Topic 1: Management Accounting and Business Environment

Strategy and Customer Value Proposition

A strategy is a game plan that enables a company to attract customers by distinguishing itself from
competitors. The focal point of a company’s strategy should be its target customers.
CUSTOMER VALUE PROPOSITIONS
• Customer Intimacy Strategy: Companies that adopt a customer intimacy strategy strive to
understand and respond to individual customers' needs better than competitors. Examples of
companies that pursue this strategy include Ritz-Carlton, Nordstrom, and Starbucks.
• Operational Excellence Strategy: Companies that adopt an operational excellence strategy strive
to deliver products and services faster, more conveniently, and at a lower price than competitors.
Examples of companies that pursue this strategy include Southwest Airlines, Wal-Mart, and The
Vanguard Group.
• Product Leadership Strategy: Companies that adopt a product leadership strategy strive to offer
higher quality products than competitors. Examples of companies that pursue this strategy
include BMW, Cisco Systems, and W.L. Gore.

Financial Accounting VS Management Accounting

• Management accounting (managerial accounting) is the practice of identifying, measuring,
analyzing, interpreting, and communicating financial information to managers for the pursuit of an
organization's goals.
• Financial accounting is a specific branch of accounting that involves a process of recording,
summarizing, and reporting the myriad of transactions resulting from business operations over a
period of time. These transactions are summarized in the preparation of financial statements—
including the balance sheet, income statement, and cash flow statement—that record a
company’s operating performance over a specified period.
Financial Accounting Management Accounting
Guiding Principle GAAP Needs of Management
Unifying Model A=L+OE No Unifying Model
Time Orientation Historical Future
Type of Information Financial Financial and Statistical
As a Matter of
Mandatory Optional
Requirement
General Users (Mostly Outside
Users of Data Management (Internal Users)
Users)
End Results Financial Statements Not an end result but a means
Annually, Quarterly, or As Required
Frequency More Frequent as the Need Arises
Traditionally or Legally
May Report on Parts as well as the
Focus Reports on Business as a Whole
Whole
Timeliness is Given More
Precision VS Timeliness Precision is Required
Importance
Relevant Data Even is not
Relevance of Data Objective and Verifiable
Completely Objective and Verifiable
Flexible Format, Driven by User’s
Report Format Based on GAAP
Needs
Unit of Measure Peso Value Peso Value or Physical Measure

Role of Management Accountants

Managers carry out three main activities – planning, directing and motivating, and controlling.
I. Planning
• Establishing a basic strategy
• Selecting a course of action
• Specifying how the action will be implemented
An important part of planning is to identify alternatives and then to select from among the
alternatives the one that does the best job of furthering the organization‘s objectives. Once
alternatives have been identified, the plans of management are often expressed formally in
budgets. Budgets are usually prepared under the direction of the controller, who is the manager
in charge of the accounting department. Typically, budgets are prepared annually.
 II. 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.
It involves mobilizing people to carry out plans and run routine operations. In addition to planning
for the future, managers must oversee day-to-day activities to keep the organization functioning
smoothly. Managerial accounting data, such as daily sales reports, are often used in this type of
day-to-day decision making.
III. Controlling
The control function ensures that plans are being followed. Feedback in the form of performance
reports that compare actual results with the budget is an essential part of the control function. In
carrying out the control function, managers seek to ensure that the plan is being followed.
Feedback, which signals whether operations are on track, is the key to effective control. A
performance report compares budgeted to actual results. It suggests where operations are not
proceeding as planned and where some parts of the organization may require additional
attention.

PLANNING AND CONTROL CYCLE

The work of management, known as the planning and control cycle, can be depicted as shown. The
process is a continuous loop in many organizations. Once plans are made, they are implemented. The
controlling process starts with measuring actual performance and then comparing those results with
planned performance. Corrective action may be necessary if actual results differ significantly from the
plan. In some cases, new information may result in altering the plan before the cycle is repeated. Note
that decision making is involved in all management activities.

ORGANIZATIONAL STRUCTURE
Decentralization is the delegation of decision-making authority throughout an organization.
An organization chart shows how responsibility is divided among managers and formal lines of reporting
and communication.
Chain of Command
• Line and Staff Relationships: A person in a line position is directly involved in achieving the
organization's basic objectives. A person in a staff position is indirectly involved in achieving
those basic objectives. Staff positions support line positions, but they do not have direct authority
over line positions.
• Chief Financial Officer: CFO is a member of the top management team responsible for providing
timely and relevant data to support planning and controlling activities and for preparing financial
statements for external users.

