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Management Accounting and Cost

Accounting
 Management Accounting
 relates to the provision of appropriate information, including cost
information for decision-making, planning, control, and
performance evaluation.

 Cost accounting
 defines costs and valuates inventories to help managers to run
Managerial Accounting and the businesses

Business Environment Management Accounting and Cost Accounting

• are intertwined and
Chapter 1
• the terms are sometimes interchangeable
 their functions are to help companies make better decisions

Garrison, Noreen, Brewer, Cheng & Yuen © 2012 McGraw-Hill Education (Asia) McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 2

World Merchandise Trade Volume By Major Regional Shares In World Merchandise

Product Group, 1950-2009 (Volume Indices, 1950=100) Exports, 2009
Log. scale
% 2009
10000 45

40
5000 35

30
2500
25
Manufactures
20

1000 15
Fuels and mining 10
products
500 5
Agricultural 0
products North America South and Central Europe Commonwealth of Africa Middle East Asia
250
America Independent States
(CIS)

100 Source: World Trade Organization, International Trade Statistic 2010

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Source: World Trade Organization, International Trade Statistic 2010

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Distribution of Fortune Global 500

Top 10 Companies of Fortune Global 500
companies between 2005 and 2010 (ranked by revenue)

Fortune Global 500 2010 2009 2007 2005

2010 2009
Australia 8 9 8 9
Revenues Profits Revenues Profits
China 46 37 24 16
RankCompany ($ millions) ($ millions) RankCompany ($ millions) ($ millions)
India 8 7 6 5
Japan 71 68 67 81 1 Wal-Mart Stores 408,214 14,335 1 Royal Dutch Shell 458,361 26,277
Malaysia 1 1 1 1 2 Royal Dutch Shell 285,129 12,518 2 Exxon Mobil 442,851 45,220
Singapore 2 2 1 1 3 Exxon Mobil 284,650 19,280 3 Wal-Mart Stores 405,607 13,400
South Korea 10 14 14 11 4 BP 246,138 16,578 4 BP 367,053 21,157
Taiwan 8 6 6 2 5 Toyota Motor 204,106 2,256 5 Chevron 263,159 23,931
Thailand 1 1 1 1 6 Japan Post Holdings 202,196 4,849 6 Total 234,674 15,500

Asia Pacific 155 145 128 127 7 Sinopec 187,518 5,756 7 ConocoPhillips 230,764 -16,998

US 139 140 162 176 8 State Grid 184,496 -343 8 ING Group 226,577 -1,067

Canada 11 14 16 13 9 AXA 175,257 5,012 9 Sinopec 207,814 1,961

Europe 184 188 183 178 10 China National Petroleum 165,496 10,272 10 Toyota Motor 204,352 -4,349

Others 11 13 11 6 source: http://money.cnn.com/magazines/fortune/global500/2010/full_list/index.html

500 500 500 500

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Internet Penetration Rate And Borderless

Trading Potential Strategy

A strategy
The Internet fuels globalization is a “game plan”
by providing companies with greater that enables a company
access to geographically dispersed to attract customers
customers, employees, and suppliers. by distinguishing itself
from competitors.

As of June 2010, more than 71% of The focal point of a

the world's population was still company’s strategy should
be its target customers.
not connected to the Internet.
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Customer Value Propositions Learning Objective 1

Understand the role of

Customer
Understand and respond to
Intimacy
Strategy
individual customer needs.
management accountants
in an organization.
Operational Deliver products and services
Excellence faster, more conveniently,
Strategy and at lower prices.

Product
Leadership Offer higher quality products.
Strategy
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Organizational Structure Line and Staff Relationships

Decentralization is the delegation of decision-
decision-
Line positions are directly Staff positions support
making authority throughout an organization. related to achievement of and assist line positions.
the basic objectives of an  Example: Cost
Corporate Organization Chart organization. accountants in the
 Example: Production manufacturing plant.
Board of Directors supervisors in a
manufacturing plant.
President

Purchasing Personnel Vice President Chief Financial

Operations Officer

Treasurer Controller

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The Chief Financial Officer (CFO) Learning Objective 2

A member of the top management team responsible Understand the basic

for: concepts underlying Lean
 Providing timely and relevant data to support planning Production, the Theory of
and control activities.
Constraints, and Six Sigma.
 Preparing financial statements for external users.

