Chapter 1

Lecture Notes

Chapter theme: This chapter describes the larger business

environment within which management accounting
operates. It is divided into six sections: (1) what is
managerial accounting, (2) managerial accounting and
globalization, (3) a strategic view of managerial
1 accounting, (5) value creation perspectives: external,
internal, leadership and cultural, (5) Business management
perspectives,: ethics, corporate governance, enterprise risk
management, corporate social responsibility and
sustainability, and (6) the professional qualifications of
Management Accountants.

I. What is managerial accounting?

A. Financial and managerial accounting: seven key

differences

i. Users

1. Financial accounting reports are prepared

for external parties. Managerial accounting
reports are prepared for internal users.

2 ii. Emphasis on the future

1. Financial accounting summarizes past

activities. Managerial accounting has a
strong future orientation.

iii. Relevance of data

1. Financial accounting data should be

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 objective and verifiable. Managerial
accountants focus on providing relevant
data even if these data are not completely
objective or verifiable.
iv. Less emphasis on precision

2. Financial accounting focuses on precision

when reporting to external parties.
Managerial accounting aids decision makers
by providing good estimates as soon as
possible rather than waiting for precise data
later.

v. Segments of an organization

3. Financial accounting is concerned with

companywide reports. Managerial
2 accounting focuses on segment reports.
Examples of segments include:
a. Product lines, sales territories,
divisions, departments, etc.

vi. Managerial accounting – no externally

imposed rules

4. Financial accounting conforms to GAAP

and IFRS. Managerial accounting is not
bound by GAAP and IFRS.

vii. Managerial accounting – not mandatory

5. Financial accounting is mandatory because

various outside parties require periodic
financial statements. Managerial accounting
is not mandatory.
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 B. Managerial accounting helps managers carry out three
3 main activities—planning, controlling, and decision
making.

i. Planning
1. Planning involves establishing goals and
specifying how to achieve them.
4 2. Plans are often accompanied by a budget.
a. A budget is a detailed plan for the
future that is usually expressed in
formal quantitative terms.

ii. Controlling
1. Controlling involves gathering feedback to
ensure that the plan is being properly
executed or modified as circumstances
5 change.
2. Part of the control process includes
preparing performance reports.
a. A performance report compares
budgeted to actual results to improve
future performance.

iii. Decision making

1. Decision making involves selecting a
course of action from competing
alternatives.
6
2. Many managerial decisions revolve around
answering three questions:
a. What should we be selling?
b. Who should we be serving?
c. How should we execute?

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 C. Managerial Accounting and Cost Accounting

 Management accounting is one of the core

functions of businesses to help plan, evaluate and
control businesses. It relates to the provision of
appropriate information for decision-making.
 It is critical that management accounting
information is prepared, provided, and used on a
timely basis. Late information is no information.
 It is important for management accounting
information to be relevant, and such relevant
7 information needs to be obtained efficiently and
effectively.
 Cost-benefit evaluation is a key concept in
management accounting.
 Cost accounting defines costs and valuates
inventories to help managers to run businesses;
example including:
o FIFO, weighted average inventory valuation
technique
o Job costing, Process costing, Activity-based
costing
o Cost allocation techniques
 Cost accounting intertwines with Management
Accounting and the terms are sometimes
interchangeable.

D. Managerial Accounting and Globalization

i. With the fast changing globalised economy,

A. Management Accounting play an important
role in supporting management to make quick
and relevant decisions.
 Examples include
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 o offshoring,
o outsourcing
8 o Insourcing
o Supplier chain management, etc.

ii. The World Merchandise Exports data show

that Asia had progressive increases in global
trading activities from 1948 to 2012.
B. iii. Europe and Asia had the lion shares (about
70%) of the world merchandise exports. The
gap between Asia and Europe exports had
closed significantly over the period.

iv. Fortune 500 Global companies

 Asia Pacific companies (181
companies) overtook Europe and US
companies becoming the largest group of
the top 500 companies in 2012.
 European companies consistently form
the foundation of the Fortune Global 500
totaling 161 companies in 2012.
 From 2005 to 2012, among the Fortune
Global 500 companies, China companies
increased more than 4 folds from 16 to 73
10 (a gain of 57 companies) whereas US
companies reduced from 176 to 132 (a
drop of 44 companies)
 In the second half of 2010, China
officially overtook Japan as the second
biggest economy in the world, reflecting
the growing power of China companies.
 The number of Fortune 500 Global
firms from Taiwan and India companies
trailed closely behind South Korea and
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 were comparable with Australia,
10 forming another powerful group in the
Asia-Pacific region.

v. Top 10 Companies of Fortune Global 500

 Asian and China companies not only
increase in the total numbers on the
Fortune Global 500 list but also are
taking more top spots.
 Three out of ten companies in 2012
were from Asia (2 from China and 1 from
Japan). There were only four Asian
C. companies on the top 10 in 2010 (2 from
China and 2 from Japan).
 Checking the increase in revenue, the
two Chinese Companies increased over
$100 billion each within a year.
 Together with the earlier slides, data
show the important contribution of Asia
companies to the world economy.

vi. Internet Penetration Rate And Borderless

Trading Potential
 The Internet fuels globalization by
12 providing companies with greater access
to geographically dispersed customers,
employees, and suppliers.
 While the number of internet users
continues to grow, as of June 2012, about
66 % 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.

