© 2012 McGraw-Hill Education (Asia) Managerial Accounting and the Business Environment Chapter 1...

© 2012 McGraw-Hill Education (Asia)

Managerial Accounting and the Business Environment

Chapter 1

Garrison, Noreen, Brewer, Cheng & Yuen

McGraw-Hill Education (Asia) Slide 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


World Merchandise Trade Volume By Major Product Group, 1950-2009 (Volume Indices, 1950=100)

Source: World Trade Organization, International Trade Statistic 2010



Regional Shares In World Merchandise Exports, 2009



Distribution of Fortune Global 500 companies between 2005 and 2010

Fortune Global 500 2010 2009 2007 2005Australia 8 9 8 9China 46 37 24 16India 8 7 6 5Japan 71 68 67 81Malaysia 1 1 1 1Singapore 2 2 1 1South Korea 10 14 14 11Taiwan 8 6 6 2Thailand 1 1 1 1Asia Pacific 155 145 128 127US 139 140 162 176Canada 11 14 16 13Europe 184 188 183 178Others 11 13 11 6

500 500 500 500



Top 10 Companies of Fortune Global 500 (ranked by revenue)

2010 2009

RankCompany

Revenues Profits

RankCompany

Revenues Profits

($ millions) ($ millions) ($ 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


Internet Penetration Rate And Borderless Trading Potential

The Internet fuels globalizationby providing companies with greateraccess to geographically dispersed

customers, employees, and suppliers.

The Internet fuels globalizationby providing companies with greateraccess to geographically dispersed

customers, employees, and suppliers.

As of June 2010, more than 71% ofthe world's population was stillnot connected to the Internet.

As of June 2010, more than 71% ofthe world's population was stillnot connected to the Internet.



Strategy

A strategyis a “game plan”

that enables a companyto attract customers

by distinguishing itselffrom competitors.

The focal point of acompany’s strategy should

be its target customers.

The focal point of acompany’s strategy should

be its target customers.



Customer Value Propositions

Understand and respond toindividual customer needs.Understand and respond toindividual customer needs.

CustomerIntimacyStrategy

OperationalExcellenceStrategy

Deliver products and servicesfaster, more conveniently,

and at lower prices.

Deliver products and servicesfaster, more conveniently,

and at lower prices.

ProductLeadership

StrategyOffer higher quality products.Offer higher quality products.



Learning Objective 1

Understand the role of Understand the role of management accountants management accountants

in an organization.in an organization.



Corporate Organization Chart

Purcha sing Personnel V ice PresidentO pera tions

T rea surer C ontro ller

C hief F ina ncia lO fficer

President

B oa rd of D irectors

Organizational Structure

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

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



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.



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.

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.




Understand the basic Understand the basic concepts underlying concepts underlying Lean Production, the Lean Production, the

Theory of Constraints, Theory of Constraints, and Six Sigma.and Six Sigma.



Process Management

Business functions making up the value chainBusiness functions making up the value chain

Product Customer R&D Design Manufacturing Marketing Distribution Service

A businessprocess is a series of

steps that are followed in order tocarry out some task in

a business.



Process Management

There are three approaches toimproving business processes . . .

LeanProduction

Theory ofConstraints (TOC)

SixSigma



Traditional “Push” Manufacturing Company

Forecast Sales Order components

Produce goods in anticipation of Sales

Make Sales from Finished Goods

Inventory

Store Inventory

StoreInventory



Traditional “push”manufacturing

Traditional “Push” Manufacturing Company

Largeinventories

Finishedgoods

Rawmaterials

Work inprocess

Materials waitingto be processed.Materials waitingto be processed.

Completed products awaiting sale.

Completed products awaiting sale.

Partially completed products requiring more work before

they are ready for sale.

Partially completed products requiring more work before

they are ready for sale.Garrison, Noreen, Brewer, Cheng & Yuen


Lean Production

The lean thinkingmodel is a fivestep approach.

The lean thinkingmodel is a fivestep approach.

Identify valuein specific

products/services.

Identify valuein specific

products/services.

Identify thebusiness process

that delivers value.

Identify thebusiness process

that delivers value.

Organize workarrangements around

the flow of thebusiness process.

Organize workarrangements around

the flow of thebusiness process.

Create a pullsystem that respondsto customer orders.

Create a pullsystem that respondsto customer orders.

Continuously pursueperfection in the

business process.

Continuously pursueperfection in the

business process.Garrison, Noreen, Brewer, Cheng & Yuen


Customer places an order

Create Production Order

Generate component requirements

Production begins as parts arrive

Goods delivered when needed

Components are ordered

Lean ProductionThe five step process results in a “pull” manufacturing system

that reduces inventories, decreases defects, reduceswasted effort, and shortens customer response times.