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Process Management Process Management

A business There are three approaches to
process is a series of improving business processes . . .
steps that are followed in order to
carry out some task in Theory of
a business. Constraints (TOC)
Lean Six
Production Sigma
Product Customer
R&D Design Manufacturing Marketing Distribution Service

Business functions making up the value chain

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Traditional “Push” Manufacturing Company Traditional “Push” Manufacturing Company

Traditional “push” Large
manufacturing inventories

Forecast Sales Order components Store Inventory

Raw Work in Finished
materials process goods

Materials waiting Completed products

to be processed. awaiting sale.
Make Sales from
Finished Goods Store Produce goods in
Inventory Inventory anticipation of Sales Partially completed products
requiring more work before
they are ready for sale.
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Lean Production Lean Production

 Identify value  Identify the The five step process results in a “pull” manufacturing system
in specific business process that reduces inventories, decreases defects, reduces
products/services. that delivers value. wasted effort, and shortens customer response times.

The lean thinking  Organize work

arrangements around
model is a five Customer places Create Production Generate component
the flow of the
step approach. business process.
an order Order requirements

 Continuously pursue  Create a pull

perfection in the system that responds Goods delivered Production begins Components
business process. to customer orders. when needed as parts arrive are ordered
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Lean Production Theory of Constraints

A constraint (also called a bottleneck) is anything that
Lean thinking can be used to improve business prevents you from getting more of what you want.
processes that link companies together. The Theory of Constraints is based on the observation that
effectively managing the constraint is the key to success.

The constraint in a system is determined

by the step that has the smallest capacity.

The term supply chain management refers to the

coordination of business processes across
companies to better serve end consumers.

McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 21 McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 22

Theory of Constraints Six Sigma

2. Allow the A process improvement method relying on customer
Only actions
that strengthen weakest link to feedback and fact-based data gathering and analysis
the weakest link set the tempo. techniques to drive process improvement.
in the “chain”
improve the
process. Refers to a process that Sometimes
3. Focus on
generates no more associated
1. Identify the improving
than 3.4 defects per million with the term zero
weakest link. the weakest
opportunities. defects.
link.

4. Recognize that
the weakest link
is no longer so.
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Six Sigma Learning Objective 3

The Six Sigma DMAIC Framework
Stage Goals
Define ● Establish the scope and purpose of the project. Understand the
importance of upholding
● Diagram the flow of the current process.
● Establish the customer's requirements for the
process. ethical standards.
Measure ● Gather baseline performance data related to
the existing process.
● Narrow the scope of the project to the most
important problems.
Analyze ● Identify the root cause(s) of the problems
identified in the Measure stage.
Improve ● Develop, evaluate, and implement solutions
to the problems.
Control ● Ensure that problems remain fixed.
● Seek to improve the new methods over time.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 25 McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 26

Code of Conduct for Management

Accountants IMA Guidelines for Ethical Behavior
All Professional Management Accountants Bodies issue their Recognize and
own Code of Conduct but they all share similar fundamental communicate professional
principles and conceptual approaches as the one issued by limitations that preclude
the Institute of Management Accountants. responsible judgment.
The Institute of Management Accountants’ (IMA) Statement
of Ethical Professional Practice
Maintain Follow applicable
consists of two parts that offer guidelines for:
 Ethical behavior.
professional Competence laws, regulations
competence. and standards.
 Resolution for an ethical conflict.

Provide accurate, clear,

concise, and timely decision
support information.
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IMA Guidelines for Ethical Behavior IMA Guidelines for Ethical Behavior

Do not disclose confidential Mitigate conflicts of

information unless legally interest and advise others
obligated to do so. of potential conflicts.

