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Managerial Accounting and the

Business Environment
Chapter 1

McGrawHill/Irwin Copyright2010byTheMcGrawHillCompanies,Inc.Allrightsreserved.
Management Accounting
Financial Accounting: The process of recording,
summarizing and reporting the myriad of transactions
from a business, so as to provide an accurate picture of
its financial position and performance.
Management/Cost Accounting: The process of
identifying, measuring, analyzing, interpreting, and
communicating information for the pursuit of an
organization's goals.

1: Globalization
Increased Competition
New Markets
Variety of Goods
2: Strategy
Game Plan that enables a company to attract
customer by Distinguishing itself from competitors:
So who will be the focal point of the companys
strategy?
The reason why its customer choose it over the
competitor is called Value propositions.
So what will be the essence of the strategy?
Three Categories of value Preposition:
Customer Value Propositions
Customer
Understand and respond to
Intimacy
individual customer needs.

Operational Deliver products and services


Excellence faster, more conveniently,
and at lower prices.

Product
Leadership Offer higher quality products.

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3: Organizational Structure
Decentralization: is the delegation of decision-making authority
throughout an organization.
Organizational Chart: It shows how responsibility is divided among
managers and it shows formal lines of reporting and communication
or chain of command. It also depicts line and staff position
Line Position: a person in line position is directly involved in
achieving the basic objectives of the organization e.g. Faculty
members in universities, Sales person, Store mangers, vice
president operations in retail stores.
Staff Position: a person in staff position is indirectly involved in
achieving the companies basic objectives. E.g. Administrative staff
in the university like DOO, Registrar treasure etc and in retail
business CFO, Personnel Department etc
Organizational Chart

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 C h ie f F in a n c ia l
O p e r a t io n s O f f ic e r

T re a su re r C o n t r o lle r

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4: Process Management
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 companys products
and services.
4: Process Management
A business
process is a series of
steps that are followed in order to
carry out some task in
a business.

Product Customer
R&D Design Manufacturing Marketing Distribution Service

Business functions making up the value chain

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Traditional Push Manufacturing Company

Traditional push Large


manufacturing inventories

Raw Work in Finished


materials process goods

Materials waiting Completed products


to be processed. awaiting sale.
Partially completed products
requiring more work before
they are ready for sale.
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Methods to Improve Process

1: Lean Production (Lean Thinking Model)

2: Theory of Constraints

3: Six Sigma
4.1 Lean Thinking Model
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.
The second step is to identify the business process that delivers this
value to customers.
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.
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.
The fifth step is to continuously pursue perfection in the business
process.
4.1 Lean Production
Identify value Identify the
in specific business process
products/services. that delivers value.

The lean thinking Organize work


arrangements around
model is a five
the flow of the
step approach. business process.

Continuously pursue Create a pull


perfection in the system that responds
business process. to customer orders.
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4.1 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 Create Production Generate component


an order Order requirements

Goods delivered Production begins Components


when needed as parts arrive are ordered
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4.2 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.

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4.2 Theory of Constraints
Only actions 2. Allow the
that strengthen weakest link to
the weakest link set the tempo.
in the chain
improve the
process.
3. Focus on
1. Identify the improving
weakest link. the weakest
link.

4. Recognize that
the weakest link
is no longer so.
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Example
4.3 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 Sometimes
Sometimes
generates
generates no no more
more associated
associated
than
than 3.4
3.4 defects
defects per
per million
million with
with the
the term
term zero
zero
opportunities.
opportunities. defects.
defects.

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4.3 Six Sigma

The Most Common frame work used to guide six


sigma process improvement efforts is known as
DMAIC
4.3 Six Sigma

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5: Importance of Ethics in Business
Without fundamental trust in the integrity of
Businesses, the economy would operate much less
efficiently.
Example: Dishonesty of fruit shops in Pakistan.

No Trust No Enron (Energy Company):


In 1990s it reported accounting fiction profit.
Enron has to be trustworthy because its customers
will have to face consequences if fails to fulfill its
promise.
When in 2001 it announced that its previous financial
statements overstated the Firm performance led to its
death
Institute of Management Accountants
Guidelines for Ethical Behavior
Recognize
Recognize and
and
communicate
communicate professional
professional
limitations
limitations that
that prevent
prevent
responsible
responsible judgment.
judgment.

Maintain
Maintain Follow
Follow applicable
applicable
professional
professional Competence laws,
laws, regulations
regulations
competence.
competence. and
and standards.
standards.

