Managerial Accounting and the Business Environment

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Managerial Accounting and the Business Environment

• Chapter 1

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Management Accounting and Cost Accounting

• Management Accounting
• relates to the provision of appropriate
  information, including cost information for
  decision-making, planning, control, and
  performance evaluation.
• Cost accounting
• defines costs and valuates inventories to help
  managers to run businesses

• Management Accounting and Cost Accounting
• are intertwined and
• the terms are sometimes interchangeable
• their functions are to help companies make
  better decisions

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World Merchandise Trade Volume By Major Product
Group, 1950-2009 (Volume Indices, 1950100)
Source World Trade Organization, International
Trade Statistic 2010
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Regional Shares In World Merchandise Exports, 2009
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Distribution of Fortune Global 500 companies
between 2005 and 2010
Fortune Global 500 2010 2009 2007 2005
Australia 8 9 8 9
China 46 37 24 16
India 8 7 6 5
Japan 71 68 67 81
Malaysia 1 1 1 1
Singapore 2 2 1 1
South Korea 10 14 14 11
Taiwan 8 6 6 2
Thailand 1 1 1 1
Asia Pacific 155 145 128 127
US 139 140 162 176
Canada 11 14 16 13
Europe 184 188 183 178
Others 11 13 11 6
500 500 500 500
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Top 10 Companies of Fortune Global 500 (ranked by
revenue)
    2010       2009  
Rank Company Revenues Profits Rank Company Revenues Profits
Rank Company ( millions) ( millions) Rank Company ( millions) ( millions)
1 Wal-Mart Stores 408,214 14,335 1 Royal Dutch Shell 458,361 26,277
2 Royal Dutch Shell 285,129 12,518 2 Exxon Mobil 442,851 45,220
3 Exxon Mobil 284,650 19,280 3 Wal-Mart Stores 405,607 13,400
4 BP 246,138 16,578 4 BP 367,053 21,157
5 Toyota Motor 204,106 2,256 5 Chevron 263,159 23,931
6 Japan Post Holdings 202,196 4,849 6 Total 234,674 15,500
7 Sinopec 187,518 5,756 7 ConocoPhillips 230,764 -16,998
8 State Grid 184,496 -343 8 ING Group 226,577 -1,067
9 AXA 175,257 5,012 9 Sinopec 207,814 1,961
10 China National Petroleum 165,496 10,272 10 Toyota Motor 204,352 -4,349
source http//money.cnn.com/magazines/fortune/global500/2010/full_list/index.html
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Internet Penetration Rate And Borderless Trading
Potential
The Internet fuels globalizationby providing
companies with greateraccess to geographically
dispersedcustomers, employees, and suppliers.
As of June 2010, more than 71 ofthe world's
population was stillnot connected to
the Internet.
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Strategy
A strategyis a game planthat enables a
companyto attract customersby distinguishing
itselffrom competitors.
The focal point of acompanys strategy shouldbe
its target customers.
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Customer Value Propositions
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Learning Objective 1
Understand the role of management accountants in
an organization.
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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 2
Understand the basic concepts underlying Lean
Production, the Theory of Constraints, and Six
Sigma.
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Process Management
A businessprocess is a series ofsteps that are
followed in order tocarry out some task ina
business.
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Process Management
There are three approaches toimproving business
processes . . .

• Theory ofConstraints (TOC)

• LeanProduction

• SixSigma

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Traditional Push Manufacturing Company
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Traditional Push Manufacturing Company
Traditional pushmanufacturing
Largeinventories
Finishedgoods
Rawmaterials
Work inprocess
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Lean Production
? Identify valuein specificproducts/services.
? Identify thebusiness processthat delivers
value.
The lean thinkingmodel is a fivestep approach.
? Organize workarrangements around the flow of
thebusiness process.
? Create a pullsystem that respondsto customer
orders.
? Continuously pursueperfection in thebusiness
process.
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Lean Production
The five step process results in a pull
manufacturing systemthat reduces inventories,
decreases defects, reduceswasted effort, and
shortens customer response times.
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Lean Production
Lean thinking can 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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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 determinedby the
step that has the smallest capacity.
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Theory of Constraints
2. Allow the weakest link to set the tempo.
Only actions that strengthen the weakest link in
the chain improve the process.
3. Focus on improving the weakest link.
1. Identify the weakest link.
4. Recognize that the weakest linkis no longer
so.
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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 morethan
3.4 defects per million opportunities.
Sometimes associatedwith the term zero defects.
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Six Sigma
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Learning Objective 3
Understand the importance of upholding ethical
standards.
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Code of Conduct for Management Accountants
All Professional Management Accountants Bodies
issue their own Code of Conduct but they all
share similar fundamental principles and
conceptual approaches as the one issued by the
Institute of Management Accountants.
The Institute of Management Accountants (IMA)
Statement of Ethical Professional
Practiceconsists of two parts that offer
guidelines for ? Ethical behavior. ?
Resolution for an ethical conflict.
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IMA Guidelines for Ethical Behavior
Recognize and communicate professional
limitations that preclude responsible judgment.
Follow applicablelaws, regulationsand
standards.
Maintain professional competence.
Competence
Provide accurate, clear, concise, and timely
decision support information.
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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.
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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.
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IMA Guidelines for Ethical Behavior
Communicate information fairly and objectively.
Disclose delays or deficiencies in information
timeliness, processing, or internal controls.
Credibility
Disclose all relevant information that could
influence a users understanding of reports and
recommendations.
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IMA Guidelines for Resolution of an Ethical
Conflict

• Follow employers established policies.
• For an unresolved ethical conflict
• 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
  supervisors knowledge, assuming the supervisor
  is not involved.