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 II. A Strategy View of Managerial Accounting

A. Definition

13 i. A strategy is a “game plan” that enables a

company to attract customers by
distinguishing itself from competitors.

B. Customer value propositions

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:

1. Ritz-Carlton, Nordstrom, and Starbucks.

ii. Companies that adopt an operational

excellence strategy strive to deliver products
and services faster, more conveniently, and at
14 a lower price than competitors. Examples of
companies that pursue this strategy include:

1. Daiso, Southwest Airlines, Wal-Mart, and

The Vanguard Group.

iii. Companies that adopt a product leadership

strategy strive to offer higher quality products
than competitors. Examples of companies that
pursue this strategy include:

1. Louis Vuitton, BMW, Cisco Systems, and

W.L. Gore.

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 C. Value Creation:
i. Value-added activities and processes

1. Value creation is not just for customers but

to all stakeholders.
2. Creating value to different groups of
stakeholders require paying attention to
value-added (versus non-value-added)
activities and processes.
3. Possible techniques focusing on value-added
activities and processes include:
15  Activity-based costing and
management
 Lean production
 Just-in-time inventory management
and production
 Theory of Constraints
 Kaizen costing
 Life-cycle costing
 Target pricing and costing
 Quality management e.g. total quality
management and six sigma

ii. Four Different Perspectives

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 1. External Perspectives – Value chain
management
a. Suppliers (upstream)
b. Customers (downstream)
D. 2. Internal Perspectives – Value chain
management
a. Business processes (examples
mentioned in slide 17)
3. Leadership Perspective
a. Leaders who can unite behaviors of
fellow employees
). Need to consider intrinsic
and extrinsic motivating
factors
). Need to be aware of
cognitive biases that
adversely affect planning,
controlling and decision
making.
4. Culture Perspective
E. a. National and organizational cultures
). Power distance,
individualism, uncertainty
avoidance, masculinity and
long-term orientation
 Different operating procedures and
remuneration approaches may be
required for different locations due
to the variation of the five cultural
dimensions.

iii. Process management

1. Key definitions/concepts

a. A business process is a series of steps

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17
 that are followed in order to carry out
some task in a business.

b. A value chain consists of the major

business functions that add value to a
company’s products and services.

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 D. Managerial Accounting: Beyond the Numbers
i. In addition to the External, Internal,
Leadership and Cultural Perspectives, the
following four business management
perspectives also go beyond the numbers to
enable intelligent planning, control, and
18 decision making:
a. An Ethics Perspective
b. A Corporate Governance Perspective
c. An Enterprise Risk Management
Perspective
d. A Corporate Social Responsibility and
Sustainability Perspective

E. An Ethics Perspective
i. All professional accountants’ bodies issue
ethical guidelines.
ii. The IMA’s Statement of Ethical Professional
F. Practice has two main parts – guidelines for
ethical behavior and guidelines for resolution
of an ethical conflict.
iii. Guidelines for ethical behavior
1. Competence
a. Maintain professional competence.
b. Follow applicable laws, regulations,
20 and standards.
c. Provide accurate, clear, concise, and
timely decision support information.
d. Recognize and communicate
professional limitations that preclude
responsible judgment.
2. Confidentiality
a. Do not disclose confidential
21 information unless legally obligated to
do so.
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 b. Ensure that subordinates do not
21 disclose confidential information.
c. Do not use confidential information for
unethical or illegal advantage.
3. Integrity
a. Mitigate conflicts of interest and
advise others of potential conflicts.
22 b. Refrain from conduct that would
prejudice carrying out duties ethically.
c. Abstain from activities that might
discredit the profession.
4. Credibility
a. Communicate information fairly and
objectively.
b. Disclose all relevant information that
23 could influence a user’s understanding
of reports and recommendations.
c. Disclose delays or deficiencies in
information timeliness, processing, or
internal controls.
iv. Guidelines for resolution of an ethical
conflict

1. Follow the organization’s established

policies for resolving ethical conflict. If this
does not work, consider the following
steps/advice:
a. Discuss the conflict with immediate
24 supervisor or next highest uninvolved
managerial level.
b. If immediate supervisor is the CEO,
consider the board of directors or the
audit committee.
c. Remember that contact with levels
above immediate supervisor should
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 only be initiated with supervisor’s
24 knowledge, assuming the supervisor is
not involved.
d. Except where legally prescribed,
communication with individuals not
employed by the organization is not
appropriate.
e. Clarify relevant ethical issues with an
25
objective advisor, such as a member of
the IMA’s Ethics Counseling Service.
f. Consult an attorney regarding your
legal obligations.

v. Why have ethical standards?

