MANAGEMENT

ACCOUNTING
Managerial Accounting and the Business Environment
The Differences Between
Managerial and Financial
Accounting
 Financial and Managerial
Accounting
Financial Accounting Managerial Accounting

Users of Accounting Information

Shareholders Management
Creditors
Government
General Public
 Comparison of Financial and 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
Management Accounting 1
Mandatory for Not 4
external reports Mandatory
 The Work of Management and the Need
for Managerial Accounting Information

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 Strategy
A strategy
is a “game plan”
that enables a company
to attract customers
by distinguishing itself
from competitors.

The focal point of a

company’s strategy should
Management Accounting 1 be its target customers. 6
 Customer Value Propositions
Customer
Understand and respond to
Intimacy
individual customer needs.
Strategy

Operational Deliver products and services

Excellence faster, more conveniently,
Strategy and at lower prices.

Product
Leadership Offer higher quality products.
Strategy
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 Learning Objective 1

Understand the role of

management accountants in
an organization.
 Work of Management

Planning
Directing and
Motivating

Controlling

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 Planning

• Establishing a basic strategy

• Selecting a course of action
• Specifying how the action will be implemented

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 Planning
Identify
alternatives.

Select alternative that does

the best job of furthering
organization’s objectives.

Develop budgets to guide

progress toward the
Management Accounting 1
selected alternative. 17
 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.

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 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.

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 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)
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 Organizational Structure

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

CorporateOrganizationChart
BoardofDirectors

President

Purchasing Personnel ViceP resident ChiefFinancial

Operations Officer

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Treasurer Controller 22
 Line and Staff Relationships

Line positions are directly

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

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 Process Management
A business
process is a series of
steps that are followed in order to
carry out some task in
a business.

Product Customer
R&D Design Manufacturing Marketing Distribution Service

Business functions making up the value chain

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 Process Management
There are three approaches to
improving business processes . . .
Theory of
Constraints (TOC)
Lean Six
Production Sigma

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 Lean Production

Traditional Push System Pull System or Lean

Production
• Material/Work is pushed into downstream • Material/Work is pulled to a workstation just as
workstations regardless of whether it is needed
resources are available.
• The work is pushed through the system in
order to produce as much as possible and
to keep everyone busy – even if products
cannot be immediately sold.
• It inevitably results in large inventories of 29
raw materials, work in process and
finished goods. Management Accounting 1
Traditional “Push” Manufacturing Company

Forecast Sales Order components Store Inventory

Make Sales from

Finished Goods Store Produce goods in
Inventory Inventory anticipation of Sales
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Traditional “Push” Manufacturing Company
Traditional “push” Large
manufacturing inventories

Raw Work in Finished

materials process goods

Materials waiting Completed products

to be processed. awaiting sale.

Partially completed products

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requiring more work before
they are ready for sale.
 Lean Thinking Model

• A five step management approach that organizes resources such as people

and machines around the flow of business processes and that pulls units
through these processes in response to customers orders.

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 Lean Production
The five step process results in a “pull” manufacturing system
that reduces inventories, decreases defects, reduces
wasted effort, and shortens customer response times.

Customer places Create Production Generate component

an order Order requirements

Goods Management
delivered Accounting 1
Production begins Components 33
when needed as parts arrive are ordered
 Lean Production
 Identify value  Identify the
in specific business process
products/services. that delivers value.

The lean thinking  Organize work

arrangements around
model is a five
the flow of the
step approach. business process.

 Continuously pursue  Create a pull

perfection
Management Accounting 1
in the system that responds 34

business process. to customer orders.

 Cellular Manufacturing

• Organizing work arrangements around the flow of the business is often accomplished by
creating what is known as a manufacturing cell.
• Cellular Manufacturing
• Layout in which machines are grouped into a cell that can process items that have
similar processing requirements. A product layout is visible inside each cell.

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 Cellular Manufacturing Layout
Heat Gear
-1111 Lathe Mill Drill -1111
treat cut

Heat
222222222 Mill Drill Grind - 2222

Assembly
treat

Heat
3333333333 Lathe Mill Grind - 3333
treat

44444444444444 Mill Drill Gear - 4444

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cut
 Group Technology

• The grouping into part families of

items with similar design or
manufacturing characteristics. Each
cell is assigned a family for
production. This limits the production
variability inside cells, hence allowing
for a product layout.

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Similar manufacturing characters
 What is Just-in-Time?

• Management philosophy of continuous and forced problem solving

• Supplies and components are ‘pulled’ through system to arrive where they
are needed when they are needed.

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 What Does Just-in-Time Do?

• Attacks waste
• Anything not adding value to the product
• From the customer’s perspective
• Exposes problems and bottlenecks caused by variability
• Deviation from optimum
• Achieves streamlined production
• By reducing inventory

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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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 A Supply Chain for Beer

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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 determined

by the step that has the smallest capacity.

