Chapter 1

Managerial Accounting and the Business environment

Learning objectives:
After studying Chapter 1, you should be able to:
1 Describe what managers do and why they need accounting information
2 Identify the major differences and similarities between financial and management accounting
3 Describe the role of a management accountant in a decentralized organization
4 The Changing Business Environment
5 Discuss the impact of international competition on businesses and on management accounting

1. Describe what managers do and why they need accounting information

Management accounting is concerned with providing information to managers that is, people
inside an organization who direct and control its operations.
In contrast, financial accounting is concerned with providing information to shareholders,
creditors, and others who are outside an organization. Management accounting provides the
essential data with which organizations are actually run. Financial accounting provides the
scorecard by which a companys past performance is judged.
Every organization large and small has managers. Someone must be responsible for making
plans, organizing resources, directing personnel and controlling operations. Managers
everywhere, carry out three major activities planning, directing and motivating and controlling.
Planning involves selecting a course of action and specifying how the action will be
implemented.
Directing and motivating involves mobilizing people to carry out plans and run routine
operations.
Controlling involves ensuring that the plan is actually carried out and is appropriately modified
as circumstances change.
Management accounting information plays a vital role in these basic management activities but
most particularly in the planning and control functions.

2 Identify the major differences and similarities between financial and management
accounting

3 Describe the role of a management accountant in a decentralized organization

Decentralization
Decentralization is the delegation of decision-making authority throughout an organization by
providing managers with the authority to make decisions relating to their area of responsibility.
Line and Staff Relationships
An organization chart also depicts 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, by contrast, is only indirectly involved in achieving those basic objectives. Staff
positions support or provide assistance to line positions or other parts of the organization, but
they do not have direct authority over line positions.
The Chief Financial Officer
As previously mentioned, in the United States the manager of the accounting department is often
known as the controller. The controller in turn reports to the Chief Financial Officer (CFO). The
Chief Financial Officer is the member of the top management team who is responsible for
providing timely and relevant data to support planning and control activities and for preparing
financial statements for external users. An effective CFO is considered a key member of the top
management team whose advice is sought in all major decisions. The CFO is a highly paid
professional who has command over the technical details of accounting and finance, who can
provide leadership to other professionals in his or her department, who can analyze new and
evolving situations, who can communicate technical data to others in a simple and clear manner,
and who is able to work well with top managers from other disciplines.
4. Describe the role of management accounting in the Changing Business Environment
Just-In-Time (JIT)
When companies use the Just-In-Time (JIT) production and inventory control system, they
purchase materials and produce units only as needed to meet actual customer demand. In a JIT
system, inventories are reduced to the minimum and in some cases is zero. For example, the
Memory Products Division of Stolle Corporation in Sidney, Ohio, slashed its work in process
inventory from 10,000 units to 250 units by using JIT techniques.
Benefits of a JIT System Many companieslarge and smallhave employed JIT with great
success. Among the major companies using JIT are Bose, Goodyear,Westinghouse, General
Motors, Hughes Aircraft, Ford Motor Company, Black and Decker, Chrysler, Borg-Warner, John
Deere, Xerox, Tektronix, and Intel. The main benefits of JIT include:
1. Funds that were tied up in inventories can be used elsewhere.
2. Areas previously used to store inventories are made available for other, more productive uses.
3. Throughput time is reduced, resulting in greater potential output and quicker response to
customers.
4. Defect rates are reduced, resulting in less waste and greater customer satisfaction.

Total Quality Management (TQM)

Perhaps the most popular approach to continuous improvement is known as Total Quality
Management. There are two major characteristics of Total Quality Management (TQM): (1) a
focus on serving customers and (2) systematic problem solving using teams made up of frontline workers. A variety of specific tools are available to aid teams in their problem solving. One
of these tools, benchmarking, involves studying organizations that are among the best in the
world at performing a particular task. For example, General Mills studied NASCAR pit crews in
action to figure out how to cut the time to change a production line from one product to another
from 4.5 hours to just 12 minutes.
Perhaps the most important feature of TQM is that it improves productivity by encouraging the
use of science in decision-making and discouraging counter-productive defensive behavior.5
Process Reengineering
Process Reengineering is a more radical approach to improvement than TQM. Instead of
tweaking the existing system in a series of incremental improvements, in Process
Reengineering a business process is diagrammed in detail, questioned, and then completely
redesigned to eliminate unnecessary steps, to reduce opportunities for errors, and to reduce costs.
The Theory of Constraints (TOC)
A constraint is anything that prevents you from getting more of what you want. Every
individual and every organization faces at least one constraint, so it is not difficult to find
examples of constraints.
The Theory of Constraints (TOC) is based on the insight that effectively managing the
constraint is a key to success. As an example, long waiting periods for surgery are a chronic
problem in the National Health Service (NHS), the government-funded provider of health care in
the United Kingdom.
International Competition
Over the last several decades, competition has become worldwide in many industries. This has
been caused by reductions in tariffs, quotas, and other barriers to free trade; improvements in
global transportation systems; and increasing sophistication in international markets. These
factors work together to reduce the costs of conducting international trade and make it possible
for foreign companies to compete on a more equal footing with local companies.
Reductions in trade barriers have made it easier for agile and aggressive companies to expand
outside of their home markets. As a result, very few companies can afford to be complacent. A
company may be very successful today in its local market relative to its local competitors, but
tomorrow the competition may come from halfway around the globe. As a matter of survival,
even companies that are presently doing very well in their home markets must become worldclass competitors. On the bright side, the freer international movement of goods and services
presents tremendous export opportunities for those companies that can transform themselves into
world-class competitors. And, from the standpoint of consumers, heightened competition
promises an even greater variety of goods, at higher quality and lower prices.