11th Edition

Chapter 1

McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.

 Managerial Accounting and
the Business Environment

Chapter One

McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.

 Work of Management

Planning
Directing and
Motivating

Controlling

McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.

 Planning

Identify
alternatives.

Select alternative that does

the best job of furthering
organizations objectives.

Develop budgets to guide

progress toward the
selected alternative.
McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.
 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 2006, The McGraw-Hill Companies, Inc.

 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 2006, The McGraw-Hill Companies, Inc.

 Exh.
1-1
Planning and Control Cycle

Formulating long-
Begin
and short-term plans
(Planning)

Comparing actual
Implementing
to planned Decision plans (Directing
performance Making and Motivating)
(Controlling)

Measuring
performance
(Controlling)

McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.

 Comparison of Financial and Exh.
1-2

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

McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.

 Organizational Structure

Decentralization is the delegation of decision-

making authority throughout an organization.

Corporate Organization Chart

Board of Directors

President

Purchasing Personnel Vice President Chief Financial

Operations Officer

Treasurer Controller

McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.

 Line and Staff Relationships

Line positions are directly Staff positions support

related to achievement of
the basic objectives of an
organization.
Example: Production
supervisors in a
manufacturing plant.
and assist line positions.
Example: Cost
accountants in the
manufacturing plant.

McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.

 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 2006, The McGraw-Hill Companies, Inc.

 The Changing Business Environment

Just-in-time production
Total quality management
Process reengineering
Business environment
Theory of constraints changes in the past
International competition twenty years
E-commerce
McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.
 Just-in-Time (JIT) Systems

Receive
customer Complete products
orders. just in time to
ship customers.

Schedule
production.

Receive materials Complete parts

just in time for just in time for
production. assembly into products.

McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.

 JIT Consequences

Improved Zero production

plant layout defects

Reduced Flexible
setup time workforce

JIT purchasing
Fewer, but more ultrareliable suppliers.
Frequent JIT deliveries in small lots.
Defect-free supplier deliveries.
McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.
 Benefits of a JIT System

Reduced Freed-up funds

inventory
costs
Greater
customer
Higher quality satisfaction
products

More rapid
response to
Increased customer orders
throughput

McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.

 Total Quality Management (TQM)

TQM improves productivity by encouraging the use of fact

and analysis for decision making and if properly implemented,
avoids counter-productive organizational infighting.

Continuous
Improvement
Systematic
problem solving
using tools such is
as benchmarking

McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.

 Process Reengineering

Anticipated results:
A business process Process is simplified.
is diagrammed Process is completed
in detail. in less time.
Costs are reduced.
Opportunities for
errors are reduced.

Every step in The process is redesigned

the business to eliminate all
process must non-value-added activities
be justified.

McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.

 Process Reengineering versus TQM

Process Reengineering Total Quality Management

Radically overhauls Tweaks existing
existing processes. processes to realize
Likely to be imposed gradual improvements.
from above and to use Uses a team approach
outside consultants. involving people who
work directly in the
process.

McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.

 Theory of Constraints

A constraint (also called a bottleneck) is anything that

prevents you from getting more of what you want.

The constraint in a system is determined

by the step that has the smallest capacity.

McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.

 Theory of Constraints

Only actions 2. Allow the

that strengthen weakest link to
the weakest link set the tempo.
in the chain
improve the
process.
3. Focus on
1. Identify the improving
weakest link. the weakest
link.

4. Recognize that
the weakest link
is no longer so.
McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.
 International Competition

Increasing sophistication
in international markets.

Fewer tariffs, Improvements

Competition has
quotas, and in global
other barriers become worldwide transportation
to free trade. in most industries. systems.

An excellent management accounting system is needed

to succeed in todays competitive global marketplace.
McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.
 E-Commerce

In recent years, many dot.com

businesses failed that might have
benefited from the application of
managerial accounting tools:
Cost concepts (Chapter 2)
Cost estimation (Chapter 5)
Cost-volume-profit (Chapter 6)
Activity-based costing (Chapter 8)
Budgeting (Chapter 9)
Decision-making (Chapter 13)
Capital budgeting (Chapter 14)

McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.

 Code of Conduct for
Management Accountants

The Institute of Management Accountants (IMA)

Standards of Ethical Conduct for Practitioners
of Management Accounting and Financial
Management have two major parts offering
guidelines for:
Ethical behavior.
Resolution for an ethical conflict.

McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.

 IMA Guidelines for Ethical Behavior

Follow applicable laws,

regulations and
standards.

Maintain
professional Competence
competence.

Prepare complete and clear

reports after appropriate
analysis.
McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.
 IMA Guidelines for Ethical Behavior

Do not disclose confidential

information unless legally
obligated to do so.

Do not use
confidential
information for Confidentiality
personal
advantage.

Ensure that subordinates do

not disclose confidential
information.
McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.
 IMA Guidelines for Ethical Behavior

Avoid conflicts of interest

and advise others of
potential conflicts.

Do not subvert
organizations
legitimate Integrity
objectives.

Recognize and
communicate personal and
professional limitations.
McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.
 IMA Guidelines for Ethical Behavior

Avoid activities that could

affect your ability to
perform duties.

Refrain from Refuse gifts

activities or favors
that could Integrity that might
discredit the influence
profession. behavior.

Communicate
unfavorable as well as
favorable information.
McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.
 IMA Guidelines for Ethical Behavior

Communicate information
fairly and objectively.

Objectivity

Disclose all information

that might be useful to
management.

McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.

 IMA Guidelines for Resolution
of an Ethical Conflict
Follow established policies.
For unresolved ethical conflicts:
Discuss the conflict with immediate superior
or next highest uninvolved manager.
Make reference to the Sarbanes-Oxley Act
passed by Congress in 2002 in part to give
legal protection to those reporting
corporate misconduct.
If immediate superior is the CEO,
consider the board of directors or
the audit committee.

McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.

 IMA Guidelines for Resolution
of an Ethical Conflict
Follow 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.
The last resort is to resign.

McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.

 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
desireable goods and services at higher prices.
McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.
 Codes of Conduct on
the International Level

The Guidelines on 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 IFACs code deals with
the accountants ethical responsibilities in:
Taxes
Fees and commissions
Advertising and solicitation
Handling of monies
Cross-border activities.
McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.
 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 IMAs website at
www.imanet.org or by calling 1-800-638-4427.
McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.
 End of Chapter 1

McGraw-Hill/Irwin Copyright 2006, The McGraw-Hill Companies, Inc.