The five step process results in a “pull” manufacturing systemthat reduces inventories, decreases defects, reduceswasted effort, and shortens customer response times.



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.



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 determinedThe constraint in a system is determinedby the step that has theby the step that has the smallest smallest capacity.

Theory of Constraints



4. Recognize that the weakest linkis no longer so.

4. Recognize that the weakest linkis no longer so.

1. Identify the weakest link.1. Identify the weakest link.

2. Allow the weakest link to set the tempo.

2. Allow the weakest link to set the tempo.

3. Focus on improving

the weakest link.

3. Focus on improving

the weakest link.

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

Theory of Constraints



Six Sigma

A process improvement method relying on customer feedback and fact-based data gathering and analysis

techniques to drive process improvement.

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 more

than 3.4 defects per million opportunities.

Refers to a process that generates no more

than 3.4 defects per million opportunities.

Sometimes associated

with the term zero defects.

Sometimes associated

with the term zero defects.



Six Sigma

Stage GoalsDefine ● Establish the scope and purpose of the project.

● Diagram the flow of the current process.● Establish the customer's requirements for the process.

Measure ● Gather baseline performance data related to the existing process.● Narrow the scope of the project to the most important problems.

Analyze ● Identify the root cause(s) of the problems identified in the Measure stage.

Improve ● Develop, evaluate, and implement solutions to the problems.

Control ● Ensure that problems remain fixed.● Seek to improve the new methods over time.

The Six Sigma DMAIC Framework




Understand the Understand the importance of upholding importance of upholding

ethical standards.ethical standards.



Code of Conduct for Management Accountants

The Institute of Management Accountants’ (IMA) Statement of Ethical Professional Practice

consists of two parts that offer guidelines for: Ethical behavior. Resolution for an ethical conflict.

The Institute of Management Accountants’ (IMA) Statement of Ethical Professional Practice

consists of two parts that offer guidelines for: Ethical behavior. Resolution for an ethical conflict.


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.


CompetenceCompetenceFollow applicablelaws, regulationsand standards.

Follow applicablelaws, regulationsand standards.

Maintain professional competence.

Maintain professional competence.

Provide accurate, clear, concise, and timely decision

support information.

Provide accurate, clear, concise, and timely decision

support information.

IMA Guidelines for Ethical Behavior

Recognize and communicate professional limitations that preclude responsible judgment.

Recognize and communicate professional limitations that preclude responsible judgment.



ConfidentialityConfidentiality

Do not disclose confidential Do not disclose confidential information unless legally information unless legally

obligated to do so. obligated to do so.

Do not disclose confidential Do not disclose confidential information unless legally information unless legally

obligated to do so. obligated to do so.

Ensure that subordinates do Ensure that subordinates do not disclose confidential not disclose confidential

information. information.

Ensure that subordinates do Ensure that subordinates do not disclose confidential not disclose confidential

information. information.

Do not use Do not use confidential confidential

information for information for unethical or illegalunethical or illegal

advantage. advantage.

Do not use Do not use confidential confidential

information for information for unethical or illegalunethical or illegal

advantage. advantage.




Mitigate conflicts of interest and advise others

of potential conflicts.

Mitigate conflicts of interest and advise others

of potential conflicts.

Abstain from activities that might discredit the

profession.

Abstain from activities that might discredit the

profession.

Refrain from conduct that

would prejudice carrying out

duties ethically.

Refrain from conduct that

would prejudice carrying out

duties ethically.

IntegrityIntegrity




Communicate information fairly and objectively.

Communicate information fairly and objectively.

Disclose all relevant information that could

influence a user’s understanding of reports and recommendations.

Disclose all relevant information that could

influence a user’s understanding of reports and recommendations.

CredibilityCredibility


Disclose delays or deficiencies in information timeliness, processing, or

internal controls.

Disclose delays or deficiencies in information timeliness, processing, or

internal controls.



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.



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.

IMA Guidelines for Resolution of an 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.



Except where legally prescribed, maintain confidentiality.

Clarify issues in a confidential discussion with an objective advisor.

Consult an attorney as to legal obligations.

IMA Guidelines for Resolution of an Ethical Conflict



Abandoning ethical standards in business would lead to a lower quality of life with less

desirable goods and services at higher prices.

Why Have Ethical Standards?

Without ethical standards in business, theeconomy, and all of us who depend on it for

jobs, goods, and services, would suffer.

Ethical standards in business are essential for asmooth functioning economy.

Ethical standards in business are essential for asmooth functioning economy.



