Chapter 1

ManagerialAccounting & Business Environment

 Overview – Managerial Accounting &
Business Environment
Contents
• Comparison of Financial and Management
Accounting
• Work of Management and need of Management
Accounting
• Expanding Role of Management Accounting
• Organization Structure
• The Changing Business Environment
• Professional Ethics
Learning Objectives
• Identify the major differences and similarities
between financial and managerial accounting
• Understand the role of managerial accountants
in an organization
• Understand the importance of upholding
ethical standards
 Section A –
Financial & Managerial Accounting
What is Business
Start Business Owner gets
with Capital dividends /
Owner share of profit
provided either
By Utilizing
by equity or
Resources,
debt Debt
Business
providers get
generates
Starting of Interest on
revenues &
Business means debt
profits
acquiring of
Debt resources Profit portion
Provider (assets) reinvest as
Retained
Earning

Business requires management from inception to day to day operation.

Objective of business is to add value to those who invested in the business.
Accounting & Business
• Accounting is an art to systematically records all financial
transactions in a standardized pattern to measure value of the
business.

• It is an art to transform financial data into meaningful financial

information to external and internal stakeholders.
 Financial Accounting vs.
Managerial Accounting
- What would be the
projected sales for
- What is total sales
2018
for 2016
- Should the
- How much is total Company need to
salaries expense in increase price of the
Financial Managerial
the current year products in
Accounting is to Accounting is to
anticipation of
Measure Value - How much is the Create Value
rising fuel prices
total operating - How much cost
profit for current
Company can
year as compare to
controlled to make
last year.
business more
profitable
Differences – Financial & Managerial Accounting
Enterprise Financial Management
Definition of Management Accounting by
Institute of Management Accountants
• According to the Institute of Management Accountants (IMA):
"Management accounting is a profession that involves partnering in
management decision making, devising planning and performance
management systems, and providing expertise in financial reporting
and control to assist management in the formulation and
implementation of an organization's strategy"
Quick Check
• Although financial and managerial accounting differ in many ways,
they are similar in that both rely on the same underlying financial
data. (True/False)

• Management accounting focuses primarily on providing data for:

• A) internal uses by managers.
• B) external uses by stockholders and creditors.
• C) external uses by the Internal Revenue Service.
• D) external uses by the Securities and Exchange Commission.
Quick Check (Cont’d)
• Compared to financial accounting, managerial accounting places
more emphasis on:

• A) the flexibility of information.

• B) the precision of information.
• C) the timeliness of information.
• D) both A and C above.
 Section B –
Work for Management &
Roles for Management Accountants
Work of Management
Planning
Directing and
Motivating

Controlling
Planning
Identify
Identify
alternatives.
alternatives.

Select
Select alternative
alternative that
that does
does
the
the best
best job
job of
of furthering
furthering
organization’s
organization’s objectives.
objectives.

Develop
Develop budgets
budgets to
to guide
guide
progress
progress toward
toward the
the
selected
selected alternative.
alternative.
 Directing and Motivating

Directing and motivating involves managing day-to-day

activities to keep the organization running smoothly.
• Employee work assignments.
• Routine problem solving.
• Conflict resolution.
• Effective communications.
Controlling
The
The control
control function
function ensures
ensures
that
that plans
plans are
are being
being followed.
followed.

Feedback
Feedback inin the
the form
form ofof performance
performance reports
reports
that
that compare
compare actual
actual results
results with
with the
the budget
budget
are
are an
an essential
essential part
part of
of the
the control
control function.
function.
 Exh.
1-1

Planning and Control Cycle

Formulating long-and
Begin
short-term plans
(Planning)

Comparing actual
Implementing
to planned Decision plans (Directing and
performance Making Motivating)
(Controlling)

Measuring
performance
(Controlling)
Role of Management Accountant in an
Organization

Decision
Planning
Making
Controlling
Role of Management Accountant in an Organization
Organizational Structure
Decentralization
Decentralization is
is the
the delegation
delegation of
of decision-
decision-
making
making authority
authority throughout
throughout anan organization.
organization.