Process Management
Process management is a systematic procedure that ensures effective and efficient business processes
are in place. It is a set of activities that align business processes with strategic goals. A well-defined
process plays a crucial role in a business’s positive growth.

LEAN PRODUCTION
• Traditional Push System: Traditional production approach where goods are manufactured based
on long-term forecasts and predetermined production schedules. In this system, production
processes are initiated based on anticipated demand, regardless of the actual customer orders.
The push approach almost inevitably results in large inventories of raw materials, work in
process, and finished goods.
• Pull System: Lean manufacturing approach that operates on actual customer demand. In this
system, products are pulled through the supply chain in response to customer orders or
consumption. The focus is on producing items only when there is a genuine demand, avoiding
unnecessary production and excessive inventory.

• Lean Thinking Model

A five-step management approach that organizes resources such as people and machines
around the flow of business processes and that pulls units through these processes in response
to customers‘ orders. The five step process results in a ―pull manufacturing system that reduces
inventories, decreases defects, reduces wasted effort, and shortens customer response times.
The lean thinking model is a five-step management approach that organizes resources, such as
people and machines, around the flow of business processes and that pulls units through these
processes in response to customer orders.
• STEP 1: Identify the value to customers in specific products and services.
• STEP 2: Identify the business process that delivers this value to customers. The linked steps
that comprise a business process typically span the departmental boundaries specified in an
organization chart.
• STEP 3: Organize work arrangements around the flow of the business process. This is often
accomplished by creating what is known as a manufacturing cell.
• STEP 4: Create a pull system where production is not initiated until a customer has ordered a
product. This facet of the lean thinking model is often called just-in-time production, or JIT for
short.
• STEP 5: Continuously pursue perfection in the business process.
 Lean thinking can be used to improve business processes that link companies together. The term
supply chain management is commonly used to refer to the coordination of business processes
across companies to better serve end consumers.
• Cellular Manufacturing: Organizing work arrangements around the business flow is often done by
creating a manufacturing cell. Layout in which machines are grouped into a cell that can process
items that have similar processing requirements. A product layout is visible inside each cell.
• Just In Time
Management philosophy of continuous and forced problem solving. Supplies and components are
pulled through system to arrive where they are needed when they are needed.
• Attacks waste - Anything not adding value to the product from the customer‘s perspective
• Exposes problems and bottlenecks caused by variability - Deviation from optimum
• Achieves streamlined production - By reducing inventory

THEORY OF CONSTRAINTS
A constraint (also called a bottleneck) is anything that prevents you from getting more of what you want.
The constraint in a system is determined by the step that has the least capacity. The Theory of
Constraints is based on the insight that effectively managing constraints is the key to success. The goal is
to manage the constraint with the intent of generating more business rather than cutting the workforce.
The Theory of Constraints approach to process improvement involves four steps:
1. Identify the weakest link in the chain which is the constraint.
2. Do not place a greater strain on the system than the weakest link can handle – if you do, the
chain will break.
3. Concentrate improvement efforts on strengthening the weakest link.
4. If the improvement efforts are successful, the weakest link will improve to the point that it is no
longer the weakest link. At this point, a new weakest link must be identified, and the improvement
process starts over again.

SIX SIGMA
Six Sigma is a process improvement method that relies on customer feedback and fact-based data
gathering and analysis techniques to drive process improvement. The term Six Sigma refers to a process
that generates no more than 3.4 defects per million opportunities. Because this rate of defects is so low,
Six Sigma is sometimes associated with the term “zero defects.”
DMAIC Framework
• The Define stage identifies the scope and purpose of the project, the flow of the current process,
and the customer‘s requirements.
• The Measure stage gathers baseline performance data concerning the existing process and
narrows the scope of the project to the most important problems.
• The Analyze stage identifies the root causes of the problems identified during the Measure stage.
The Analyze stage often reveals non-value-added activities that should be eliminated, wherever
possible.
• The Improve stage is where potential solutions are developed, evaluated, and implemented to
eliminate non-value-added activities and any other problems uncovered in the Analyze stage.
• The Control stage ensures that problems remain fixed and that the new methods are improved
over time
Technology in Business
A. E-commerce: Electronic commerce (e-commerce) refers to companies and individuals that buy and
sell goods and services over the internet. E-commerce operates in different types of market segments
and can be conducted over computers, tablets, smartphones, and other smart devices. Nearly every
imaginable product and service is available through e-commerce transactions, including books,
music, plane tickets, and financial services such as stock investing and online banking. As such, it is
considered a very disruptive technology.
B. Enterprise System: Enterprise systems are large-scale software packages that can track and control
all complex business operations. These systems are used as a central command hub to help
automate the business and make reporting and decision making easier. Enterprise systems integrate
many different applications, protocols and formats. In doing so, an enterprise system allows
companies to integrate business processes, such as sales, deliveries and accounts receivable, by
sharing information across business functions and employee hierarchies. These systems can replace
multiple independent systems that may or may not interact with other systems and that process data
to support business functions or processes.