Do not use Refrain from

confidential conduct that
information for Confidentiality would prejudice Integrity
unethical or illegal carrying out
advantage. duties ethically.
Abstain from activities that
Ensure that subordinates do
might discredit the
not disclose confidential
profession.
information.
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IMA Guidelines for Resolution of an Ethical

IMA Guidelines for Ethical Behavior Conflict
Follow employer’s established policies.
Communicate information
fairly and objectively. For an unresolved ethical conflict:
 Discuss the conflict with immediate supervisor or
Disclose delays or next highest uninvolved manager.
deficiencies in information
Credibility timeliness, processing, or
 If immediate supervisor is the CEO, consider the
board of directors or the audit committee.
internal controls.
 Contact with levels above the immediate supervisor
should only be initiated with the supervisor’s
Disclose all relevant knowledge, assuming the supervisor is not involved.
information that could
influence a user’s
understanding of reports
and recommendations.
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IMA Guidelines for Resolution of an Ethical

Conflict Why Have Ethical Standards?
Follow employer’s established policies.
Ethical standards in business are essential for a
For an unresolved ethical conflict: smooth functioning economy.
 Except where legally prescribed, maintain
confidentiality.
 Clarify issues in a confidential discussion with an Without ethical standards in business, the
objective advisor.
economy, and all of us who depend on it for
 Consult an attorney as to legal obligations. 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.
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Codes of Conduct on the International Level

Company Codes of Conduct
The Code of Ethics for Professional
Broad-based statements of a
Broad- Accountants, issued by the International
Federation of Accountants (IFAC), governs the
company’s responsibilities to:
activities of professional accountants worldwide.

In addition to integrity and objectivity, resolution of ethical

conflicts, competence, and confidentiality, the IFAC’s code
deals with the accountant’s ethical responsibilities in:
Employees Customers Suppliers Taxes,
Independence,
Fees and commissions,
Advertising and solicitation,
And to the communities in Handling of monies, and
which the company operates. Cross-border activities.
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The Sarbanes-Oxley Act of 2002

Corporate Governance The Sarbanes-Oxley Act of 2002 was intended to protect the
interests of those who invest in publicly traded companies by
The system by improving the reliability and accuracy of corporate financial
which a company is directed reports and disclosures. Six key aspects of the legislation include:
and controlled.  The Act requires both the CEO and CFO to certify in writing
that their company’s financial statements and disclosures
Board of Incentives and
fairly represent the results of operations.
Directors monitoring for
 The Act establishes the Public Company Accounting Oversight
Board to provide additional oversight of the audit profession.
Top To pursue
 The Act places the power to hire, compensate, and terminate
Management objectives of
public accounting firms in the hands of the audit committee.
 The Act places restrictions on audit firms, such as prohibiting
Stockholders public accounting firms from providing a variety of non-audit
services to an audit client.
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The Sarbanes-Oxley Act of 2002 Enterprise Risk Management

(continued)
Should I try to avoid the risk,
 The Act requires a public company’s independent auditor share the risk, accept the
to issue an opinion on the effectiveness of the company’s risk, or reduce the risk?
A process used
internal control over financial reporting to accompany
by a company to
management’s assessment, and both are included in the
proactively identify
company’s annual report.
and manage risk.
 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. Once a company identifies its risks, perhaps the
• Up to 10 years in prison for retaliating against a most common risk management tactic is to reduce
“whistle blower.” risks by implementing specific controls.
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Enterprise Risk Management

Examples of Controls to
Corporate Social Responsibility
Examples of Business Risks Reduce Business Risks

