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International Islamic University Chittagong
Program: MBA
Course Code: ACC 5502
Course Title: Managerial Accounting
Course Instructor:
Afzal Ahmad
Associate Professor
Department of Business Administration
Cell: 01978121212
E-mail: [email protected]
 Course Objectives

• The aim of the course is to develop students’

understanding of the theory and practice of management
accounting.
• It builds on topics of the role of management accounting
for performance measurement, planning, decision-
making and control across a range of organizations.
• It also emphasizes recent developments in management
practice, particularly those, which supports its growing
strategic role.
 Syllabus for Mid Term

• Chapter -01: Managerial Accounting and the Business

Environment
• Chapter-02: Managerial Accounting and Cost Concepts
• Chapter-03: Cost Behavior: Analysis and Use
• Chapter-04: Cost-Volume-Profit (CVP) Analysis
• Basic Text: Managerial Accounting, 13th Edition, by Ray
H. Garrison, D.B.A., CPA; Eric W. Noreen, Ph.D., CMA;
Peter C. Brewer, Ph.D., CPA.
Managerial Accounting and the
Business Environment

Chapter One
 Managerial Accounting

• Financial accounting is concerned with reporting

financial information to external parties, such as
stockholders, creditors, and regulators.
• Managerial accounting is concerned with
providing information to managers for use within
the organization.
 Managerial Accounting:
Beyond the Numbers
• Managerial accounting involves more than just
“crunching numbers.”
• To be successful, managers must complement their
measurement skills with nine business management
perspectives that “go beyond the numbers” to
enable intelligent planning, control, and decision
making.
 Before embarking on the study of management accounting,
you need to develop an appreciation for the larger business
environment within which it operates.
 This chapter is divided into nine sections (Nine perspective):
 (1) globalization,
 (2) strategy,
 (3) organizational structure,
 (4) process management,
 (5) the importance of ethics in business,
 (6) corporate governance,
 (7) enterprise risk management,
 (8) corporate social responsibility, and
 (9) the Certified Management Accountant (CMA).
 (1) Globalization
• The world has become much more interlinked over the last
20 years.
• The international market has become a truly global market
due to-
• reductions in tariffs, quotas, and other barriers to free trade;
• improvements in global transportation systems;
• explosive expansion in Internet usage; and
• increasing sophistication in international markets
• In a global marketplace, a company that has been
very successful in its local market may suddenly
find itself facing competition from halfway around
the globe.
• For example, in the 1980s American automobile
manufacturers began losing market share to Japanese
competitors who offered American consumers higher
quality cars at lower prices.
• Although globalization leads to greater competition,
it also means greater access to new markets,
customers, and workers.
• For example, the emerging markets of China, India,
Russia, and Brazil contain more than 2.5 billion potential
customers and workers.
• Many companies such as FedEx, McDonald’s , and
Nike are actively seeking to grow their sales by
investing in emerging markets.
1-2

Impact of Internet Usage on globalization

The Internet fuels globalization

by providing companies with greater
access to geographically dispersed
customers, employees, and suppliers.

The number of internet users more

than doubled during the first four
years of the new millennium
1-3

(2) Strategy

A strategy
is a “game plan”
that enables a
company to attract
customers
by distinguishing itself
from competitors.

The
The focal
focal point
po nt of
o aa
company’s
company’s strategy
st ategy should
should
be
be itss target
arget customers.
customers.
• Company can only succeed if it creates a reason for
customers to choose it over a competitor.
• These reasons, or what are more formally called
customer value propositions, are the essence of
strategy.
• Customer value propositions tend to fall into three
broad categories— customer intimacy, operational
excellence, and product leadership .
1-4

Customer Value Propositions

Customer
Intimacy Understand
Understand and
and respond
espond to
to
Strategy individual
nd v dualcustomer
customerneeds.
needs.

Operational Deliver
De ver products
p oducts and
and services
serv ces
Excellence faster,
aste momore conveniently,
e conven ently and
Strategy andatatowe
lowerp prices.
ces.

