MANAGERIAL ACCOUNTING Eighth Canadian Edition GARRISON, CHESLEY, CARROLL, WEBB Prepared by: Robert G. Ducharme, MAcc, CA University of Waterloo, School of Accounting and Finance

Managerial Accounting and the Business Environment Chapter One Managerial accounting provides information to managers so that they can effectively and efficiently manage an organization. In this first chapter, we will look at what managers do, the information that they need, the general business environment in which managers function, and the importance of business ethics.

List the functions of managers. Learning Objective 1 List the functions of managers. Learning objective number 1 is to list the functions of managers.

Directing and Motivating Work of Management Planning Directing and Motivating Controlling All managers carry out three major activities – planning, directing and motivating, and controlling.

Planning Identify alternatives. Select alternative that does the best job of furthering organization’s objectives. Develop budgets to guide progress toward the selected alternative. Planning involves selecting a course of action and specifying how the action will be implemented. The first step in planning is to identify the various alternatives. Next the alternative that does the best job of furthering the organization’s objectives is selected. Management’s plans are usually expressed in budgets. Typically, budgets are prepared annually under the direction of the controller, who is the manager of the accounting department.

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. In addition to planning for the future, managers must oversee day-to-day activities to keep the organization running smoothly. Much of a manager’s daily routine involves directing and motivating employees. Managers make work assignments, resolve conflicts, solve on-the-spot problems, and make many small decision that affect both employees and customers.

The control function ensures that plans are being followed. 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. In carrying out the control function, managers seek to ensure that the plan is being followed. Feedback, which signals whether operations are on target, is the key to effective control. One type of feedback that is very helpful to mangers is called a performance report. Budgets are compared to actual results in performance reports to determine if operations are proceeding as planned.

Planning and Control Cycle Formulating long-and short-term plans (Planning) Begin Comparing actual to planned performance (Controlling) Implementing plans (Directing and Motivating) Decision Making The work of management is summarized in the planning and control cycle shown on your screen. The process is a continuous loop in many organizations. Once plans are made, they are implemented. The controlling process starts with measuring actual performance and then comparing those results with planned performance. Corrective action may be necessary if actual results differ significantly from the plan. In some cases, new information may result in altering the plan before the cycle is repeated. Note that decision making is involved in all management activities. Measuring performance (Controlling)

Business Plans New businesses typically formalize their strategic planning in the form of a business plan. A business plan consists of information about the company’s basic product or service and about the steps to be taken to reach its potential market. The plan includes information about: production methods competition management team, and details on how the business will be financed. The business plan is a key document for: the organization’s internal management, and external use in attracting creditors and investors. New businesses typically formalize their strategic planning in the form of a business plan. A business plan consists of information about the company’s basic product or service and about the steps to be taken to reach its potential market. The plan includes information about: production methods competition management team, and details on how the business will be financed. The business plan is a key document for: the organization’s internal management, and external use in attracting creditors and investors.

Learning Objective 2 Identify the major differences and similarities between financial and managerial accounting. Learning objective number 2 is to identify the major differences and similarities between financial and managerial accounting.

Comparison of Financial and Managerial Accounting There are seven key differences between managerial accounting and financial accounting:  Financial accounting reports are prepared for external users. Managerial accounting reports are prepared for internal users. Financial accounting summarizes past transactions. Managerial accounting has a strong emphasis on the future. Financial accounting data should be objective and verifiable. Managerial accounting data should be relevant for the decision at hand, even if it is not completely objective and verifiable. Financial accounting focuses on precision. Managerial accounting aids decision makers by providing good estimates as soon as possible rather than waiting for precise data at some later time. Financial accounting is concerned with reporting for a company as a whole. Managerial accounting focuses on segments of a company such as product lines, sales territories, divisions, and departments. Financial accounting must conform to generally accepted accounting principles (GAAP). Managerial accounting is not bound by GAAP. Financial accounting is mandatory because outside parties such as the Securities and Exchange Commission and tax authorities require periodic financial statements. Managerial accounting is not mandatory.

Describe the role of management accountants in an organization. Learning Objective 3 Describe the role of management accountants in an organization. Learning objective number 3 is to describe the role of management accountants in an organization.

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 providing managers with the authority to make decisions relating to their area of responsibility. An organization chart, such as the one shown on your screen, shows how responsibility is divided among managers. It also show formal lines of reporting and communication.

