Managerial Accounting and The Business Environment: Garrison, Noreen, Brewer, Cheng & Yuen

Managerial Accounting and the
Business Environment
Chapter 1
Garrison, Noreen, Brewer, Cheng & Yuen
2012 McGraw-Hill Education (Asia)
Management Accounting and Cost

Accounting
Management 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
Management Accounting and Cost Accounting

are intertwined and
the terms are sometimes interchangeable
their functions are to help companies make better decisions
McGraw-Hill Education (Asia)
Slide 2
World Merchandise Trade Volume By Major

Product Group, 1950-2009 (Volume Indices, 1950=100)
Source: World Trade Organization, International Trade Statistic 2010

Slide 3
Regional Shares In World Merchandise

Exports, 2009
Slide 4
Distribution of Fortune Global 500

companies between 2005 and 2010
Fortune Global
500
Australia
China
India
Japan
Malaysia
Singapore
South Korea
Taiwan
Thailand
Asia Pacific
US
Canada
Europe
Others
2010 2009 2007 2005

8
9
8
9
46
37
24
16
8
7
6
5
71
68
67
81
1
1
1
1
2
2
1
1
10
14
14
11
8
6
6
2
1
1
1
1
155 145 128 127
139 140 162 176
11
14
16
13
184 188 183 178
11
13
11
6
500
500
500
500
Slide 5
Top 10 Companies of Fortune Global 500

(ranked by revenue)
Revenues
Rank Company
2010
2009
Profits
Revenues
Profits
($millions) ($millions) Rank Company
($millions)
($millions)
1 Wal-Mart Stores
408,214
14,335
1 Royal Dutch Shell
458,361
26,277
2 Royal Dutch Shell
285,129
12,518
2 Exxon Mobil
442,851
45,220
3 Exxon Mobil
284,650
19,280
3 Wal-Mart Stores
405,607
13,400
4 BP
246,138
16,578
4 BP
367,053
21,157
5 Toyota Motor
204,106
2,256
5 Chevron
263,159
23,931
6 Japan Post Holdings
202,196
4,849
6 Total
234,674
15,500
7 Sinopec
187,518
5,756
7 ConocoPhillips
230,764
-16,998
8 State Grid
184,496
-343
8 ING Group
226,577
-1,067
9 AXA
175,257
5,012
9 Sinopec
207,814
1,961
165,496
10,272
204,352
-4,349
10 China National Petroleum
10 Toyota Motor
source: http://money.cnn.com/magazines/fortune/global500/2010/full_list/index.html
Slide 6
Internet Penetration Rate And Borderless

Trading Potential
The
The Internet
Internet fuels
fuels globalization
globalization
by
by providing
providing companies
companies with
with greater
greater
access
access to
to geographically
geographically dispersed
dispersed
customers,
customers, employees,
employees, and
and suppliers.
suppliers.
As
As of
of June
June 2010,
2010, more
more than
than 71%
71% of
of
the
the world's
world's population
population was
was still
still
not
not connected
connected to
to the
the Internet.
Internet.
Slide 7
Strategy
A strategy
is a game plan
that enables a company
to attract customers
by distinguishing itself
from competitors.
The
The focal point
point of a
companys
companys strategy
strategy should
should
be its
its target
target customers.
customers.
Slide 8
Customer Value Propositions

Customer
Intimacy
Strategy
Understand and respond to

individual customer needs.
Operational
Excellence
Strategy
Deliver products and services

faster, more conveniently,
and at lower prices.
Product
Leadership
Strategy
Offer higher quality products.
Slide 9
Learning Objective 1
Understand the role of

management accountants
in an organization.
Slide 10
Organizational Structure
DecentralizationisthedelegationofdecisionDecentralizationisthedelegationofdecisionmakingauthoritythroughoutanorganization.
makingauthoritythroughoutanorganization.
C o r p o r a te O r g a n iz a tio n C h a r t
B o a r d o f D ir e c t o r s
P r e s id e n t
P u r c h a s in g
P e rso n n e l
V ic e P r e s id e n t
O p e r a t io n s
C h ie f F in a n c ia l
O f f ic e r
T re a su re r
C o n t r o lle r
Slide 11
Line and Staff Relationships

