2. Managerial Accounting and the Business Environment
Chapter 1: Managerial Accounting and the Business Environment.
This chapter describes the larger business environment within which management accounting operates. It is divided into six sections: (1) what is managerial accounting, (2) managerial accounting and globalization, (3) a strategic view of managerial accounting, (5) value creation perspectives: external, internal, leadership and cultural, (5) Business management perspectives,: ethics, corporate governance, enterprise risk management, corporate social responsibility and sustainability, and (6) the professional qualifications of Management Accountants.
Chapter 1

3. Comparison of Financial and Managerial Accounting
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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 these data are 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 good estimates as soon as possible rather than waiting for precise data later.
 Segments of an organization: Financial accounting is concerned with reporting for the company as a whole. Managerial accounting focuses more on the segments of the 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.

4. Work of Management Planning Controlling Decision Making
Managerial accounting helps managers carry out three main activities—planning, controlling, and decision making.

5. Planning Establish Goals. Specify How Goals Will Be Achieved.
Develop Budgets.
Planning involves establishing goals and specifying how to achieve them.
Plans are often accompanied by a budget.
A budget is a detailed plan for the future that is usually expressed in formal quantitative terms.

6. Controlling The control function gathers feedback to
ensure 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.
Controlling involves gathering feedback to ensure that the plan is being properly executed or modified as circumstances change.
Part of the control process includes preparing performance reports.
A performance report compares budgeted to actual results to improve future performance.

7. Decision Making Decision making involves making a selection among
competing alternatives.
What should
we be selling?
Who should
we be serving?
Decision making involves selecting a course of action from competing alternatives.
Many managerial decisions revolve around answering three questions:
What should we be selling?
Who should we be serving?
How should we execute?
How should
we execute?

8. Management Accounting and Cost 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; examples including
FIFO, weighted average inventory valuation technique
Job costing, Process costing, Activity-based costing
Cost allocation techniques
Management accounting is one of the core functions of businesses to help plan, evaluate and control businesses. It relates to the provision of appropriate information for decision-making.
It is critical that management accounting information is prepared, provided, and used on a timely basis. Late information is no information.
It is important for management accounting information to be relevant, and such relevant information needs to be obtained efficiently and effectively.
Cost-benefit evaluation is a key concept in management accounting.
Cost accounting defines costs and valuates inventories to help managers to run businesses; examples include:
FIFO, weighted average inventory valuation technique
Job costing, Process costing, Activity-based costing
Cost allocation techniques
Cost Accounting intertwines with Management Accounting and the terms are sometimes interchangeable.
Management Accounting and Cost Accounting
are intertwined and
the terms are sometimes interchangeable
their functions are to help companies make better decisions

9. Managerial Accounting and Globalization
Offshore to China ???
With the fast changing globalized economy, Management Accounting plays an important role in supporting management to make quick and relevant decisions.
Examples include
Offshoring
Outsourcing
Insourcing
Supplier chain management, etc.
Outsource to India ???

10. World Merchandise Exports
The World Merchandise Exports data show that Asia had progressive increases in global trading activities from 1948 to 2012.
Europe and Asia had the lion’s share (about 70%) of the world merchandise exports. The gap between Asia and Europe exports had closed significantly over the period.
Source: World Trade Organization Statistic 2013

11. Distribution of Fortune Global 500 companies between 2005 and 2012
Asia Pacific companies (181 companies) overtook Europe and US companies becoming the largest group of the top 500 companies in 2012.
European companies consistently form the foundation of the Fortune Global 500 totaling 161 companies in 2012.
From 2005 to 2012, among the Fortune Global 500 companies, companies from China increased more than fourfold from 16 to 73 (a gain of 57 companies) whereas US companies reduced from 176 to 132 (a drop of 44 companies)
In the second half of 2010, China officially overtook Japan as the second biggest economy in the world, reflecting the growing power of Chinese companies.
The number of Fortune 500 Global firms from Taiwan and India companies trailed closely behind South Korea and were comparable with Australia, forming another powerful group in the Asia-Pacific region.

12. Top 10 Companies of Fortune Global 500 (ranked by revenue)
Asian and Chinese companies not only show increase in their total numbers on the Fortune Global 500 list but also are taking more top spots.
Three out of ten companies in 2012 were from Asia (2 from China and 1 from Japan). There were only four Asian companies on the top 10 in 2010 (2 from China and 2 from Japan).
Checking the increase in revenue, the two Chinese companies increased over $100 billion each within a year.
Together with the earlier slides, data show the important contribution of Asian companies to the world economy.
source:

13. Internet Penetration Rate And Borderless Trading Potential
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Internet Penetration Rate And Borderless Trading Potential
The Internet fuels globalization by providing companies with greater access to geographically dispersed customers, employees, and suppliers.
The Internet fuels globalization by providing companies with greater access to geographically dispersed customers, employees, and suppliers.
While the number of internet users continues to grow, as of June 2012, about 66 % of the world’s population was still not connected to the Internet. This suggests the Internet’s impact on business has yet to fully develop.
As of June 2012, more than 66% of the world's population was still not connected to the Internet.

