Managerial Accounting and the Business Environment

1. Managerial Accounting and the Business Environment Chapter 1 Garrison, Noreen, Brewer, Cheng & Yuen

2. 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 Garrison, Noreen, Brewer, Cheng & Yuen

3. World Merchandise Trade Volume By Major Product Group, 1950-2009 (Volume Indices, 1950=100) Source: World Trade Organization, International Trade Statistic 2010 Garrison, Noreen, Brewer, Cheng & Yuen

4. Regional Shares In World Merchandise Exports, 2009 Garrison, Noreen, Brewer, Cheng & Yuen

5. Distribution of Fortune Global 500 companies between 2005 and 2010 Garrison, Noreen, Brewer, Cheng & Yuen

6. Top 10 Companies of Fortune Global 500 (ranked by revenue) Garrison, Noreen, Brewer, Cheng & Yuen

7. 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. Garrison, Noreen, Brewer, Cheng & Yuen

8. Strategy A strategyis a “game plan”that enables a companyto attract customersby distinguishing itselffrom competitors. The focal point of acompany’s strategy shouldbe its target customers. Garrison, Noreen, Brewer, Cheng & Yuen

9. CustomerIntimacyStrategy Understand and respond toindividual customer needs. OperationalExcellenceStrategy Deliver products and servicesfaster, more conveniently,and at lower prices. ProductLeadershipStrategy Offer higher quality products. Customer Value Propositions Garrison, Noreen, Brewer, Cheng & Yuen

10. Learning Objective 1 Understand the role of management accountants in an organization. Garrison, Noreen, Brewer, Cheng & Yuen

11. Organizational Structure Decentralization is the delegation of decision-making authority throughout an organization. Garrison, Noreen, Brewer, Cheng & Yuen

12. Line and Staff Relationships Linepositions 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. Garrison, Noreen, Brewer, Cheng & Yuen

13. 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. Garrison, Noreen, Brewer, Cheng & Yuen

14. Learning Objective 2 Understand the basic concepts underlying Lean Production, the Theory of Constraints, and Six Sigma. Garrison, Noreen, Brewer, Cheng & Yuen

15. Business functions making up the value chain Product Customer R&D Design Manufacturing Marketing Distribution Service Process Management A businessprocess is a series ofsteps that are followed in order tocarry out some task ina business. Garrison, Noreen, Brewer, Cheng & Yuen

16. Process Management There are three approaches toimproving business processes . . . • Theory ofConstraints (TOC) • LeanProduction • SixSigma Garrison, Noreen, Brewer, Cheng & Yuen

17. Forecast Sales Order components Store Inventory Make Sales from Finished Goods Inventory Produce goods in anticipation of Sales StoreInventory Traditional “Push” Manufacturing Company Garrison, Noreen, Brewer, Cheng & Yuen

18. Materials waitingto be processed. Completed products awaiting sale. Partially completed products requiring more work before they are ready for sale. Traditional “Push” Manufacturing Company Traditional “push”manufacturing Largeinventories Rawmaterials Work inprocess Finishedgoods Garrison, Noreen, Brewer, Cheng & Yuen

19. 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.  Continuously pursueperfection in thebusiness process.  Create a pullsystem that respondsto customer orders. Garrison, Noreen, Brewer, Cheng & Yuen

20. Customer places an order Create Production Order Generate component requirements Goods delivered when needed Production begins as parts arrive Components are ordered Lean Production The five step process results in a “pull” manufacturing systemthat reduces inventories, decreases defects, reduceswasted effort, and shortens customer response times. Garrison, Noreen, Brewer, Cheng & Yuen

21. 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. Garrison, Noreen, Brewer, Cheng & Yuen

22. 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. Theory of Constraints The constraint in a system is determinedby the step that has thesmallest capacity. Garrison, Noreen, Brewer, Cheng & Yuen

23. 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. Garrison, Noreen, Brewer, Cheng & Yuen