Linepositions are directly
related to achievement of
the basic objectives of an
organization.
Example:Production
supervisorsina
manufacturingplant.
Staff positions support

and assist line positions.
Example:Cost
accountantsinthe
manufacturingplant.
Slide 12
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.
Slide 13
Understand the basic

concepts underlying
Lean Production, the
Theory of Constraints,
and Six Sigma.
Slide 14
Process Management
A business
process is a series of
steps that are followed in order to
carry out some task in
a business.
R&D
Product
Design
Customer
Manufacturing Marketing Distribution Service
Businessfunctionsmakingupthevaluechain
Slide 15
Process Management
There are three approaches to
improving business processes . . .
Theoryof
Constraints(TOC)
Lean
Production
Six
Sigma
Slide 16
Traditional Push Manufacturing Company
Forecast Sales
Make Sales from

Finished Goods
Inventory
Order components
Store
Inventory
Store Inventory
Produce goods in
anticipation of Sales
Slide 17
Traditional Push Manufacturing Company

Traditional push
manufacturing
Raw
materials
Work in
process
Materialswaiting
tobeprocessed.
Large
inventories
Finished
goods
Completedproducts
awaitingsale.
Partiallycompletedproducts
requiringmoreworkbefore
theyarereadyforsale.
Slide 18
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.
Continuously pursue
perfection in the
business process.
Create a pull
system that responds
to customer orders.
Slide 19
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
Goods delivered
when needed
Production begins
as parts arrive
Components
are ordered
Slide 20
Lean Production
Lean thinking can be used to improve business
processes that link companies together.
The term supply chain management refers to the

coordination of business processes across
companies to better serve end consumers.
Slide 21
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.
Slide 22
Theory of Constraints
2.Allowthe
weakestlinkto
setthetempo.
Onlyactions
thatstrengthen
theweakestlink
inthechain
improvethe
process.
3.Focuson
improving
theweakest
link.
1.Identifythe
weakestlink.
4.Recognizethat
theweakestlink
isnolongerso.
Slide 23
Six Sigma
A
A process
process improvement
improvement method
method relying
relying on
on customer
customer
feedback
feedback and
and fact-based
fact-based data
data gathering
gathering and
and analysis
analysis
techniques
techniques to
to drive
drive process
process improvement.
improvement.
Refers
Refers to
to aa process
process that
that
generates
generates no
no more
more
than
than 3.4
3.4 defects
defects per
per million
million
opportunities.
opportunities.
Sometimes
Sometimes
associated
associated
with
with the
the term
term zero
zero
defects.
defects.
Slide 24
Six Sigma
Slide 25
Understand the
importance of upholding
ethical standards.
Slide 26
Code of Conduct for Management

Accountants
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.
Slide 27
IMA Guidelines for Ethical Behavior

Recognizeand
Recognizeand
communicateprofessional
communicateprofessional
limitationsthatpreclude
limitationsthatpreclude
responsiblejudgment.
responsiblejudgment.
Maintain
Maintain
professional
professional
competence.
competence.
Competence
Followapplicable
Followapplicable
laws,regulations
laws,regulations
andstandards.
andstandards.
Provideaccurate,clear,
Provideaccurate,clear,
concise,andtimelydecision
concise,andtimelydecision
supportinformation.
supportinformation.
Slide 28

Donotdiscloseconfidential
Donotdiscloseconfidential
informationunlesslegally
informationunlesslegally
obligatedtodoso.
obligatedtodoso.
Donotuse
Donotuse
confidential
confidential
informationfor
informationfor
unethicalorillegal
unethicalorillegal
advantage.
advantage.
Confidentiality
Confidentiality
Ensurethatsubordinatesdo
Ensurethatsubordinatesdo
notdiscloseconfidential
notdiscloseconfidential
information.
information.
Slide 29

Mitigateconflictsof
Mitigateconflictsof
interestandadviseothers
interestandadviseothers
ofpotentialconflicts.
ofpotentialconflicts.
Refrainfrom
Refrainfrom
conductthat
conductthat
wouldprejudice
wouldprejudice
carryingout
carryingout
dutiesethically.
dutiesethically.
Integrity
Abstainfromactivitiesthat
Abstainfromactivitiesthat
mightdiscreditthe
mightdiscreditthe
profession.
profession.
Slide 30