Product
Leadership Offer
O er higher
h gher quality
qual typroducts.
p oducts.
Strategy
 (3) Organizational Structure

• Organizational structure is divided into two parts:

• First, we highlight the fact that presidents of all but the
smallest companies cannot execute their strategies alone.
• They must seek the help of their employees by
empowering them to make decisions—they must
decentralize.
• Next, we describe the most common formal decentralized
organizational structure in use today—the functional
structure.
 Decentralization

• Decentralization is the delegation of

decision-making authority throughout an
organization by giving managers the
authority to make decisions relating to their
area of responsibility.
• Some organizations are more decentralized
than others.
 The Functional View of
Organizations
• Exhibit 1–2 shows an organizational structure in the
form of an organization chart.
• The purpose of an organization chart is to show how
responsibility is divided among managers and to show
formal lines of reporting and communication, or chain
of command .
• Each box depicts an area of management responsibility,
and the lines between the boxes show the lines of
formal authority between managers.
• 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.
1-14

Line and Staff Relationships

Line positions are directly Staff positions support and

related to achievement of the assist line positions.
basic objectives of an  Example: Cost
organization. accountants in the
 Example: Production manufacturing plant.
supervisors in a
manufacturing plant.
1-15

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.
1-17

(4) Process Management

A business
process is a
series of steps that to
are followed in order
carry out some task in
a business.
 The term value chain is often used when we look at how the functional
departments of an organization interact with one another to form business
processes.
 A value chain, as shown in Exhibit 1–3 , consists of the major business
functions that add value to a company’s products and services.
 The customer’s needs are most effectively met by coordinating the business
processes that span these functions.
1-18

Process Management
There are three approaches to
improving business processes . ..

Theory of
Constraints (TOC)
Lean Six
Productio Sigma
n
 4(a) Lean Production
• In a traditional manufacturing company, work is pushed through the
system in order to produce as much as possible and to keep everyone
busy—even if products cannot be immediately sold.
• This almost certainly results in large inventories of raw materials, work
in process, and finished goods.
• Raw materials are the materials that are used to make a product.
• Work in process inventories consist of units of product that are only
partially complete and will require further work before they are ready
for sale to a customer.
• Finished goods inventories consist of units of product that have been
completed but have not yet been sold to customers.
1-19
Traditional “Push”
Manufacturing Company

Forecast Sales Order components Store Inventory

Make Sales from

Finished Goods Store Produce goods in
Inventory Inventory Anticipation of Sales
 1-20
Traditional “Push”
Manufacturing Company

Traditional “push” Large

manufacturing inventories

Raw Work in Fin

Finished
materials process goods
go

Materials
Materials waiting
waiting Completed
Completed products
products
to
to be
be processed.
processed. awaiting
awaiting sale.
sale.

Partially
Partially completed
completed products
products
requiring
requiring more
more work
work before
before
they
they are
are ready
ready for
for sale.
sale.
 Lean Thinking Model
• 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.
• The result is lower inventories, fewer defects, less wasted effort, and quicker
customer response times.
 1-22

Lean Production

The
The five
ve step
s ep process
process results
results inn aa “pull”
“pul ” manufacturing
manu acturing system
sys em
thatthat reduces
reduces inventories,
nventor decreases
es decreases de ecdefects, reduces
s reduces wasted
ef effort,
wasted ort, andandshortens customer
shortens cust omerresponse
response times
times.

Customer Places Create Production Generate Component

an Order Order Requirements

Goods Delivered Production Begins as Components

when needed Parts Arrive are Ordered
• The first step is to identify the value to customers
in specific products and services.
• The second step is to identify the business process
that delivers this value to customers.
• The third step is to organize work arrangements
around the flow of the business process. This is
often accomplished by creating what is known as a
manufacturing cell .
• The fourth step in the lean thinking model is to
create a pull system where production is not
initiated until a customer has ordered a product.
• As this sequence suggests, work takes place “just-in-time” in the
sense that raw materials are received by each manufacturing cell
just in time to go into production, manufactured parts are
completed just in time to be assembled into products, and
products are completed just in time to be shipped to customers.

• This side of the lean thinking model is often

called just-in-time production, or JIT for short.
• The fifth step of the lean thinking model is to
continuously pursue excellence in the business
process.
1-24

4(b) Theory of Constraints

A constraint (also called a bottleneck) is anything that prevents
you from getting more of what you want.
The Theory of Constraints is based on the observation that
effectively managing the constraint is the key to success.

The
Theconstraint
constraint in ansystem is determined
a system s de ermined
by
bythehestep thathat
s ep hashas
the smallest
he smalcapacity.
est capaci y
1-25

Theory of Constraints

22.Allow
A owthe
the
weakest link
weakest nktoto
set
setthe
themeasure.
tempo

3.Focus
3 Focusonon
1.Identify
1 Identthe fy improving
mprov ng
weakest link.
the weakest the
the weakest
weakest
nk. link.
nk

4 4.Recogn
Recognize
ze that
that
the
theweakest
weakest lliink
nk
sisno
no longer
onger so.so.
1-26

Six Sigma
AA process
process improvement
mprovement method method
relying on rely
customer feedback
ng on and fact-based
customer eedbackdata
gathering and analysis techniques to drive process improvement. Motorola and General
and act-based data gather ng and analysis techn ques to
Electric are closely identified with the Six Sigma movement.
dr ve process mprovement.