14. A Strategic View of Managerial Accounting
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A Strategic View of Managerial Accounting
A strategy is a “game plan” that enables a company to attract customers by distinguishing itself from competitors.
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 be its target customers.

15. Customer Value Propositions
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Customer Value Propositions
Understand and respond to individual customer needs.
Customer Intimacy Strategy
Operational Excellence Strategy
Deliver products and services faster, more conveniently, and at lower prices.
Part I.
Companies that adopt a customer intimacy strategy strive to understand and respond to individual customer needs better than competitors. Examples of companies that pursue this strategy include: Ritz-Carlton, Nordstrom, and Starbucks.
Part II.
Companies that adopt an operational excellence strategy strive to deliver products and services faster, more conveniently, and at a lower price than competitors. Examples of companies that pursue this strategy include: Daiso, Southwest Airlines, Wal-Mart, and The Vanguard Group.
Part III.
Companies that adopt a product leadership strategy strive to offer higher quality products than competitors. Examples of companies that pursue this strategy include: Louis Vuitton, BMW, Cisco Systems, and W.L. Gore.
Product Leadership Strategy
Offer higher quality products.

16. Value Creation: Value-added activities and processes
Create value to stakeholders
Need to pay attention to value-added (vs. non-value- added) activities and processes
Possible techniques focusing on value-added activities and processes include:
Activity-based costing and management
Lean production
Just-in-time inventory management and production
Theory of Constraints
Kaizen costing
Life-cycle costing
Target pricing and costing
Quality management, e.g. total quality management and six sigma

17. Value Creation: Different Perspectives
External Perspectives – Value chain management
Suppliers (upstream)
Customers (downstream)
Internal Perspectives – Value chain management
Business processes (examples mentioned in slide 17)
Leadership Perspective
Leaders who can unite behaviors of fellow employees
Need to consider intrinsic and extrinsic motivating factors
Need to be aware of cognitive biases that adversely affect planning, controlling and decision making.
Cultural Perspective
National and organizational cultures
Power distance, individualism, uncertainty avoidance, masculinity and long-term orientation
Four Different Perspectives
1. External Perspectives – Value chain management
Suppliers (upstream)
Customers (downstream)
2. Internal Perspectives – Value chain management
Business processes (examples mentioned in slide 17)
3. Leadership Perspective
Leaders who can unite behaviors of fellow employees
Need to consider intrinsic and extrinsic motivating factors
Need to be aware of cognitive biases that adversely affect planning, controlling and decision making.
4. Cultural Perspective
National and organizational cultures
Power distance, individualism, uncertainty avoidance, masculinity and long-term orientation
Different operating procedures and remuneration approaches may be required for different locations due to the variation of the five cultural dimensions.

18. Business functions making up the value chain
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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.
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. 

19. Managerial Accounting: Beyond the Numbers
In addition to the External, Internal, Leadership and Cultural Perspectives, the following four business management perspectives also go beyond the numbers to enable intelligent planning, control, and decision making:
An Ethics Perspective
A Corporate Governance Perspective
An Enterprise Risk Management Perspective
A Corporate Social Responsibility and Sustainability Perspective
In addition to the External, Internal, Leadership and Cultural Perspectives, the following four business management perspectives also go beyond the numbers to enable intelligent planning, control, and decision making:
An Ethics Perspective
A Corporate Governance Perspective
An Enterprise Risk Management Perspective
A Corporate Social Responsibility and Sustainability Perspective

20. 1-19
An Ethics Perspective
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.
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 accountants’ bodies issue ethical guidelines.
The Institute of Management Accountants’ Statement of Ethical Professional Practice consists of two parts — guidelines for ethical behavior and guidelines for resolution of an ethical conflict.

21. An Ethics Perspective: IMA Guidelines for Ethical Behavior
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An Ethics Perspective: 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 behavior in four broad areas. The first area is professional competence.
Management accountants must:
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.

22. An Ethics Perspective: IMA Guidelines for Ethical Behavior
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An Ethics Perspective: 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.
Not use confidential information for unethical or illegal advantage.
Ensure that subordinates do not disclose confidential information.

23. An Ethics Perspective: IMA Guidelines for Ethical Behavior
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An Ethics Perspective: 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.

24. An Ethics Perspective: IMA Guidelines for Ethical Behavior
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An Ethics Perspective: IMA Guidelines for Ethical Behavior
Communicate information fairly and objectively.
Disclose delays or deficiencies in information timeliness, processing, or internal controls.
Credibility
The fourth area is credibility. 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.
Disclose all relevant information that could influence a user’s understanding of reports and recommendations.

25. 1-24
An Ethics Perspective: 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.
When faced with an ethical conflict, 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.

