1-1 Learning Objective 1 Identify the major differences and similarities between financial and managerial accounting. Learning objective number 1 is to identify the major differences and similarities between financial and managerial accounting.

Comparison of Financial and Managerial Accounting 1-2 Comparison of Financial and Managerial Accounting There are seven key differences between managerial accounting and financial accounting:  Users: Financial accounting reports are prepared for external parties, whereas managerial accounting reports are prepared for internal users.  Emphasis on the future: Financial accounting summarizes past transactions. Managerial accounting has a strong future orientation.  Relevance of data: Financial accounting data should be objective and verifiable. Managerial accountants focus on providing relevant data even if it is not completely objective and verifiable.  Less emphasis on precision: Financial accounting focuses on precision when reporting to external parties. Managerial accounting aids decision makers by providing reasonable estimates more quickly, rather than waiting for precise data later.  Segments of an organization: Financial accounting is concerned with reporting for a company as a whole. Managerial accounting focuses more on the segments of a company. Examples of segments include product lines, sales territories, divisions, departments, etc..  Generally Accepted Accounting Principles (GAAP): Financial accounting conforms to GAAP. Managerial accounting is not bound by GAAP.  Managerial accounting – not mandatory: Financial accounting is mandatory because various outside parties require periodic financial statements. Managerial accounting is not mandatory.

Understand the role of management accountants in an organization. 1-3 Learning Objective 2 Understand the role of management accountants in an organization. Learning objective number 2 is to understand the role of management accountants in an organization.

Organizational Structure 1-4 Organizational Structure Decentralization is the delegation of decision-making authority throughout an organization. Decentralization is the delegation of decision-making authority throughout an organization by giving managers the authority to make decisions relating to their area of responsibility. An organization chart shows how responsibility is divided among managers and it shows formal lines of reporting and communication.

Line and Staff Relationships 1-5 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. An organization chart also shows line and staff positions in an organization. A person in a line position is directly involved in achieving the basic objectives of the organization. A person in a staff position is indirectly involved in achieving those basic objectives. Staff positions support line positions, but they do not have direct authority over line positions.

The Chief Financial Officer (CFO) 1-6 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. The Chief Financial Officer (CFO) is the member of the top management team who is responsible for providing timely and relevant data to support planning and controlling activities and for preparing financial statements for external users.

1-7 Learning Objective 3 Understand the basic concepts underlying Lean Production, the Theory of Constraints, and Six Sigma. Learning objective number 3 is to understand the basic concepts underlying Lean Production, the Theory of Constraints, and Six Sigma.

Business functions making up the value chain 1-8 Process Management A business process is a series of steps that are followed in order to carry out some task in a business. Business functions making up the value chain Product Customer R&D Design Manufacturing Marketing Distribution Service Part I. A business process is a series of steps that are followed in order to carry out some task in a business.   Part II. A value chain consists of the major business functions that add value to a company’s products and services. 

Theory of Constraints (TOC) 1-9 Process Management There are three approaches to improving business processes . . . Theory of Constraints (TOC) Lean Production Six Sigma Next, we will discuss three different approaches to improving business processes:  Lean production,  The theory of constraints (TOC), and  Six Sigma.

Traditional “Push” Manufacturing Company 1-10 Traditional “Push” Manufacturing Company Forecast Sales Store Inventory Order components Make Sales from Finished Goods Inventory Store Inventory Produce goods in Anticipation of Sales In a traditional manufacturing company, 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.

Traditional “Push” Manufacturing Company 1-11 Traditional “push” manufacturing Large inventories Raw materials Work in process Finished goods Materials waiting to be processed. Partially completed products requiring more work before they are ready for sale. Completed products awaiting sale. Part I. This almost inevitable results in large inventories of raw materials, work in process and finished goods. Part II Raw materials are the materials that are used to make a product. Part III. Work in process inventories consist of units of product that are only partially complete and will require further work before they are ready for sale to the customer. Part IV. Finished goods consist of units of product that have been completed but have not yet been sold to customers.

Lean Production The lean thinking model is a five step approach. 1-12 Exhibit 1-6 Lean Production  Identify value in specific products/services.  Identify the business process that delivers value. The lean thinking model is a five step approach.  Organize work arrangements around the flow of the business process. Part I. The lean thinking model is 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 customer orders.  The first step is to identify the value to customers in specific products and services. Part II.  The second step is to identify the business process that delivers this value to customers. The linked steps that comprise a business process typically span the departmental boundaries that are specified in an organization chart. Part III.  The third step is to organize work arrangements around the flow of the business process. This is often accomplished by creating what is known as a manufacturing cell. Part IV.  The fourth step is to create a pull system where production is not initiated until a customer has ordered a product. This facet of the lean thinking model is often called just-in-time production, or JIT for short. Part V.  The fifth step is to continuously pursue perfection in the business process.  Continuously pursue perfection in the business process.  Create a pull system that responds to customer orders.

1-13 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 an Order Create Production Order Generate Component Requirements The result of this five step process is to lower inventories, decrease defects, reduce wasted effort, and shorten customer response times.   Production Begins as Parts Arrive Goods Delivered when needed Components are Ordered

1-14 Lean Production Lean thinking may be used to improve business processes that link companies together.  The lean thinking model can also be used to improve the business processes that link companies together.  The term supply chain management is commonly used to refer to the coordination of business processes across companies to better serve end consumers. The term supply chain management refers to the coordination of business processes across companies to better serve end consumers.

1-15 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. A constraint (also called a bottleneck) is anything that prevents you from getting more of what you want. The constraint in a system is determined by the step that has the least capacity. The Theory of Constraints is based on the observation that effectively managing the constraint is the key to success. The goal is to manage the constraint with the intent of generating more business rather than cutting the workforce.

Theory of Constraints 2. Allow the weakest link to set the tempo. 1-16 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. The Theory of Constraints approach to process improvement involves four steps:  Identify the weakest link in the chain which is the constraint.  Do not place a greater strain on the system than the weakest link can handle – if you do, the chain will break.  Concentrate improvement efforts on strengthening the weakest link.  If the improvement efforts are successful, the weakest link will improve to the point that it is no longer the weakest link. At this point, a new weakest link must be identified and the improvement process starts over again. 4. Recognize that the weakest link is no longer so.

1-17 End of Chapter 1 End of Chapter 1.