24. 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. Garrison, Noreen, Brewer, Cheng & Yuen

25. Six Sigma Garrison, Noreen, Brewer, Cheng & Yuen

26. Learning Objective 3 Understand the importance of upholding ethical standards. Garrison, Noreen, Brewer, Cheng & Yuen

27. 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. Garrison, Noreen, Brewer, Cheng & Yuen

28. 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. Garrison, Noreen, Brewer, Cheng & Yuen

29. IMA Guidelines for Ethical Behavior Do not disclose confidential information unless legally obligated to do so. Do not use confidential information for unethical or illegaladvantage. Confidentiality Ensure that subordinates do not disclose confidential information. Garrison, Noreen, Brewer, Cheng & Yuen

30. 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. Garrison, Noreen, Brewer, Cheng & Yuen

31. 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 user’s understanding of reports and recommendations. Garrison, Noreen, Brewer, Cheng & Yuen

32. IMA Guidelines for Resolution of an Ethical Conflict Follow employer’s 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 supervisor’s knowledge, assuming the supervisor is not involved. Garrison, Noreen, Brewer, Cheng & Yuen

33. IMA Guidelines for Resolution of an Ethical Conflict Follow employer’s 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. Garrison, Noreen, Brewer, Cheng & Yuen

34. Without ethical standards in business, theeconomy, and all of us who depend on it forjobs, goods, and services, would suffer. Abandoning ethical standards in business would lead to a lower quality of life with lessdesirable goods and services at higher prices. Why Have Ethical Standards? Ethical standards in business are essential for asmooth functioning economy. Garrison, Noreen, Brewer, Cheng & Yuen

35. Employees Customers Suppliers And to the communities inwhich the company operates. Company Codes of Conduct Broad-based statements of acompany’s responsibilities to: Garrison, Noreen, Brewer, Cheng & Yuen

36. 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 IFAC’s code deals with the accountant’s ethical responsibilities in: Taxes, Independence, Fees and commissions, Advertising and solicitation, Handling of monies, and Cross-border activities. Garrison, Noreen, Brewer, Cheng & Yuen

37. Board ofDirectors Incentives andmonitoring for TopManagement To pursueobjectives of Stockholders Corporate Governance The system bywhich a company is directedand controlled. Garrison, Noreen, Brewer, Cheng & Yuen

38. 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 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. Garrison, Noreen, Brewer, Cheng & Yuen

39. The Sarbanes-Oxley Act of 2002 • (continued) •  The Act requires a public company’s independent auditor • to issue an opinion on the effectiveness of the company’s • internal control over financial reporting to accompany • management’s assessment, and both are included in the • company’s 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 a“whistle blower.”  Garrison, Noreen, Brewer, Cheng & Yuen

40. Should I try to avoid the risk, share the risk, accept therisk, or reduce the risk? 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. Garrison, Noreen, Brewer, Cheng & Yuen

41. Enterprise Risk Management Garrison, Noreen, Brewer, Cheng & Yuen

42. Corporate Social Responsibility Corporate social responsibility (CSR) is a concept whereby organizations consider the needs of all stakeholders when making decisions. Customers Employees Suppliers Communities Stockholders Environmental & Human RightsAdvocates CSR extends beyond legal complianceto include voluntary actions that satisfy stakeholder expectations. Garrison, Noreen, Brewer, Cheng & Yuen

43. Corporate Social Responsibility Garrison, Noreen, Brewer, Cheng & Yuen

44. 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. Garrison, Noreen, Brewer, Cheng & Yuen

45. 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: AT&T, Dell, ExxonMobil, Intel, Johnson & Johnson Garrison, Noreen, Brewer, Cheng & Yuen

46. 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.: Garrison, Noreen, Brewer, Cheng & Yuen

47. End of Chapter 1 Garrison, Noreen, Brewer, Cheng & Yuen