26. 1-25
An Ethics Perspective: 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.
Additional guidelines for an unresolved ethical conflict are:
 Except where legally prescribed, communication with individuals not employed by the organization is not appropriate.
Clarify relevant ethical issues with an objective advisor, such as a member of the IMA’s Ethics Counseling Service.
Consult an attorney regarding your legal obligations.

27. An Ethics Perspective: Why Have Ethical Standards?
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An Ethics Perspective: 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 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.

28. An Ethics Perspective: Company Codes of Conduct
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An Ethics Perspective: Company Codes of Conduct
Broad-based statements of a company’s responsibilities to:
And to the communities in which the company operates.
Employees
Customers
Suppliers
Many companies have a formal code of conduct. These codes are generally broad-based statements of a company’s responsibilities to its employees, its customers, its suppliers, and the communities in which the company operates.

29. An Ethics Perspective: Codes of Conduct on the International Level
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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
Cross-border activities.
The Code of Ethics for Professional Accountants, issued by the International Federation of Accountants (IFAC), governs the activities of all professional accountants throughout the world. In addition to outlining ethical requirements in matters dealing with integrity and objectivity, resolution of ethical conflicts, competence, and confidentiality, the IFAC’s code also outlines the accountant’s ethical responsibilities in matters relating to:
Taxes,
Independence,
Fees and commissions,
Advertising and solicitation,
Handling of monies, and
Cross-border activities.

30. A Corporate Governance Perspective
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A Corporate Governance Perspective
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 directed 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.

31. A Corporate Governance Perspective: The Sarbanes-Oxley Act of 2002
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A Corporate Governance Perspective: 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 services to an audit client.
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 services to an audit client.

32. A Corporate Governance Perspective: The Sarbanes-Oxley Act of 2002
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A Corporate Governance Perspective: 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.
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 “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.
 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 “whistle blower.”

33. An Enterprise Risk Management Perspective
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An Enterprise Risk Management Perspective
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.

34. An Enterprise Risk Management Perspective
1-33
This slide contains a subset of the business risks and controls shown in Exhibit 1-7 of the textbook. Collectively, these examples illustrate the diversity of risks that companies can face.

35. Corporate Social Responsibility & Sustainability Perspective
Corporate social responsibility (CSR) is a concept whereby organizations consider the needs
of all stakeholders when making decisions.
Customers
Employees
Suppliers
Communities
Stockholders
Environmental & Human Rights Advocates
Corporate social responsibility (CSR) is a concept whereby organizations consider the needs of all stakeholders when making decisions. CSR extends beyond legal compliance to include voluntary actions that satisfy stakeholder expectations.
Stakeholders include groups, such as customers, employees, suppliers, communities, stockholders, and environmental and human rights advocates, whose interests are tied to the company’s performance.
CSR extends beyond legal compliance to include voluntary actions that satisfy stakeholder expectations.

36. Corporate Social Responsibility & Sustainability Perspective
This slide presents examples of corporate social responsibilities that are of interest to the six stakeholder groups just mentioned.

37. Corporate Social Responsibility & Sustainability Perspective
Global Reporting Initiative (GRI)
promotes a systematic and standardized approach
to corporate social responsibility and embed it in corporate culture;
to stimulate demand for sustainability information;
thus benefitting both reporting organizations and report users.
International Federation of Accountants (IFAC) Sustainability Framework
Organizations should
achieve a “Triple Bottom-Line”
Economic, environmental an social goals
(or 3Ps: Profit, Planet, and People)
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; and
minimize environmental damages, and provide a safe working and living environment for the communities.
GRI and IFAC play an important role in promoting sustainability reporting. The triple bottom-line concept is critical for long-term sustainability of businesses.

38. Sustainability Reporting: GRI Registered Companies
European companies led the pack in sustainability reporting followed by Asian companies. The growing trend of adopting GRI sustainability reporting standards is encouraging. It increased from 10 companies in 1999 to 3,718 companies in 2012.
Examples of GRI Registered Companies
Asia: 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

39. Professional Qualification of Management Accountants
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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
The Chartered Institute of Management Accountants
CIMA UK
FCMA , ACMA
The Institute of Certified Management Accountants of Australia
ICMA
Australia
- CMA Philippines
Philippines
- CMA Indonesia
Indonesia
- CMA Sri Lanka
Sri Lanka
- CMA India
India
The Institute of Cost and Works Accountants of India
ICWAI
FICWA, AICWA
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) or Chartered Management Accountant (FCMA, ACMA) or other management accountant’s qualifications such as Cost and Works Accountants in India.
Management accountants who become professionally qualified accountants are often given greater responsibilities and higher compensation than other management accountants who are professionally qualified.
Information about becoming a professionally qualified management accountant can be accessed on the IMA’s website at CIMA’s website ( other relevant institutions’ website by simple search on Google or other search engines.

40. End of Chapter 1
End of chapter 1.