Communicateinformation
Communicateinformation
fairlyandobjectively.
fairlyandobjectively.
Credibility
Credibility
Disclosedelaysor
Disclosedelaysor
deficienciesininformation
deficienciesininformation
timeliness,processing,or
timeliness,processing,or
internalcontrols.
internalcontrols.
Discloseallrelevant
Discloseallrelevant
informationthatcould
informationthatcould
influenceausers
influenceausers
understandingofreports
understandingofreports
andrecommendations.
andrecommendations.
Slide 31
IMA Guidelines for Resolution of an Ethical

Conflict
Followemployersestablishedpolicies.
Foranunresolvedethicalconflict:
Discuss
Discuss the
the conflict
conflict with
with immediate
immediate supervisor
supervisor or
or
next
next highest
highest uninvolved
uninvolved manager.
manager.
If
If immediate
supervisor is
is the
the CEO,
CEO, consider
consider the
the
board
board of
of directors
directors or
or the
the audit
audit committee.
committee.
Contact
Contact with
with levels
levels above
above the
the immediate
supervisor
should
should only
only be
be initiated
initiated with
with the
the supervisors
supervisors
knowledge,
knowledge, assuming
assuming the
the supervisor
supervisor is
is not
not involved.
involved.
Slide 32
IMA Guidelines for Resolution of an Ethical

Conflict
Except
Except where
where legally
legally prescribed,
prescribed, maintain
maintain
confidentiality.
confidentiality.
Clarify
Clarify issues
issues in
in aa confidential
confidential discussion
discussion with
with an
an
objective
objective advisor.
advisor.
Consult
Consult an
an attorney
attorney as
as to
to legal
legal obligations.
obligations.
Slide 33
Why Have Ethical Standards?

Ethical
Ethical standards
standards in
in business
business are
are essential
essential for
for aa
smooth
smooth functioning
functioning economy.
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.
Slide 34
Company Codes of Conduct

Broad-based
Broad-based statements
statements of
of aa
companys
companys responsibilities
responsibilities to:
to:
Employees
Customers
Suppliers
And to the communities in

which the company operates.
Slide 35
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 IFACs code
deals with the accountants ethical responsibilities in:
Taxes,
Independence,
Fees and commissions,
Advertising and solicitation,
Handling of monies, and
Cross-border activities.
Slide 36
Corporate Governance
Thesystemby
whichacompanyisdirected
andcontrolled.
Board of
Directors
Incentives and
monitoring for
Top
Management
To pursue
objectives of
Stockholders
Slide 37
The Sarbanes-Oxley Act of 2002

The
The Sarbanes-Oxley
Sarbanes-Oxley Act
Act of
of 2002
2002 was
was intended
intended to
to protect
protect the
the
interests
interests of
of those
those who
who invest
invest in
in publicly
publicly traded
traded companies
companies by
by
improving
improving the
the reliability
reliability and
and accuracy
accuracy of
of corporate
corporate financial
financial
reports
reports and
and disclosures.
disclosures. Six
Six key
key aspects
aspects of
of the
the legislation
legislation include:
include:
The
The Act
Act requires
requires both
both the
the CEO
CEO and
and CFO
CFO to
to certify
certify in
in writing
writing
that
that their
their companys
companys financial
financial statements
statements and
and disclosures
disclosures
fairly
fairly represent
represent the
the results
results of
of operations.
operations.
The
The Act
Act establishes
establishes the
the Public
Public Company
Company Accounting
Accounting Oversight
Oversight
Board
Board to
to provide
provide additional
additional oversight
oversight of
of the
the audit
audit profession.
profession.
The
The Act
Act places
places the
the power
power to
to hire,
hire, compensate,
compensate, and
and terminate
terminate
public
public accounting
accounting firms
firms in
in the
the hands
hands of
of the
the audit
audit committee.
committee.
The
The Act
Act places
places restrictions
restrictions on
on audit
audit firms,
firms, such
such as
as prohibiting
prohibiting
public
public accounting
accounting firms
firms from
from providing
providing aa variety
variety of
of non-audit
non-audit
services
services to
to an
an audit
audit client.
client.
Slide 38
The Sarbanes-Oxley Act of 2002

