1. Managerial Accounting and the Business Environment
Chapter 1
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 nine sections: (1) globalization, (2) strategy, (3) organizational structure, (4) process management, (5) the importance of ethics in business, (6) corporate governance, (7) enterprise risk management, (8) corporate social responsibility, and (9) the Certified Management Accountant.
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

2. The data reveal an enormous increase in import activity from 1995 to In particular, imports from Canada, Mexico, and China skyrocketed.

3. The data reveal an increase in exports to Canada and Mexico
The data reveal an increase in exports to Canada and Mexico. Interestingly, the increase in exports to China pales in comparison to the growth rate in imports from China. 

4. Internet Usage
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 2008, more than 78 % 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 2008, more than 78% of the world's population was still not connected to the Internet.

5. Strategy
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.

6. 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: 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: BMW, Cisco Systems, and W.L. Gore.
Product Leadership Strategy
Offer higher quality products.

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

8. 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.

9. 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.

10. 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.

11. Learning Objective 2
Understand the basic concepts underlying Lean Production, the Theory of Constraints, and Six Sigma.
Learning objective number 2 is to understand the basic concepts underlying Lean Production, the Theory of Constraints, and Six Sigma.

12. 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. 

13. Theory of Constraints (TOC)
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.

14. 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.

15. 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.
The “push” approach almost inevitably 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.

16. Lean Production The lean thinking model is a five step approach.
 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.

17. 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

18. Lean Production
Lean thinking can 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.

19. 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 insight 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.

20. 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.

21. 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.
Sometimes associated with the term zero defects.
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.”

22. 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.

23. Understand the importance of upholding ethical standards.
Learning Objective 3
Understand the importance of upholding ethical standards.
Learning objective number 3 is to understand the importance of upholding ethical standards.

24. 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.
The Institute of Management Accountant’s Statement of Ethical Professional Practice consists of two parts — guidelines for ethical behavior and guidelines for resolution of an ethical conflict.

25. 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.

26. 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.

27. 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.

28. 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.

29. 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.

30. 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.

31. 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.

32. 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.

33. 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
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.

34. 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 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.

35. 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.

36. 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.”

37. 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.

38. Enterprise Risk Management
This slide contains a subset of the business risks and controls shown in Exhibit 1-9 of the textbook. Collectively, these examples illustrate the diversity of risks that companies can face.

39. Corporate Social Responsibility
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.

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

41. 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).
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).
Management accountants who become CMAs are often given greater responsibilities and higher compensation than other management accountants who are not CMAs.
Information about becoming a CMA and the CMA program can be accessed on the IMA’s website at or by calling
Information about becoming a CMA and the CMA program can be accessed on the IMA’s website at or by calling

42. End of Chapter 1
End of Chapter 1.