Provide
Provide accurate,
accurate, clear,
clear,
concise,
concise, and
and timely
timely decision
decision
support
support information.
information.
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IMA Guidelines for Ethical Behavior
Do
Do not
not disclose
disclose confidential
confidential
information
information unless
unless legally
legally
obligated
obligated to
to do
do so.
so.

Do
Do not
not use
use
confidential
confidential
information
information forfor Confidentiality
Confidentiality
unethical
unethical or
or illegal
illegal
advantage.
advantage.

Ensure
Ensure that
that subordinates
subordinates do
do
not
not disclose
disclose confidential
confidential
information.
information.

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IMA Guidelines for Ethical Behavior

Mitigate
Mitigate conflicts
conflicts of
of
interest
interest and
and advise
advise others
others
of
of potential
potential conflicts.
conflicts.
Avoid
Avoid such
such
conduct
conduct that
that
would
would allow
allow Integrity
carrying
carrying out
out
duties
duties
unethically.
unethically.
give
give up
up those
those activities
activities that
that
might
might discredit
discredit (disgrace)
(disgrace)
the
the profession.
profession.

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IMA Guidelines for Ethical Behavior
Communicate
Communicate information
information
fairly
fairly and
and objectively.
objectively.

Disclose
Disclose delays
delays or
or
deficiencies
deficiencies inin information
information
Credibility
Credibility timeliness,
timeliness, processing,
processing, or or
internal
internal controls.
controls.

Disclose
Disclose all
all relevant
relevant
information
information that
that could
could
influence
influence aa users
users
understanding
understanding of of reports
reports
and
and recommendations.
recommendations.
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6: Corporate Governance
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 companys owners and
it should provide for effective monitoring of
performance.
6: Corporate Governance
The system by
which a company is directed
and controlled.
Board of Incentives and
Directors monitoring for

Top To pursue
Management objectives of

Stockholders

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The Sarbanes Oxley Act of 2002
The Purpose is to protect the investors. The six key
legislations are:
I: Act requires CEO and CFO to certify in writing that the
companies financial statements and Accompanying
disclosure represents fair results of operations. (also a
threat of possible jail time if not).
II: The act establishes the Public Company Accounting
Oversight Board to provide additional oversight over
the Audit Profession. The act authorizes the board to
conduct investigations, to take disciplinary actions against
Audit Firms, and to enact various standards and rules
concerning preparation of audit reports.
The Sarbanes Oxley Act of 2002
III: Act places the power to Hire, Compensate, and Terminate the
Audit Firm in hands of Internal Audit Committee of the
Independent Board Of Directors.
IV: The Act Prohibit the Auditing firm from providing Non Auditing
services to an Audit Client.
V: Act requires that the company annual report must contain Internal
control report. Internal control are put in place by the
management to provide assurance to investors that financial
disclosures are reliable. It must be accompanied by an opinion of
audit firm whether the firms has maintained effective internal
control over its financial system.
VI: Act establishes severe penalties. e.g up to 20 years in prison for
altering or destroying documents. 10 years in prison for retaliating
whistle blower.
7: Enterprise Risk Management

Enterprise risk management is a process used by a


company to proactively identify the risks that it faces
and manage those risks.
Business Risk Controls to Reduce Business
Risk
Intellectual assets being stolen Create fire wall that prohibit
from computer files computer hackers
Product Harming Customers Develop a formal and rigorous
new product testing program
An employee steeling assets Segregate duties so that same
employee does not have
physical custody of an asset.
An employee accessing Creating passwords-protected
unauthorized information. barriers that prohibited
employees from obtaining
Enterprise Risk Management
Should I try to avoid the risk,
Transfer the risk, accept the
risk, or reduce the risk?
A process used
by a company to
proactively identify
and manage risk.

Once
Once aa company
company identifies
identifies its
its risks,
risks, perhaps
perhaps the
the
most
most common
common riskrisk management
management tactictactic is
is to
to reduce
reduce
risks
risks by
by implementing
implementing specific
specific controls.
controls.
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8: Corporate Social Responsibility
Corporate social responsibility (CSR) is a concept
whereby organizations consider the needs
of all stakeholders when making decisions.

Environmental
Customers Employees Suppliers Communities Stockholders & Human Rights
Advocates

CSR extends beyond legal compliance


to include voluntary actions that satisfy
stakeholder expectations.

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End of Chapter 1

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