.

Anticipated results:
Process is simplified.
Process is completed
in less time.
Costs are reduced.
Opportunities for
errors are reduced.

Every step in

The process is

the business
process must
be justified.

redesigned to include
only those steps that make
the product more valuable.
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Theory of Constraints
A sequential process of identifying and removing
constraints in a system.
Restrictions or barriers that impede
progress toward an objective

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International Competition
Meeting world-class competition demands a
world-class management accounting system.
Managers must make decisions to plan, direct,
and control a world-class organization.

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Organizational Structure
An
An organization
organization is
is aa group
group of
of people
people
united
united for
for aa common
common purpose.
purpose.
C o rp o r a te O r g a n iz a tio n C h a r t
B o a r d o f D ir e c t o r s
P r e s id e n t
P u r c h a s in g

P e rs 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

C h ie f F in a n c ia l
O f f ic e r

T re a su re r

C o n t r o lle r

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Decentralization
Decentralization
Decentralization is
is the
the delegation
delegation of
of decisiondecisionmaking
making authority
authority throughout
throughout an
an organization.
organization.

C o r p o r a t e O r g a n i z a t i o n C Dh a r t

on
i
t
za ng
i
l
a
i
r
k
t
en ma
c
De sion
ci
e
d
P u r c h a s in g

ec
en
de
tra
cis
ion lizat
ion
m
ak
ing

B o a r d o f D ir e c t o r s
P r e s id e n t
P e rs 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

C h ie f F in a n c ia l
O f f ic e r

T re a su re r

C o n t r o lle r

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Line and Staff Relationships

Line positions are
directly involved in
achievement of the
basic objectives of an
organization.
Example: Production

Staff positions support

and assist line
positions.
Example: Cost

accountants in the
manufacturing plant.

supervisors in a
manufacturing plant.

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The Controller
The
The chief
chief accountant
accountant in
in an
an organization
organization
with
with responsibility
responsibility for:
for:

Financial
Financial planning
planning and
and analysis.
analysis.

Cost
Cost control.
control.

Financial
Financial reporting.
reporting.

Accounting
Accounting information
information systems.
systems.

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Importance of Ethics
in Accounting
Ethical accounting practices build trust and

promote loyal, productive relationships with

users of accounting information.

Many companies and professional

organizations, such as the Institute

of Management Accountants (IMA),
have written codes of ethics which
serve as guides for employees.

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IMA Code of Ethics for

Management Accountants
Competence
Competence
Confidentiality
Confidentiality
Integrity
Integrity
Objectivity
Objectivity
Resolution
Resolutionof
ofEthical
EthicalConflict
Conflict
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IMA Code of Ethics for

Management Accountants
Follow applicable laws,
regulations and
standards.
Maintain
professional
competence.

Competence
Prepare complete and clear
reports after appropriate
analysis.
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IMA Code of Ethics for

Management Accountants
Do not disclose confidential
information unless legally
obligated to do so.
Do not use
confidential
information for
personal
advantage.

Confidentiality
Ensure that subordinates do
not disclose confidential
information.
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IMA Code of Ethics for

Management Accountants
Avoid conflicts of interest
and advise others of
potential conflicts.
Do not subvert
organizations
legitimate
objectives.

Integrity
Recognize and
communicate personal and
professional limitations.
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IMA Code of Ethics for

Management Accountants
Avoid activities that could
affect your ability to
perform duties.
Refrain from
activities
that could
discredit the
profession.

Refuse gifts
or favors
that might
influence
behavior.

Integrity
Communicate
unfavorable as well as
favorable information.

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IMA Code of Ethics for

Management Accountants
Communicate information
fairly and objectively.

Objectivity
Disclose all information
that might be useful to
management.
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IMA Code of Ethics for

Management Accountants
Resolution of Ethical Conflict
Follow established policies.
For unresolved ethical conflicts:
Discuss the conflict with immediate superior.
If immediate superior is the CEO, consider the board

of directors or the audit committee.

Except where legally prescribed, maintain

confidentiality.

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IMA Code of Ethics for

Management Accountants
Resolution of Ethical Conflict
Clarify issues in a confidential discussion with

an objective advisor.

Consult an attorney as to legal obligations.

The last resort is to resign.

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End of Chapter 1

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