Ethics in Business
PRINCIPLES: IMA’s overarching ethical principles include: Honesty, Fairness, Objectivity, and
Responsibility. Members shall act in accordance with these principles and shall encourage others within
their organizations to adhere to them.

STANDARDS: IMA members have a responsibility to comply with and uphold the standards of
Competence, Confidentiality, Integrity, and Credibility. Failure to comply may result in disciplinary action.
I. Competence
• Maintain an appropriate level of professional leadership and expertise by enhancing
knowledge and skills.
• Perform professional duties in accordance with relevant laws, regulations, and technical
standards.
• Provide decision support information and recommendations that are accurate, clear, concise,
and timely. Recognize and help manage risk.
II. Confidentiality
• Keep information confidential except when disclosure is authorized or legally required.
• Inform all relevant parties regarding appropriate use of confidential information. Monitor to
ensure compliance.
• Refrain from using confidential information for unethical or an illegal advantage.
III. Integrity
• Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid
apparent conflicts of interest. Advise all parties of any potential conflicts of interest.
• Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
 • Abstain from engaging in or supporting any activity that might discredit the profession.
• Contribute to a positive ethical culture and place integrity of the profession above personal
interests.
IV. Credibility
• Communicate information fairly and objectively.
• Provide all relevant information that could reasonably be expected to influence an intended
user’s understanding of the reports, analyses, or recommendations.
• Report any delays or deficiencies in information, timeliness, processing, or internal controls in
conformance with organization policy and/or applicable law.
• Communicate professional limitations or other constraints that would preclude responsible
judgment or successful performance of an activity.

IMA GUIDELINES ON RESOLVING ETHICAL ISSUES

In applying the Standards of Ethical Professional Practice, the member may encounter unethical issues or
behavior. In these situations, the member should not ignore them, but rather should actively seek
resolution of the issue. In determining which steps to follow, the member should consider all risks involved
and whether protections exist against retaliation. When faced with unethical issues, the member should
follow the established policies of his or her organization, including use of an anonymous reporting system
if available. If the organization does not have established policies, the member should consider the
following courses of action:
• The resolution process could include a discussion with the member’s immediate supervisor. If the
supervisor appears to be involved, the issue could be presented to the next level of management.
• IMA offers an anonymous helpline that the member may call to request how key elements of the
IMA Statement of Ethical Professional Practice could be applied to the ethical issue.
• The member should consider consulting his or her own attorney to learn of any legal obligations,
rights, and risks concerning the issue. If resolution efforts are not successful, the member may
wish to consider disassociating from the organization.

COMPANY CODES OF CONDUCT

Many companies have a formal code of conduct. These codes are generally broad-based statements of a
company‘s responsibilities to its employees, its customers, its suppliers, and the communities in which the
company operates.

CODES OF CONDUCT ON THE INTERNATIONAL LEVEL

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. In addition to outlining
ethical requirements in matters dealing with integrity and 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,
• Handling of monies, and
• Cross-border activities.

Corporate Governance
Corporate governance is the system by which a company is directed and controlled. If properly
implemented, the corporate 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.

SARBANES-OXLEY ACT OF 2002

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

Enterprise Risk Management

Business risk is a component of total risk. Business risk represents the notion that a firm may experience
events or circumstances that create a threat to its ability to continue operating.
Enterprise Risk Management (ERM) is a holistic approach employed across the entire organization to
identify, assess, and manage various risks that an organization may encounter in pursuit of its objectives.

International Certification in Management Accounting

CMA is the international certification provided to management accountants. It is issued by the Institute of
Management Accountants. To earn the certification, an applicant should pass 2-part exams and have 2
years qualified working experience. For more information, go to their website
(https://asiapac.imanet.org/ima-certifications/cma-certification).