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 the basic objectives of the organization. Staff positions support or provide assistance to line positions, but they do not have direct authority over line positions.

The Controller 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) or Controller is a member of the top management team who is responsible for providing timely and relevant data to support management planning and controlling activities. The CFO is also responsible for preparing external financial statements. An organization’s treasurer and controller report to the CFO.

The Professional Management Accountant Three types of professional accountants work as management accountants in Canada: CGA CA CMA Three types of professional accountants work as management accountants in Canada: CGA (Certified General Accountant) CA (Chartered Accountant) CMA (Certified Management Accountant)

Explain the nature and importance of ethics for accountants. Learning Objective 4 Explain the nature and importance of ethics for accountants. Learning objective number 4 is to understand the importance of upholding ethical standards.

Professional Ethics for Management Accountants The U.S. Institute of Management Accountant’s (IMA) Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management have two major parts offering guidelines for:  Ethical behaviour.  Resolution for an ethical conflict. The Institute of Management Accountant’s Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management have two main parts — guidelines for ethical behaviour and guidelines for resolution for an ethical conflict.

IMA Guidelines for Ethical Behavior Recognize and communicate professional limitations that preclude responsible judgment. Maintain professional competence. Competence Follow applicable laws, regulations and standards. Management accountants have responsibility for ethical behaviour in four broad areas. The first area is professional competence. Management accountants are expected to: Maintain professional competence. Follow applicable laws, regulations, and standards. Provide accurate, clear, concise, and timely decision support information. Recognize and communicate professional limitations that preclude responsible judgment Provide accurate, clear, concise, and timely decision support information.

IMA Guidelines for Ethical Behavior Do not disclose confidential information unless legally obligated to do so. Do not use confidential information for unethical or illegal advantage. Confidentiality The second area is confidentiality. Management accountants must: Not disclose confidential information unless legally obligated to do so. Ensure that subordinates do not disclose confidential information. Do not use confidential information for unethical or illegal advantage. Ensure that subordinates do not disclose confidential information.

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 The third area is integrity. Management accountants must: Mitigate conflicts of interest and advise others of potential conflicts. Refrain from conduct that would prejudice carrying out duties ethically. Abstain from activities that might discredit the profession. Abstain from activities that might discredit the profession.

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. The fourth area is objectivity. Management accountants must: Communicate information fairly and objectively. Disclose all relevant information that could influence a user’s understanding of reports and recommendations. Disclose delays or deficiencies in information timeliness, processing, or internal controls.

IMA Guidelines for Resolution of an Ethical Conflict Follow employer’s established policies. For unresolved ethical conflicts: 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. When faced with ethical conflicts, the employer’s established policies for conflict resolution should be followed. If the conflict cannot be resolved within established policies, a management accountant should: Discuss the conflict with immediate superior or next highest uninvolved manager. If immediate supervisor is the CEO, consider discussing the conflict with the board of directors or the audit committee. Remember that contact with levels above 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 Follow employer’s established policies. For unresolved ethical conflicts: Except where legally prescribed, maintain confidentiality. Clarify issues in a confidential discussion with an objective advisor. Consult an attorney as to legal obligations. The last resort is to resign. Additional guidelines for unresolved ethical conflicts are: Except where legally prescribed, maintain confidentiality. Clarify issues in a confidential discussion with an objective advisor. Consult an attorney as to legal obligations. The last resort is to resign.

Why Have Ethical Standards? Ethical standards in business are essential for a smooth functioning advanced market 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 desirable goods and services at higher prices Ethical standards are motivated by a very practical consideration — if the standards are not followed in business, then the economy and all of us would suffer. Abandoning ethical standards would lead to a lower standard of living with lower-quality goods and services, less to choose from and higher prices. In short, ethical standards are essential for the smooth functioning of an advanced market economy.

The system by which a company is directed and controlled. Corporate Governance The system by which a company is directed and controlled. Board of Directors Top Management Stockholders To pursue objectives of Incentives and monitoring for Corporate governance is the system by which a company is direct and controlled.   If properly implemented the corporate governance system should provide incentives for the board of directors and top management to pursue objectives that are in the interests of the company’s owners and it should provide for effective monitoring of performance.

And the communities in which the company operates. Corporate Governance An effective corporate governance system should also protect the interests of the company’s other stakeholders. And the communities in which the company operates. Employees Customers Suppliers Creditors Many would argue that in addition to protecting the interests of stockholders, an effective corporate governance system also should protect the interests of the company’s other stakeholders—customers, creditors, employees, suppliers, and the communities within which the company operates.

