1. Managerial Accounting and the Business Environment
Chapter 1: Managerial Accounting: An Overview
This chapter explains why managerial accounting is important to the future careers of all business students. It answers three questions: (1) What is managerial accounting? (2) Why does managerial accounting matter to your career? and (3) What skills do managers need to succeed? It also discusses the importance of ethics in business and corporate social responsibility.
Chapter 1

2. Strategic Management Skills
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. A company can succeed only if it creates a reason for customers to choose it over a competitor. These reasons, or what are more formally called customer value propositions, are the essence of strategy.
The focal point of a company’s strategy should be its target customers.
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3. Customer Value Propositions
1-3
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: Cisco Systems, The Keg Steakhouse & Bar, and Dell Computer Corporation.
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: WestJet Airlines, Wal-Mart, and Canadian National Railways.
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, SABIAN Cymbols, and Research in Motion (RIM).
Product Leadership Strategy
Offer higher quality products.
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4. Work of Management Planning Directing and Motivating Controlling
Managerial accounting helps managers carry out three main activities – planning, directing and motivating, and controlling.
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5. 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.
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6. 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.
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7. 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.
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8. 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)
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9. 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.
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10. Comparison of Financial and Managerial Accounting: Seven Key Differences
What is Managerial Accounting?
There are seven key differences between financial accounting and managerial 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 companywide reports. Managerial accounting focuses on the segment reports. Examples of segments include: product lines, sales territories, divisions, departments, etc.
 Managerial accounting–no externally imposed rules: Financial accounting conforms to GAAP and IFRS. Managerial accounting is not bound by GAAP and IFRS.
 Managerial accounting–not mandatory: Financial accounting is mandatory because various outside parties require periodic financial statements. Managerial accounting is not mandatory.
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11. Organizational Structure
1-11
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.
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12. 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.
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13. A member of the top management team responsible for:
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.
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14. 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)
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15. 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).
For accounting majors, the Certified Management Accountant (CMA) designation is a globally-respected credential that will increase your credibility, upward mobility, and compensation.
Management accounting is not subject to the type of regulation that is evident for financial accounting. However, CMA Canada issues management accounting guidelines and management accounting practice statements on fundamental areas of practice. Adherence to the guidelines is voluntary, but wide acceptance is expected because of the relevance and expertise used in their preparation. Currently, CMA Canada has issued 78 guidelines and 49 management accounting practice statements on topics such as strategic management, risk management and governance, performance management and measurement, and financial reporting. The difference between practice statements and guidelines is that practice statements are more prescriptive in nature and contain less background discussion and research than the guidelines.
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16. Professional Ethics for Management Accountants
CMA Ontario provides clear guidance concerning what professional ethical standards to follow, including:
 Accountants must maintain a level of competence appropriate to their designation.
 Confidentiality is essential because of the importance of the information they analyze.
 Integrity is maintained by avoiding conflicts of interest with their employers or clients, by communicating the limits of professional competence, and by not accepting favours that would compromise their judgment.
 Objectivity must be present in communications, so that recipients can receive both favourable and unfavourable information.
Professional accounting groups are given the right of association and certain rights of self-government by provincial and territorial governments in Canada. One inherent requirement of such rights is an expression of public service in the form of a code of ethics. Each accounting group is then permitted to operate according to the laws of the country, using its code of ethics as an operating guideline.
Typically, these codes contain details of how members should conduct themselves in their dealings with the public, their association, and other members. For example, accountants must maintain a level of competence appropriate to their designation. Confidentiality is essential because of the importance of the information they analyze. Integrity is maintained by avoiding conflicts of interest with their employers or clients, by communicating the limits of professional competence, and by not accepting favours that would compromise their judgment. Objectivity must be present in communications, so that recipients can receive both favourable and unfavourable information.
Professional accountants must study the full text of their code of ethics because the rules for competence, confidentiality, integrity, and objectivity are complex in real situations. In addition, procedures for resolving complex situations should be known.
Some codes of ethics give more extensive guidance than others. For example, the code developed by CMA Ontario provides clear guidance concerning what professional ethical standards to follow, as shown in the excerpts provided in Exhibit 1–5. Notice how the details of this code address the concepts of confidentiality, integrity, and objectivity discussed above.
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17. CMA 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.
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18. CMA 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.
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19. CMA 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.
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20. CMA 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 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.
Disclose all relevant information that could influence a user’s understanding of reports and recommendations.
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21. 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.
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22. 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
Shareholders
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.
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23. 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.
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24. 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
Shareholders
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, shareholders, 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.
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25. 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
A business process is a series of steps that are followed in order to carry out some task in a business.
A value chain consists of the major business functions that add value to a company’s products and services. 
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26. There are four approaches to improving business processes . . .
Process Management
There are four approaches to improving business processes . . .
Six
Sigma
Enterprise
Systems
Lean Production
Risk Management
Next, we will discuss three different approaches to improving business processes:
 Lean production,
 Six Sigma,
 Enterprise Systems, and
 Risk Management.
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27. 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.
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28. 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.
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29. 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.
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30. 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
Production begins as parts arrive
Lean production is a management approach that organizes resources such as people and machines around the flow of business processes and that only produces units in response to customer orders.
Lean production is often called just-in-time (JIT) production because products are only made in response to customer orders and they are completed just-in-time to be shipped to customers.
Goods delivered when needed
Components are ordered
Lean Production is often called Just-In-Time (JIT) production.
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31. 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.
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32. 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.”
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33. Exhibit
1-9
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.
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34. 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.
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35. Enterprise Risk Management
Should I try to avoid the risk, accept the risk, or reduce the risk?
A process used by a company to proactively identify and manage risk.
Enterprise risk management is a process used by a company to proactively identify the risks that it faces and manage those risks.
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.
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36. 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.
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37. Measurement Skills
A good manager compliments an understanding of strategy, risks, and business processes with data-driven analysis.
The question you are trying to answer defines what you’ll measure and how you analyze it.
Consider the following examples.
• Chapter 2: What cost classifications do I use for different management purposes?
• Chapter 3 & 4: What is the value of our ending inventory and cost of goods sold for external reporting purposes?
• Chapter 5: How profitable is each of our products, services, and customers?
• Chapter 6: How do I estimate my costs and how will my costs change if I adjust my production volume?
• Chapter 7: How will my profits change if I change my selling price, sales volume, or costs?
• Chapter 8: How should the income statement be presented?
• Chapter 9 & 10: How well am I performing relative to my plan?
• Chapter 11: What performance measures should we monitor to ensure that we achieve our strategic goal?
• Chapter 12: How do I quantify the profit impact of pursuing one course of action versus another?
• Chapter 13: How do I make long-term capital investment decisions?
The key to effective analysis is to understand that the question you are addressing defines what you measure and how you analyze the data.
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38. Measurement Skills
Planning
The primary purpose of this course is to teach measurement skills that managers use to support planning, directing and motivating, and controlling activities.
Directing and
Motivating
The primary purpose of this course is to teach you measurement skills that managers use every day to support their planning, directing and motivating, and controlling.
Controlling
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39. End of Chapter 1
End of Chapter 1.