Chapter 1 serves four main purposes. First, it explains the differences and similarities between financial and managerial accounting. Second, it describes the role of management accountants in an organization. Third, it explains the basic concepts underlying Lean Production, the Theory of Constraints (TOC), and Six Sigma. Fourth, it discusses the importance of upholding ethical standards.
The data reveal an enormous increase in import activity from 1990 to 2004. In particular, imports from Canada, Mexico, and China skyrocketed.
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.
The Internet fuels globalization by providing companies with greater access to geographically dispersed customers, employees, and suppliers. The number of internet users more than doubled during the first four years of the new millennium.
As of 2004, more than 87% 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.
A strategy is a “game plan” that enables a company to attract customers by distinguishing itself from competitors.
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
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Managers carry out three main activities – planning, directing and motivating, and controlling.
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An important part of planning is to identify alternatives and then to select from among the alternatives the one that does the best job of furthering the organization’s objectives. Once alternatives have been identified, the plans of management are often expressed formally in budgets. Budgets are usually prepared under the direction of the controller, who is the manager in charge of the accounting department. Typically, budgets are prepared annually.
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In addition to planning for the future, managers must oversee day-to-day activities to keep the organization functioning smoothly. Managerial accounting data, such as daily sales reports, are often used in this type of day-to-day decision making.
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In carrying out the control function, managers seek to ensure that the plan is being followed. Feedback, which signals whether operations are on track, is the key to effective control. A performance report compares budgeted to actual results. It suggests where operations are not proceeding as planned and where some parts of the organization may require additional attention.
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The work of management, which is known as the planning and control cycle, can be depicted as shown. 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.
Learning objective number 1 is to identify the major differences and similarities between financial and managerial accounting.
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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 it is 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 reasonable estimates more quickly, rather than waiting for precise data later.
Segments of an organization: Financial accounting is concerned with reporting for a company as a whole. Managerial accounting focuses more on the segments of a 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.
Learning objective number 2 is to understand the role of management accountants in an organization.
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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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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.
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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.
Learning objective number 3 is to understand the basic concepts underlying Lean Production, the Theory of Constraints, and Six Sigma.
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.
Next, we will discuss three different approaches to improving business processes:
Lean production,
The theory of constraints (TOC), and
Six Sigma.
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.
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.
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.
The result of this five step process is to lower inventories, decrease defects, reduce wasted effort, and shorten customer response times.
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.
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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 observation 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.
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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.
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.”
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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The growth in e-commerce is occurring because the Internet has important advantages over more conventional marketplaces for many kinds of transactions. For example, the Internet is an ideal technology for streamlining the mortgage lending process because:
Customers can complete loan applications over the Internet rather than tying up the time of office personnel.
Data and funds can be sent back and forth electronically.
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.
Learning objective number 4 is to understand the importance of upholding ethical standards.
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The Institute of Management Accountant’s Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management have two main parts — guidelines for ethical behavior and guidelines for resolution for an ethical conflict.
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Management accountants have responsibility for ethical behavior 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
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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.
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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.
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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.
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When faced with ethical conflicts, 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.
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Additional guidelines for unresolved ethical conflicts 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.
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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.
Many companies have a formal code of conduct. Such 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.
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The Code of Ethics for Professional Accountants, issued by the International Federation of Accountants (IFAC), govern the activities of all professional accountants throughout the world. In addition to outlining ethical requirements in matters dealing with competence, objectivity, independence, 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
Cross-border activities.
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.
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.
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 Act requires that a company’s annual report contain an internal control reportthat is accompanied by an opinion from the company’s audit firm about thefairness of that 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.”
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.
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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A management accountant who has the necessary qualifications and who passes a rigorous professional exam earns the right to be known as a CertifiedManagement 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 www.imanet.org or by calling 1-800-638-4427.
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End of Chapter 1.