Learning Objective 5 Explain the basic concepts of lean production, six sigma, computer technology and risk management. Learning objective number 5 is to explain the basic concepts of lean production, six sigma, computer technology and risk management.

Business functions making up the value chain 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. 

There are four approaches to improving business processes . . . Process Management There are four approaches to improving business processes . . . Six Sigma Computer Technology Lean Production Risk Management Next, we will discuss three different approaches to improving business processes:  Lean production,  Six Sigma,  Computer Technology, and  Risk Management.

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 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. 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.

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

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.

Sometimes associated with the term zero defects. 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 more than 3.4 defects per million opportunities. Six Sigma is a process improvement method that relies on customer feedback and fact-based data gathering and analysis techniques to drive process improvement. The term Six Sigma refers to a process that generates no more than 3.4 defects per million opportunities. Because this rate of defects is so low, Six Sigma is sometimes associated with the term “zero defects.” Sometimes associated with the term zero defects.

Exhibit 1-8 Six Sigma The DMAIC (Define, Measure, Analyze, Improve, and Control) framework has five stages:   The define stage identifies the scope and purpose of the project, the flow of the current process, and the customer’s requirements.  The measure stage gathers baseline performance data concerning the existing process and narrows the scope of the project to the most important problems.  The analyze stage identifies the root causes of the problems that were identified during the measure stage. The analyze stage often reveals non-value-added activities that should be eliminated, wherever possible.  The improve stage is where potential solutions are developed, evaluated, and implemented to eliminate non-value-added activities and any other problems uncovered in the analyze stage.  The control stage ensures that problems remain fixed and that the new methods are improved over time.

E-commerce refers to business conducted using the Internet. In addition to dot.com companies, traditional businesses, such as banks and retailers, continue to expand their Internet presence. The growth in e-commerce is occurring because the Internet has important advantages over more conventional marketplaces for many kinds of transactions. For example, the Internet is an ideal technology for streamlining the mortgage lending process because: Customers can complete loan applications over the Internet rather than tying up the time of office personnel. Data and funds can be sent back and forth electronically. The growth in e-commerce is occurring because the Internet has important advantages over more conventional marketplaces for many kinds of transactions.

E-Commerce In recent years, many dot.com businesses failed that might have benefited from the application of managerial accounting tools: Cost concepts (Chapter 2) Activity-based costing (Chapter 5) Cost estimation (Chapter 6) Cost-volume-profit (Chapter 7) Budgeting (Chapter 9) Decision-making (Chapter 12) Capital budgeting (Chapter 13) In recent years, many dot.com businesses failed. These businesses may have benefited from the application of many managerial accounting tools that are discussed in detail in later chapters: Cost concepts (Chapter 2) Activity-based costing (Chapter 5) Cost estimation (Chapter 6) Cost-volume-profit (Chapter 7) Budgeting (Chapter 9) Decision-making (Chapter 12) Capital budgeting (Chapter 13)

Enterprise Systems A single software system that integrates data across an organization, thereby enabling all employees to have simultaneous access to a common set of data. All data are recorded only once in the company’s centralized database. Part I An enterprise system integrates data across an organization into a single software system that enables all employees to have simultaneous access to a common set of data. Part II. There are two keys to the data integration inherent in an enterprise system:  All data are recorded only once in the company’s centralized digital data repository known as a database.  The unique data elements contained within a database can be linked together. For example: one data element such as a customer identification number can be related to other data elements such as that customer’s address, billing history, shipping history, merchandise returns, and so on. The ability to forge such relationships explains why this type of database is called a relational database. The unique data elements contained within a database can be linked together.

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. Part I. Enterprise risk management is a process used by a company to proactively identify the risks that it faces and manage those risks. Part II. Once a company identifies its risks, perhaps the most common risk management tactic is to reduce risks by implementing specific controls. Once a company identifies its risks, perhaps the most common risk management tactic is to reduce risks by implementing specific controls.

Enterprise Risk Management This slide contains a subset of the business risks and controls shown in Exhibit 1-11 of the textbook. Collectively, these examples illustrate the diversity of risks that companies can face.

End of Chapter 1 To effectively operate a business, managers often need information in a different format and frequency than found in financial reports. Managerial accounting provides that information to managers and other internal decision makers who find themselves in an increasingly competitive, complex, and changing business environment.