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IMA Guidelines for Resolution of an Ethical
Conflict

• Follow employers established policies.
• For an unresolved ethical conflict
• Except where legally prescribed, maintain
  confidentiality.
• Clarify issues in a confidential discussion with
  an objective advisor.
• Consult an attorney as to legal obligations.

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Why Have Ethical Standards?
Ethical standards in business are essential for
asmooth functioning economy.
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Company Codes of Conduct
Broad-based statements of acompanys
responsibilities to
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Codes of Conduct on the International Level
The Code of Ethics for ProfessionalAccountants,
issued by the InternationalFederation of
Accountants (IFAC), governs the activities of
professional accountants worldwide.
In addition to integrity and objectivity,
resolution of ethical conflicts, competence, and
confidentiality, the IFACs code deals with the
accountants ethical responsibilities
in Taxes, Independence, Fees and
commissions, Advertising and solicitation, Handlin
g of monies, and Cross-border activities.
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Corporate Governance
The system bywhich a company is directedand
controlled.
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The Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 was intended to
protect theinterests of those who invest in
publicly traded companies byimproving the
reliability and accuracy of corporate
financialreports and disclosures. Six key
aspects of the legislation include  ? The Act
requires both the CEO and CFO to certify in
writing that their companys 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

• (continued)
• ? The Act requires a public companys
  independent auditor
• to issue an opinion on the effectiveness of the
  companys
• internal control over financial reporting to
  accompany
• managements assessment, and both are included
  in the
• companys annual report.
• The Act establishes severe penalties for certain
  behaviors,such as
• Up to 20 years in prison for altering or
  destroying anydocuments that may eventually be
  used in an officialproceeding.
• Up to 10 years in prison for retaliating against
  awhistle blower. 

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Enterprise Risk Management
A process usedby a company toproactively
identifyand manage risk.
Once a company identifies its risks, perhaps
themost common risk management tactic is to
reduce risks by implementing specific controls.
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Enterprise Risk Management
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Corporate Social Responsibility
Corporate social responsibility (CSR) is a
concept whereby organizations consider the
needs of all stakeholders when making decisions.
Customers
Employees
Communities
Suppliers
Stockholders
Environmental Human RightsAdvocates
CSR extends beyond legal complianceto include
voluntary actions that satisfy stakeholder
expectations.
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Corporate Social Responsibility
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Sustainability Reporting

• Global Reporting Initiative (GRI)
• promotes a systematic and standardized approach
• to corporate social responsibility and embed it
  in corporate culture
• to stimulate demand for sustainability
  information
• thus benefitting both reporting organizations and
  report users.
• International Federation of Accountants (IFAC)
  Sustainability Framework
• Organizations should
• achieve a Triple Bottom-Line
• financial, social, and environmental goals
• (or 3Ps Profit, People, and Planet)
• promote a sound corporate governance and ethical
  responsibility to ensure financial success
  through ethical operations and transactions
• promote cultural diversity and equality
• provide opportunities for social and economic
  development of the communities and
• minimize environmental damages, and provide a
  safe working and living environment for the
  communities.

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Sustainability Reporting GRI Registered
Companies
Examples of GRI Registered Companies Asia Air
China, AsusTek, Canon, Reliance Industries,
Samsung Securities, SingTel Europe Air
France-KLM, BP, Daimler, Nestle, Nokia United
States ATT, Dell, ExxonMobil, Intel, Johnson
Johnson
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Professional Qualification of Management
Accountants

• Traditional accounting qualifications e.g.
  Chartered Accountants (ACA), Certified Public
  Accountants (CPA) and Chartered Certified
  Accountants (ACCA)
• Management accountants qualifications, e.g.

Institution Abbrev Country Qualification
The Institute of Management Accountants IMA US CMA
Certified Management Accountants of Canada (previously known as The Society of Management Accountants of Canada) CMA Canada Canada CMA
The Chartered Institute of Management Accountants CIMA UK FCMA , ACMA
The Institute of Certified Management Accountants of Australia ICMA Australia CMA
- CMA Philippines Philippines CMA
- CMA Indonesia Indonesia CMA
- CMA Sri Lanka Sri Lanka CMA
- CMA India India CMA
The Institute of Cost and Works Accountants of India ICWAI India FICWA, AICWA
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End of Chapter 1