1. Ethical standards are motivated by a very

practical consideration—if the standards are
not followed in business, then the economy
26
and all of us would suffer.

2. Abandoning ethical standards would lead to a

lower standard of living with lower-quality
goods and services, less to choose from, and
higher prices.

vi. Company codes of conduct

1. Many companies have a formal code of

conduct. These codes are generally broad-
G. 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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 vii. Codes of conduct on the international level

1. The Code of Ethics for Professional

Accountants, issued by the International
Federation of Accountants (IFAC), governs
the activities of all professional accountants
throughout the world.

2. In addition to outlining ethical requirements

in matters dealing with integrity and
28 objectivity, resolution of ethical conflicts,
competence, and confidentiality, the IFAC’s
code also outlines the accountant’s ethical
responsibilities in matters relating to:
 Taxes,
 Independence,
 Fees and commissions,
 Advertising and solicitation,
 The handling of monies, and
 Cross-border activities.

F. A Corporate governance Perspective

i. Key definitions/concepts:
Corporate governance is the system by
which a company is directed and controlled.

1. If properly implemented, the corporate

29 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.

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 ii. The Sarbanes-Oxley Act of 2002

1. 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:

a. The Act requires both the CEO and

CFO to certify in writing that their
company’s financial statements and
disclosures fairly represent the results
30 of operations.
b. The Act establishes the Public
Company Accounting Oversight
Board to provide additional oversight
to the audit profession.
c. The Act places the power to hire,
compensate, and terminate public
accounting firms in the hands of the
audit committee.
d. 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.
e. The Act requires a company’s auditor
to issue an opinion on the effectiveness
of the company’s internal control over
31 financial reporting to accompany
management’s assessment, and both
are included in the company’s annual
report.
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 f. The Act establishes severe penalties
for certain behaviors, such as:
 Up to 20 years in prison for altering
or destroying any documents that
31 may be used in an official
proceeding.
 Up to 10 years in prison for
retaliating against a “whistle
blower.”

G. An Enterprise risk management Perspective

i. Enterprise risk management is a process

used by a company to proactively identify the
risks that it faces and manage those risks.
H.
ii. Once a company identifies its risks, the most
common risk management tactic is to reduce
risks by implementing specific controls.

1. This slide contains a subset of the business

risks and controls shown in Exhibit 1-7 of
33 the textbook. Collectively, these examples
illustrate the diversity of risks that
companies can face.

H. A Corporate social responsibility & Sustainability

Perspective
i. Corporate social responsibility (CSR) is a
concept whereby organizations consider the
34
needs of all stakeholders when making
decisions. CSR extends beyond legal
compliance to include voluntary actions that
satisfy stakeholder expectations.

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 1. Stakeholders include groups, such as
customers, employees, suppliers,
34 communities, and envrionmental and human
rights advocates, whose interests are tied to
the company’s performance.

2. This slide presents examples of corporate

35 social responsibilities that are of interest to
the six stakeholder groups just mentioned.

ii. Sustainability

1. GRI and IFAC play an important role in

promoting sustainability reporting. The
triple bottom-line concept is critical for
36 long-term sustainability of businesses.
2. Triple bottom-line are: Economic,
environmental, and social goals.
(or 3Ps: Profit, Planet, and People)
 Eurpoean companies led the pack in
sustainability reporting, followed by Asian
companies.
 The growing trend of adopting GRI
37 sustainability reporting standards is
encouraging. It increased from 10
companies in 1999 to 3,718 companies in
2012.

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 III. Professional Qualification of Management
Accountants
A. Key facts
 A management accountant who has the
necessary qualifications and who passes a
rigorous professional exam earns the right to
be known as a Certified Management
Accountant (CMA) or Chartered Management
Accountant (FCMA, ACMA) or other
management accountant’s qualifications such
as Cost and Works Accountants in India.
 Management accountants who become
38 professionally qualified accountants are often
given greater responsibilities and higher
compensation than other management
accountants who are professionally qualified.
 Information about becoming a professionally
qualified management accountant can be
accessed on the IMA’s website at
www.imanet.org, CIMA’s website
(www.cimaglobal.com) other relevant
institutions’ website by simple search on
Google or other search engines.

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