(continued)
(continued)
The
The Act
Act requires
requires aa public
public companys
companys independent
independent auditor
auditor
to
to issue
issue an
an opinion
opinion on
on the
the effectiveness
effectiveness of
of the
the companys
companys
internal
internal control
control over
over financial
financial reporting
reporting to
to accompany
accompany
managements
managements assessment,
assessment, and
and both
both are
are included
included in
in the
the
companys
companys annual
annual report.
report.
The
The Act
Act establishes
establishes severe
severe penalties
penalties for
for certain
certain behaviors,
behaviors,
such
such as:
as:
Up
Up to
to 20
20 years
years in
in prison
prison for
for altering
altering or
or destroying
destroying any
any
documents
documents that
that may
may eventually
eventually be
be used
used in
in an
an official
official
proceeding.
proceeding.
Up
Up to
to 10
10 years
years in
in prison
prison for
for retaliating
retaliating against
against aa
whistle
whistle blower.
blower.
Slide 39
Enterprise Risk Management
A process used
by a company to
proactively identify
and manage risk.
Should I try to avoid the risk,

share the risk, accept the
risk, or reduce the risk?
Once
Once aa company
company identifies
identifies its risks, perhaps
perhaps the
most
most common
common risk
risk management
management tactic
tactic is
is to reduce
reduce
risks
risks by
by implementing
implementing specific
specific controls.
controls.
Slide 40
Enterprise Risk Management
Slide 41
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
CSR extends beyond legal compliance

to include voluntary actions that satisfy
stakeholder expectations.
Slide 42
Corporate Social Responsibility
Slide 43
Sustainability Reporting
Global Reporting Initiative (GRI)
promotes a systematic and standardized approach
o to corporate social responsibility and embed it in corporate culture;
o to stimulate demand for sustainability information;
thus benefitting both reporting organizations and report users.
International Federation of Accountants (IFAC) Sustainability Framework
Organizations should
o achieve a Triple Bottom-Line
financial, social, and environmental goals
(or 3Ps: Profit, People, and Planet)
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.
Slide 44
Sustainability Reporting:
GRI Registered Companies
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
Slide 45
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
CMA
Canada
Canada
CMA
The Chartered Institute of Management Accountants
CIMA
UK
FCMA , ACMA
The Institute of Certified Management Accountants of

Australia
ICMA
Australia
CMA
- CMA Philippines
Philippines
CMA
- CMA Indonesia
Indonesia
CMA
- CMA Sri Lanka
Sri Lanka
CMA
- CMA India
India
CMA
India
FICWA, AICWA
(previously known as The Society of Management Accountants of

Canada)
The Institute of Cost and Works Accountants of India
ICWAI
Slide 46
End of Chapter 1
Slide 47

Managerial Accounting and The Business Environment: Garrison, Noreen, Brewer, Cheng & Yuen

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Managerial Accounting and the

Garrison, Noreen, Brewer, Cheng & Yuen

2012 McGraw-Hill Education (Asia)

Management Accounting and Cost

relates to the provision of appropriate information, including cost

defines costs and valuates inventories to help managers to run

Management Accounting and Cost Accounting

Garrison, Noreen, Brewer, Cheng & Yuen

World Merchandise Trade Volume By Major

Source: World Trade Organization, International Trade Statistic 2010

Garrison, Noreen, Brewer, Cheng & Yuen

Regional Shares In World Merchandise

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Distribution of Fortune Global 500

McGraw-Hill Education (Asia)

2010 2009 2007 2005

Garrison, Noreen, Brewer, Cheng & Yuen

Top 10 Companies of Fortune Global 500

($millions) ($millions) Rank Company

1 Royal Dutch Shell

2 Royal Dutch Shell

6 Japan Post Holdings

10 China National Petroleum

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Internet Penetration Rate And Borderless

Garrison, Noreen, Brewer, Cheng & Yuen

Garrison, Noreen, Brewer, Cheng & Yuen

Customer Value Propositions

Understand and respond to

Deliver products and services

Offer higher quality products.

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Understand the role of

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Garrison, Noreen, Brewer, Cheng & Yuen

Line and Staff Relationships

McGraw-Hill Education (Asia)

Staff positions support

Garrison, Noreen, Brewer, Cheng & Yuen

The Chief Financial Officer (CFO)

Preparing financial statements for external users.

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Understand the basic

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Garrison, Noreen, Brewer, Cheng & Yuen

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

Traditional Push Manufacturing Company

Make Sales from

Garrison, Noreen, Brewer, Cheng & Yuen

Traditional Push Manufacturing Company

McGraw-Hill Education (Asia)

The lean thinking

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen

McGraw-Hill Education (Asia)

Garrison, Noreen, Brewer, Cheng & Yuen