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
Line and Staff Relationships
Line positions are directly Staff positions support and
related to achievement of assist line positions.
the basic objectives of an • Example: Cost accountants in
organization. the manufacturing plant.
• Example: Production
supervisors in a
manufacturing plant.
The Chief Financial Officer (CFO)
A member of the top management team responsible for:
• Providing timely and relevant data to support planning and
control activities.
• Preparing financial statements for external users.
Quick Check
1- Which of the following is not one of the three basic activities of a manager?
• A) Planning
• B) Controlling
• C) Directing and motivating
• D) Compiling management accounting reports

2- The delegation of decision making to lower levels in an organization is known as:

• A) the planning and control cycle.

• B) controlling.
• C) decentralization.
• D) none of these.
Quick Check
3- Which of the following statements are false concerning line and staff functions?

• I. Persons occupying staff functions have authority over persons occupying line functions.
• II. Both line and staff functions are depicted on the organization chart.
• III. Line functions are directly related to the basic objectives of an organization.
• A) Only I
• B) Only II
• C) Only I and II
• D) I, II, and III
 Section C –
Changing Business Environment
Just-in-Time (JIT) Systems
Receive
Receive
customer Complete
Complete products
products
customer
orders. just
just in
in time
time to
to
orders.
ship
ship customers.
customers.

Schedule
Schedule
production.
production.

Receive
Receive materials
materials Complete
Complete partsparts
just
just in
in time
time for
for just
just in
in time
time for
for
production.
production. assembly
assembly intointo products.
products.
JIT Consequences
Improved
Improved Zero
Zeroproduction
production
plant
plantlayout
layout defects
defects

Reduced
Reduced Flexible
Flexible
setup
setuptime
time workforce
workforce

JIT
JIT purchasing
purchasing
Fewer,
Fewer, but
but more
more ultrareliable
ultrareliable suppliers.
suppliers.
Frequent
Frequent JIT
JIT deliveries
deliveries inin small
small lots.
lots.
Defect-free
Defect-free supplier
supplier deliveries.
deliveries.
Benefits of a JIT System
Reduced
Reduced Freed-up
Freed-up funds
funds
inventory
inventory
costs
costs
Greater
Greater
customer
customer
Higher
Higher quality
quality satisfaction
satisfaction
products
products
More
More rapid
rapid
response
response toto
Increased
Increased throughput
throughput customer
customer orders
orders
Total Quality Management (TQM)
TQM improves productivity by encouraging the use of fact
and analysis for decision making and if properly implemented,
avoids counter-productive organizational infighting.

Continuous
Improvement
Systematic
problem solving
using tools such is
as benchmarking
Process Reengineering
Anticipated results:
A business process Process is simplified.
is diagrammed Process is completed
in detail. in less time.
Costs are reduced.
Opportunities for
errors are reduced.

Every step in The process is redesigned

the business to eliminate all
process must non-value-added activities
be justified.
Process Reengineering versus TQM
Total
Process
Quality
Reengineering
Management
• Tweaks
Radicallyexisting
overhauls
processes
existingtoprocesses.
realize gradual improvements.
• Uses
Likelyato
team
be imposed
approachfrom
involving
abovepeople
and towho
use outside
work directly
consultants.
in the
process.
Theory of Constraints
A constraint (also called a bottleneck) is anything that
prevents you from getting more of what you want.

The
The constraint
constraint inin aa system
system is
is determined
determined
by
by the
the step
step that
that has
has the
the smallest
smallest capacity.
capacity.
Theory of Constraints
Only actions 2.
2.Allow
Allowthe
the
that strengthen weakest
weakest link
linkto
to
the weakest link set
in the “chain” set the
thetempo.
tempo.
improve the
process.
3.
3. Focus
Focuson on
1.
1. Identify
Identify the
the improving
improving
weakest
weakest link.
link. the
theweakest
weakest
link.
link.

4.
4. Recognize
Recognizethatthat
the
theweakest
weakest link
link
is
isno
no longer
longer so.
so.
International Competition
Increasing
Increasing sophistication
sophistication
in
in international
international markets.
markets.