Company Codes of Conduct

EmployeesEmployees CustomersCustomers SuppliersSuppliers

And to the communities inwhich the company operates.

And to the communities inwhich the company operates.

Broad-based statements of aBroad-based statements of acompany’s responsibilities to:company’s responsibilities to:Broad-based statements of aBroad-based statements of acompany’s responsibilities to:company’s responsibilities to:



Codes of Conduct on the International Level

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, andCross-border activities.

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, andCross-border activities.

The Code of Ethics for ProfessionalAccountants, issued by the International

Federation of Accountants (IFAC), governs the activities of professional accountants worldwide.

The Code of Ethics for ProfessionalAccountants, issued by the International

Federation of Accountants (IFAC), governs the activities of professional accountants worldwide.



Corporate Governance

The system byThe system bywhich a company is directedwhich a company is directed

and controlled.and controlled.

Board ofDirectorsBoard ofDirectors

TopManagement

TopManagement

StockholdersStockholders

To pursueobjectives of

Incentives andmonitoring for



The Sarbanes-Oxley Act of 2002The 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.

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.



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.

⑥ 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.”

(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.

⑥ 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.”



Enterprise Risk Management

A process usedA process usedby a company toby a company to

proactively identifyproactively identifyand manage risk.and manage risk.

Once a company identifies its risks, perhaps themost common risk management tactic is to reduce

risks by implementing specific controls.

Once a company identifies its risks, perhaps themost common risk management tactic is to reduce

risks by implementing specific controls.

Should I try to avoid the risk, share the risk, accept therisk, or reduce the risk?



Enterprise Risk ManagementExamples of Controls to

Examples of Business Risks Reduce Business Risks● Products harming customers ● Develop a formal and rigorous

new product testing program● Losing market share due to the ● Develop an approach for legally unforeseen actions of competitors gathering information about

competitors' plans and practices● Poor weather conditions shutting ● Develop contingency plans for down operations overcoming weather-related

disruptions● Website malfunction ● Thoroughly test the website

before going "live" on the Internet● A supplier strike halting the flow ● Establish a relationship with two of raw materials companies capable of providing

raw materials● Financial statements unfairly ● Count the physical inventory on reporting the value of inventory hand to make sure that it agrees

with the accounting records● An employee accessing ● Create password-protected barriers unauthorized information that prohibit employees from

obtaining information not needed to do their jobs



Corporate Social Responsibility

CSR extends beyond legal complianceto include voluntary actions that satisfy

stakeholder expectations.

CSR extends beyond legal complianceto include voluntary actions that satisfy

stakeholder expectations.

Corporate social responsibility (CSR) is a concept whereby organizations consider the needs of all stakeholders when making decisions.

Corporate social responsibility (CSR) is a concept whereby organizations consider the needs of all stakeholders when making decisions.

Customers Employees CommunitiesSuppliers StockholdersEnvironmental

& Human RightsAdvocates



Corporate Social ResponsibilityCompanies should provide customers with: Companies and their suppliers should provide● Safe, high quality products that are fairly employees with: priced ● Safe and humane working conditions● Competent, courteous, and rapid delivery ● Non-discriminatory treatments and the of products and services right to organize and file grievances● Full disclosure of product-related risks ● Fair compensation● Easy to use information systems for ● Opportunities for training, promotion, shopping and tracking orders and personal developmentCompanies should provide suppliers with: Companies should provide communities with:● Fair contract terms and prompt payments ● Payment of fair taxes ● Reasonable time to prepare orders ● Honest information about plans such as ● Hassle-free acceptance of timely and plant closings complete deliveries ● Resources that support charities, schools,● Cooperative rather than unilateral and civic activities actions ● Reasonable access to media sourcesCompanies should provide stockholders with: Companies should provide environmental ● Competent management and human rights advocates with:● Easy access to complete and accurate ● Greenhouse gas emissions data financial information ● Recycling and resource conservation data● Full disclosure of enterprise risks ● Child labor transparency● Honest answers to knowledgeable ● Full disclosure of suppliers located in questions developing countries

Examples of Corporate Social Responsibility



Sustainability Reporting


Global Reporting Initiative (GRI) •promotes a systematic and standardized approach

o to corporate social responsibility and embed it in corporate culture;o to stimulate demand for sustainability information;

thus benefitting both reporting organizations and report users.

International Federation of Accountants (IFAC) Sustainability Framework•Organizations should

o 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; andminimize environmental damages, and provide a safe working and living environment for the communities.


Sustainability Reporting: GRI Registered Companies


Examples of GRI Registered CompaniesAsia: 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


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


End of Chapter 1


© 2012 McGraw-Hill Education (Asia) Managerial Accounting and the Business Environment Chapter 1...

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