Chapter 1

Managerial Accounting & the Business Environment

Managerial Accounting and Financial Accounting

Managerial accounting provides information for managers inside an organization who direct and control its operations. Financial accounting provides information to stockholders, creditors and others who are outside the organization.

Differences Between Financial and Managerial Accounting

Financial Accounting
1. Users 2. Time focus 3. Verifiability versus relevance 4. Precision versus timeliness 5. Subject 6. Requirements External persons who make financial decisions Historical perspective Emphasis on verifiability Emphasis on precision Primary focus is on the whole organization Must follow GAAP and prescribed formats

Managerial Accounting
Managers who plan for and control an organization Future emphasis Emphasis on relevance for planning and control Emphasis on timeliness Focuses on segments of an organization Need not follow GAAP or any prescribed format

The Changing Business Environment

Growth of the internet Just-in-Time production Total Quality Management International competition

Business environment changes in the past twenty years

The Changing Business Environment

Just-In-Time Total Quality Management Process Reengineering Theory of Constraints

Just-in-Time (JIT) Systems

Receive customer orders. Complete products just in time to ship customers.

Schedule production. Receive materials just in time for production. Complete parts just in time for assembly into products.

JIT Consequences
Improved plant layout Reduced setup time Zero production defects Flexible workforce

JIT purchasing Fewer, but more ultrareliable suppliers. Frequent JIT deliveries in small lots. Defect-free supplier deliveries.

Benefits of a JIT System

Reduced inventory costs Freed-up funds

Higher quality products

Greater customer satisfaction More rapid response to customer orders

Decreased throughput

Total Quality Management

Study the current process. Collect data. Analyze the data to identify possible causes.

Develop a plan for improvement.

Decide how to measure improvement.

Plan

If successful, make the change permanent. If the results are not successful, try again.

Act

is

Do

Implement the plan on a small scale if possible. Collect data.

Check
Evaluate the data collected during the Do phase. Did the expected improvement occur?

Process Reengineering
A business process is diagrammed in detail.
Anticipated results: Process is simplified. Process is completed in less time. Costs are reduced. Opportunities for errors are reduced. The process is redesigned to include only those steps that make our product more valuable.

Every step in the business process must be justified.

Theory of Constraints
A sequential process of identifying and removing constraints in a system.
Restrictions or barriers that impede progress toward an objective

Theory of Constraints
Only actions that strengthen the weakest link in the chain improve the process.

2. Identify process constraints

1. Measure process capacity

3. Use bottlenecks effectively.

4. Coordinate processes

Theory of Constraints
Process Capacity
A measure of a processs ability to transform resources into value products and services. System Constraint The point in a system that limits the overall output of the system. Often called the bottleneck.

International Competition
Meeting world-class competition demands a world-class management accounting system. Managers must make decisions to plan, direct, and control a world-class organization.

Importance of Ethics in Accounting

Ethical accounting practices build trust and promote loyal, productive relationships with users of accounting information. Many companies and professional organizations, such as the Institute of Management Accountants (IMA), have written codes of ethics which serve as guides for employees.

IMA Code of Ethics for Management Accountants

Four broad areas of responsibility:
Maintain a high level of professional competence treat sensitive matters with confidentiality Maintain personal integrity

Be objective in all disclosures

IMA Code of Ethics for Management Accountants

Follow applicable laws, regulations and standards.

Maintain professional competence.

Competence
Prepare complete and clear reports after appropriate analysis.

IMA Code of Ethics for Management Accountants

Do not disclose confidential information unless legally obligated to do so. Do not use confidential information for personal advantage.

Confidentiality

Ensure that subordinates do not disclose confidential information.

IMA Code of Ethics for Management Accountants

Avoid conflicts of interest and advise others of potential conflicts. Do not subvert organizations legitimate objectives.

Integrity
Recognize and communicate personal and professional limitations.

IMA Code of Ethics for Management Accountants

Avoid activities that could affect your ability to perform duties. Refrain from activities that could discredit the profession. Refuse gifts or favors that might influence behavior.

Integrity
Communicate unfavorable as well as favorable information.

IMA Code of Ethics for Management Accountants

Communicate information fairly and objectively.

Objectivity
Disclose all information that might be useful to management.

IMA Code of Ethics for Management Accountants

Resolution of Ethical Conflict
Follow established policies.
For unresolved ethical conflicts:
Discuss the conflict with immediate superior. If immediate superior is the CEO, consider the board of directors or the audit committee. Except where legally prescribed, maintain confidentiality.

IMA Code of Ethics for Management Accountants

Resolution of Ethical Conflict
Clarify issues in a confidential discussion with an objective advisor. Consult an attorney as to legal obligations. The last resort is to resign.

End of Chapter 1