Fewer
Fewer tariffs,
tariffs, Improvements
Improvements
Competition has
quotas,
quotas, and
and in
in global
global
other
other barriers
barriers
become worldwide transportation
transportation
to
to free
free trade.
trade. in most industries. systems.
systems.

An
An excellent
excellent management
management accounting
accounting system
system is
is needed
needed
to
to succeed
succeed inin today’s
today’s competitive
competitive global
global marketplace.
marketplace.
 Section D –
IMA Statement of Ethical Professional Practice
Code of Conduct for
Management Accountants
The Institute of Management Accountant’s (IMA)
Standards of Ethical Conduct for Practitioners
of Management Accounting and Financial Management
have two major parts offering guidelines for:
 Ethical behavior.
 Resolution for an ethical conflict.
Four Pillars of Professional Practice

Competence Confidentiality
Principles
Integrity Credibility
IMA Guidelines for Ethical Behavior
Follow applicable laws,
regulations and standards.

Maintain
professional Competence
competence.

Prepare complete and clear

reports after appropriate
analysis.
IMA Guidelines for Ethical Behavior
Do not disclose confidential
information unless legally
obligated to do so.

Do not use
confidential
information for Confidentiality
personal
advantage.

Ensure that subordinates do

not disclose confidential
information.
IMA Guidelines for Ethical Behavior
Avoid conflicts of interest
and advise others of
potential conflicts.

Do not subvert
organization’s
legitimate Integrity
objectives.

Recognize and
communicate personal and
professional limitations.
IMA Guidelines for Ethical Behavior
Avoid activities that could
affect your ability to
perform duties.

Refrain from Refuse gifts

activities or favors
that could Integrity that might
discredit the influence
profession. behavior.

Communicate
unfavorable as well as
favorable information.
IMA Guidelines for Ethical Behavior
Communicate information
fairly and objectively.

Objectivity

Disclose all information

that might be useful to
management.
IMA Guidelines for Resolution
of an Ethical Conflict
• Follow established policies.
• For unresolved ethical conflicts:
• Discuss the conflict with immediate superior or
next highest uninvolved manager.
• Make reference to the Sarbanes-Oxley Act passed
by Congress in 2002 in part to give legal protection
to those reporting corporate misconduct.
• If immediate superior is the CEO,
consider the board of directors or
the audit committee.
IMA Guidelines for Resolution
of an Ethical Conflict
• Follow established policies.
• For unresolved ethical conflicts:
• Except where legally prescribed, maintain
confidentiality.
• Clarify issues in a confidential discussion with an
objective advisor.
• Consult an attorney as to legal obligations.
• The last resort is to resign.
Why Have Ethical Standards?
Ethical
Ethical standards
standards in
in business
business are
are essential
essential for
for aa
smooth
smooth functioning
functioning advanced
advanced market
market economy.
economy.

Without ethical standards in business, the

economy, and all of us who depend on it for
jobs, goods, and services, would suffer.

Abandoning ethical standards in business would

lead to a lower quality of life with less
desirable goods and services at higher prices.
Quick Check
• The Standards of Ethical Conduct for Management Accountants developed by
the Institute of Management Accountants contain a policy regarding
confidentiality that requires management accountants to refrain from
disclosing confidential information acquired in the course of their work:

• A) except when authorized by management.

• B) in all situations.
• C) except when authorized by management, unless legally obligated to do so.
• D) in all cases not prohibited by law.
Quick Check
• Samantha Galloway is a managerial accountant in the accounting department
of Mustang Industries, Inc. Samantha has just discovered evidence that some
of the corporation's marketing managers have been wrongfully inflating their
expense reports in order to obtain higher reimbursements from the firm.
According to the Institute of Management Accountants' Standards of Ethical
Conduct, what should Samantha do upon discovering this evidence?

A) notify the controller.

B) notify the marketing managers involved.
C) notify the president of the corporation.
D) ignore the evidence because she is not part of the Marketing Department.
Thank You !!!