Refers
Re ers to
to aa process
process that
that generates
generates no
no more
more
than
than 3.4
3 4 defects
de ects per
per million
m on opportunities.
opportun ties.

Sometimes
Sometimes associated
associated
with the
w th theterm
term zero defects.
zero defects
• The most common framework used to guide Six Sigma
process improvement efforts is known as DMAIC
(pronounced: du-may-ik), which stands for Define,
Measure, Analyze, Improve, and Control.
• The Define stage of the process focuses on defining the
scope and purpose of the project, the flow of the current
process, and the customer’s requirements.
• The Measure stage is used to gather baseline performance
data concerning the existing process and to narrow the
scope of the project to the most important problems.
• The Analyze stage focuses on identifying
the root causes of the problems that were
identified during the Measure stage.
• The Analyze stage often reveals that the
process includes many activities that do not
add value to the product or service .
• Activities that customers are not willing to pay
for because they add no value are known as
non-value-added activities and such activities
should be eliminated wherever possible.
• During the Improve stage potential
solutions are developed, evaluated,
and implemented to eliminate non-
value-added activities and any other
problems uncovered in the Analyze
stage.
• Finally, the objective in the Control
stage is to ensure that the problems
remain fixed and that the new
methods are improved over time.
 (5) The importance of Ethics in
Business
• A series of major financial scandals involving Enron , Tyco
International, HealthSouth, Adelphia Communications,
WorldCom , Global Crossing , Rite Aid, and other companies
have raised deep concerns about ethics in business.
• The managers and companies involved in these scandals have
suffered from huge fines to jail terms and financial collapse.
• And the recognition that ethical behavior is absolutely essential
for the functioning of our economy has led to numerous
regulatory changes.
1-31

Code of Conduct for

Management
Accountants
 The Institute of Management Accountants’ (IMA’s) Statement of Ethical
Professional Practice consists of two parts.
 The first part provides general guidelines for ethical behavior. In a
nutshell, a management accountant has ethical responsibilities in four
broad areas:
 first, to maintain a high level of professional competence;
 second, to treat sensitive matters with confidentiality;
 third, to maintain personal integrity; and
 fourth, to disclose information in a credible fashion.
 The second part of the standards specifies what should be done if an
individual finds evidence of ethical misconduct.
 IMA Statement of Ethical
Professional Practice
• Members of IMA shall behave ethically.
• A commitment to ethical professional practice
includes: main principles that express values, and
standards that guide conduct.
 PRINCIPLES

• IMA’s main ethical principles include: Honesty,

Fairness, Objectivity, and Responsibility.
• Members shall act in accordance with these
principles and shall encourage others within their
organizations to follow to them.
 STANDARDS
• A member’s failure to comply with the following standards may result in disciplinary
action.
• I. COMPETENCE (Capability or Fitness)
• Each member has a responsibility to:
• 1. Maintain an appropriate level of professional expertise by continually developing
knowledge and skills.
• 2. Perform professional duties in accordance with relevant laws, regulations, and
technical standards.
• 3. Provide decision support information and recommendations that are accurate, clear,
concise, and timely.
• 4. Recognize and communicate professional limitations or other constraints that would
preclude responsible judgment or successful performance of an activity.
• II. CONFIDENTIALITY (Privacy)
• Each member has a responsibility to:
• 1. Keep information confidential except when disclosure is authorized or legally
required.
• 2. Inform all relevant parties regarding appropriate use of confidential
information. Monitor subordinates’ activities to ensure compliance.
• 3. Refrain from using confidential information for unethical or illegal advantage.
• III. INTEGRITY (Honesty)
• Each member has a responsibility to:
• 1. Mitigate actual conflicts of interest. Regularly communicate with business
associates to avoid apparent conflicts of interest. Advise all parties of any
potential conflicts.
• 2. Refrain from engaging in any conduct that would prejudice carrying out duties
ethically.
• 3. Abstain from engaging in or supporting any activity that might discredit the
profession.
• IV. CREDIBILITY (Reliability)
• Each member has a responsibility to:
• 1. Communicate information fairly and objectively.
• 2. Disclose all relevant information that could reasonably be
expected to influence an intended user’s understanding of the
reports, analyses, or recommendations.
• 3. Disclose delays or deficiencies in information, timeliness,
processing, or internal controls in conformance with organization
policy and/or applicable law.
1-36

IMA Guidelines for Resolution

of an Ethical Conflict
• Follow employer’s established policies.
• For unresolved ethical conflicts:
 Discuss the conflict with immediate supervisor or
next highest uninvolved manager.
 If immediate supervisor is the CEO, consider the
board of directors or the audit committee.
 Contact with levels above the immediate
supervisor
should only be initiated with the supervisor’s
knowledge, assuming the supervisor is not
involved.
1-38

Why Have Ethical Standards?

