Chapter 1

Managerial Accounting & the Business Environment

Learning Objectives
Contrast Financial and Managerial Acctg. Understand the 3 areas of Managerial Accounting: P, M/D, C Define Line vs. Staff Understand pros/cons of JIT Define TQM: PDCA, benchmarking Discuss Theory of Constraints Ethics for Management Accountants: CMA
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Managerial Accounting and Financial Accounting

Managerial accounting provides information for managers inside 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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Differences Between Financial and Managerial Accounting

Financial Accounting
1. Users 2. Time focus 3. Verifiability versus relevance 4. Precision versus timeliness 5. Subject 6. Requirements External persons who make financial decisions Historical perspective Emphasis on verifiability Emphasis on precision Primary focus is on the whole organization Must follow GAAP and prescribed formats

Managerial Accounting
Managers who plan for and control an organization Future emphasis Emphasis on relevance for planning and control Emphasis on timeliness Focuses on segments of an organization Need not follow GAAP or any prescribed format

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Organizational Structure
Decentralization is the delegation of decision-making authority throughout an organization.

Corporate Organization Chart

Board of Directors President Purchasing Personnel Vice President Operations Chief Financial Officer Controller

Treasurer
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Line and Staff Relationships

Line position are directly related to achievement of the basic objectives of an organization.

Staff positions support and assist line positions.

Example: Production supervisors in a manufacturing plant. Sales/Store managers,

Example: Cost accountants in the manufacturing plant. Purch. Managers, Human Resources, IT Dept.

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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.

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Complete parts just in time for assembly into products.

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JIT Consequences
Improved plant layout Reduced setup time Zero production defects Flexible workforce

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

Reduced inventory costs Freed-up funds

Higher quality products

Greater customer satisfaction More rapid response to customer orders

Increased throughput
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The Dark Side of JIT

Dependent on single/few source of supply What if a disruption in delivery?

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Total Quality Management: PDCA

or Demings Wheel Benchmarking

Where are we?

Where do we want to go? Plan

Do we need to change the plan?

Act

is

Do

How do we start?

Check

Continuous Improvement
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How are we doing?

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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. The process is redesigned to include only those steps that make our product more valuable.
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Every step in the business process must be justified.

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The Dark Side of Process Reengineering

Can erode employee trust Layoffs

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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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Who came up with this idea, anyway?

The Goal, by Goldratt & Cox The ISSUE is THROUGHPUT, or contribution margin per unit (CMUmore later on this) The idea of LABOR as a FIXED COST.

Only actions that strengthen the weakest link in the chain improve the process.

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TOC: It comes down to 3 choices:

Increase Throughput
Reduce Investments (inventories) Decrease Operating Expenses (labor, new machinery, overhead, administrative costs)

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Importance of Ethics in Accounting

Build trust 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. Code of Conduct for Management Accountants
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IMA Code of Ethics for Management Accountants

Four broad areas of responsibility: C: Maintain a high level of
professional competence

C: treat sensitive matters

with confidentiality

I: Maintain personal integrity O: Be objective in all

disclosures

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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

former Halliburton CEO

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.
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Integrity
Communicate unfavorable as well as favorable information.

Refuse gifts or favors that might influence behavior.

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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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Exh. 1-1

Planning and Control Cycle

Formulating longand short-term plans (Planning) Comparing actual to planned performance (Controlling)

Begin

Decision Making

Implementing plans (Directing and Motivating)

Measuring performance (Controlling)

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The Changing Business Environment

Growth of the internet Just-in-Time production Total Quality Management International competition

Business environment changes in the past twenty years

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E-Commerce
During 2001, many dot.com businesses failed that might have benefited from the application of managerial accounting tools: cost concepts (Chap. 2) cost estimation (Chap. 5) cost-volume-profit (Chap. 6) activity-based costing (Chap. 8) budgeting (Chap. 9) decision-making (Chap. 13) capital budgeting (Chap. 14)
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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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Theory of Constraints
Only actions that strengthen the weakest link in the chain improve the process.

2. Identify process constraints

1. Measure process capacity

3. Use bottlenecks effectively.

4. Coordinate processes
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Theory of Constraints
Process Capacity
A measure of a processs ability to transform resources into value products and services. System Constraint The point in a system that limits the overall output of the system. Often called the bottleneck.
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