Corporate social responsibility (CSR) is a concept

● Products harming customers
● Losing market share due to the
unforeseen actions of competitors
● Poor weather conditions shutting
down operations
● Website malfunction
● A supplier strike halting the flow
of raw materials
● Financial statements unfairly
reporting the value of inventory
● An employee accessing
unauthorized information
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen
● Develop a formal and rigorous
new product testing program
● Develop an approach for legally
whereby organizations consider the needs
of all stakeholders when making decisions.
gathering information about
competitors' plans and practices
● Develop contingency plans for
overcoming weather-related
disruptions
● Thoroughly test the website
before going "live" on the Internet
● Establish a relationship with two
Environmental
companies capable of providing
Customers Employees Suppliers Communities Stockholders & Human Rights
raw materials
● Count the physical inventory on
Advocates
hand to make sure that it agrees
with the accounting records
● Create password-protected barriers CSR extends beyond legal compliance
to include voluntary actions that satisfy
that prohibit employees from
obtaining information not needed
to do their jobs stakeholder expectations.
Slide 41 McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 42
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Corporate Social Responsibility

Examples of Corporate Social Responsibility Sustainability Reporting
Companies should provide customers with: Companies and their suppliers should provide
● Safe, high quality products that are fairly employees with:
Global Reporting Initiative (GRI)
priced ● Safe and humane working conditions •promotes a systematic and standardized approach
● Competent, courteous, and rapid delivery ● Non-discriminatory treatments and the o to corporate social responsibility and embed it in corporate culture;
of products and services right to organize and file grievances o to stimulate demand for sustainability information;
● Full disclosure of product-related risks ● Fair compensation thus benefitting both reporting organizations and report users.
● Easy to use information systems for ● Opportunities for training, promotion,
shopping and tracking orders and personal development International Federation of Accountants (IFAC) Sustainability Framework
Companies should provide suppliers with: Companies should provide communities with:
•Organizations should
● Fair contract terms and prompt payments ● Payment of fair taxes
● Reasonable time to prepare orders ● Honest information about plans such as
o achieve a “Triple Bottom-Line”
● Hassle-free acceptance of timely and plant closings  financial, social, and environmental goals
complete deliveries ● Resources that support charities, schools, (or 3Ps: Profit, People, and Planet)
● Cooperative rather than unilateral and civic activities  promote a sound corporate governance and ethical responsibility
actions ● Reasonable access to media sources to ensure financial success through ethical operations and
Companies should provide stockholders with: Companies should provide environmental transactions;
● Competent management and human rights advocates with: promote cultural diversity and equality;
● Easy access to complete and accurate ● Greenhouse gas emissions data
provide opportunities for social and economic development of the communities;
financial information ● Recycling and resource conservation data
● Full disclosure of enterprise risks ● Child labor transparency
and
● Honest answers to knowledgeable ● Full disclosure of suppliers located in minimize environmental damages, and provide a safe working and living
questions developing countries environment for the communities.
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Sustainability Reporting: Professional Qualification of Management

GRI Registered Companies Accountants
• Traditional accounting qualifications e.g. Chartered Accountants (ACA), Certified
Public Accountants (CPA) and Chartered Certified Accountants (ACCA)
• Management accountants qualifications, e.g.:
Institution Abbrev Country Qualification
The Institute of Management Accountants IMA US CMA
Certified Management Accountants of Canada CMA Canada CMA
(previously known as The Society of Management Accountants of Canada) Canada
The Chartered Institute of Management Accountants CIMA UK FCMA , ACMA
The Institute of Certified Management Accountants of ICMA Australia CMA
Australia
- CMA Philippines Philippines CMA
- CMA Indonesia Indonesia CMA
Examples of GRI Registered Companies
- CMA Sri Lanka Sri Lanka CMA
Asia: Air China, AsusTek, Canon, Reliance Industries, Samsung
Securities, SingTel - CMA India India CMA
Europe: Air France-KLM, BP, Daimler, Nestle, Nokia The Institute of Cost and Works Accountants of India ICWAI India FICWA, AICWA
United States: AT&T, Dell, ExxonMobil, Intel, Johnson & Johnson

McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 45 McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 46

End of Chapter 1

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