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 Bottleneck Operation

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 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
Management Accounting 1 the weakest link 44

is no longer so.
 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 Sometimes

generates no more associated
than 3.4 defects per million with the term zero
opportunities. defects.

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 Six Sigma
The Six Sigma DMAIC Framework
Stage Goals
Define ● 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
Management Accounting 1 that problems remain fixed. 46

● Seek to improve the new methods over time.

 Technology in Business
• Enterprise system is designed to
overcome the problems of having
separate software programs used by
different departments of an organization
• E-commerce refers to like data duplication, data inconsistencies
and lengthy customer response times and
business that is conducted high costs. An Enterprise System
integrates data across an organization
using the internet. into a single software system that enables
all employees to have simultaneous
access to a common set of data.
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 Learning Objective 3

Understand the
importance of upholding
ethical standards.
Code of Conduct for Management Accountants
The Institute of Management Accountant’s (IMA)
Statement of Ethical Professional Practice
consists of two parts that offer guidelines for:
 Ethical behavior.
 Resolution for an ethical conflict.

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Code of Conduct for Management Accountants

A management accountant has ethical responsibilities in four broad areas:

1. To maintain a high level of professional competence.
2. To treat sensitive matters with confidentiality.
3. To maintain personal integrity.
4. To disclose information in a credible fashion.
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 IMA Guidelines for Ethical Behavior
Recognize and
communicate professional
limitations that preclude
responsible judgment.

Maintain Follow applicable

professional Competence laws, regulations
competence. and standards.

Provide accurate, clear,

concise, and timely decision
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support information.
 IMA Guidelines for Ethical Behavior
Do not disclose confidential
information unless legally
obligated to do so.

Do not use
confidential
information for Confidentiality
unethical or illegal
advantage.

Ensure that subordinates do

not disclose confidential
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information.
 IMA Guidelines for Ethical Behavior
Mitigate conflicts of
interest and advise others
of potential conflicts.

Refrain from
conduct that
would prejudice Integrity
carrying out
duties ethically.
Abstain from activities that
might discredit the
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 IMA Guidelines for Ethical Behavior
Communicate information
fairly and objectively.

Disclose delays or
deficiencies in information
Credibility timeliness, processing, or
internal controls.

Disclose all relevant

information that could
influence a user’s
understanding of reports
54
and recommendations.
Management Accounting 1
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.

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 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.

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 Why Have Ethical Standards?
Ethical standards in business are essential for a
smooth functioning 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 57
desirable goods and services at higher prices.
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 Company Codes of Conduct
Broad-based statements of a
company’s responsibilities to:

Employees Customers Suppliers

And to the communities in

which the company operates.
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 Codes of Conduct on the International
Level
The Code of Ethics for Professional
Accountants, issued by the International
Federation 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
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Cross-border activities. 59
 Corporate Governance
The system by
which a company is directed
and controlled.
Board of Incentives and
Directors monitoring for

Top To pursue
Management objectives of

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 The Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 was intended to protect the
interests of those who invest in publicly traded companies by
improving the reliability and accuracy of corporate financial
reports 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
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services to an audit client.
(continued)

The Sarbanes-Oxley Act of 2002
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 any
documents that may eventually be used in an official
proceeding.
• Up to 10 years in prison for retaliating against a
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“whistle blower.”
 Enterprise Risk Management
Should I try to avoid the risk,
share the risk, accept the
risk, or reduce the risk?
A process used
by a company to
proactively identify
and manage risk.

Once a company identifies its risks, perhaps the

most common risk management tactic is to reduce
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risks by implementing specific controls.

 Enterprise Risk Management
Examples 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
Management Accounting 1 obtaining information not needed 64

to do their jobs
 Corporate
Corporate Social Responsibility
social responsibility (CSR) is a concept
whereby organizations consider the needs
of all stakeholders when making decisions.

Environmental
Customers Employees Suppliers Communities Stockholders & Human Rights
Advocates

CSR extends beyond legal compliance

to include
Management Accounting 1 voluntary actions that satisfy 65

stakeholder expectations.
 Corporate Social Responsibility
Examples of Corporate Social Responsibility
Companies 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 development
Companies 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 sources
Companies 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
● HonestManagement
answers to knowledgeable
Accounting 1 ● Full disclosure of suppliers located in 66

questions developing countries

 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 IMA’s website at
Management Accounting 1
[Link] or by calling 1-800-638-4427. 67
 References:
• Warren, Reeve & Fess, 8th Edition (2004) Financial and Managerial Accounting,
South-Western Thompson Learning
• Garrison, R. H., Noreen, E. W. & Brewer, P. C., 13th edition (2010). Managerial
Accounting, McGraw-Hill/Irwin
• Stevenson, W. J., 8th edition (2005). Operations Management, McGraw-
Hill/Irwin
• Heizer & Render, 7th edition (2004). Operations Management, Prentice Hall

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