Ethical
Eth cal standards
standards inn business
bus nessare
areessential
essentialfor
ora
smooth
a smooth functioning advanced
unct oning market
advanced economy.
market
economy.

Without ethical standards in business, the

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

Cancelling ethical standards in business would

lead to a lower quality of life with less
desirable goods and services at higher prices.
 (6) Corporate Governance

• Effective corporate governance enhances stockholders’ confidence

that a company is being run in their best interests rather than in the
interests of top managers.
• 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.
1-41

Corporate Governance

The system by
which a company is
directed and
controlled.
Board
Board of
o Incentives and
Directors
D rectors monitoring for

Top
Top To pursue
Management
Management objectives of

Stockholders
Stockho ders
 1-42

Corporate Governance

An
An effective
ef ect ve corporate
co porate governance
governance system
system
should
should also
also protect
p otec the
he interests
nterests of
of the
he
company’s
company sother
otherstakeholders.
stakeho ders

Employees
Emp oyees Customers
Customers Creditors
C ed ors Supplier
Suppl e rss
Suppl

And
And the
the communities
communities in
in
which
which the
the company
company operates.
operates.
 Sarbanes-Oxley Act of 2002
• The Sarbanes–Oxley Act of 2002 (enacted July 30, 2002), also known as the
"Public Company Accounting Reform and Investor Protection Act" (in
the Senate) and "Corporate and Auditing Accountability, Responsibility, and
Transparency Act" (in the House) and more commonly called Sarbanes–
Oxley, Sarbox or SOX, is a United States federal law that set new or
expanded requirements for all U.S. public company boards, management and
public accounting firms.
• A number of provisions of the Act also apply to privately held companies.
• 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.
• There are six key aspects of the legislation.
• First, the Act requires that both the CEO and CFO
certify in writing that their company’s financial
statements and accompanying disclosures fairly
represent the results of operations

• Second, The Act authorizes the Board to conduct

investigations, to take disciplinary actions against
audit firms, and to enact various standards and
rules concerning the preparation of audit reports.
• Third, the Act places the power to hire, compensate, and
terminate the public accounting firm that audits a company’s
financial reports in the hands of the audit committee of the
board of directors.
• Previously, management often had the power to hire and fire its
auditors. Furthermore, the Act specifies that all members of the audit
committee must be independent, meaning that they do not have an
affiliation with the company they are overseeing, nor do they receive
any consulting or advisory compensation from the company.

• Fourth, The Act prohibits a public accounting firm from

providing a wide variety of non-auditing services to an audit
client.
• Fifth, the Act requires that a company’s annual
report contain an internal control report .

• Finally, the Act establishes severe penalties of as

many as 20 years in prison for altering or
destroying any documents that may eventually be
used in an official proceeding.
 (7) Enterprise risk
management
• Businesses face risks every day. Some risks are foreseeable
(predictable).
• For example, a company could reasonably be expected to expect the possibility
of a natural disaster or a fire destroying its centralized data storage facility.
• Companies respond to this type of risk by maintaining off-site
backup data storage facilities.
• Other risks are unforeseeable.
• Every business strategy or decision involves risks.
• Enterprise risk management is a process used by a company to
proactively identify and manage those risks.
1-45

Enterprise Risk Management

A process used Should I try to avoid the risk,

share the risk, accept the
by a company to risk, or reduce the risk?
proactively
identify and
manage risk.
Once a company identifies its risks, it
can respond to them in various ways
such as accepting, avoiding, or
reducing the risk.

Perhaps
Once the mostden
a company common
es srisksks
management
perhaps he
tacticcommon
most is to reduce risks by implementing
sk management ac c s specific
o educe
controls.
sks by mplement ng speci c cont ols.
1-46

Enterprise Risk Management

Examples of Controls to
Examples of Business Risks Reduce Business Risks
● Products harming customers ● Develop a formal and rigorous
new product testing program
● Losing market share due to the ● Develop an approach for legally
unforeseen actions of competitors gathering information about
competitors' plans and practices
● Poor weather conditions shutting ● Develop contingency plans for
down operations overcoming weather-related
disruptions
● Website malfunction ● Thoroughly test the website
before going "live" on the
● A supplier strike halting the flow Internet
of raw materials ● Establish a relationship with two
companies capable of providing
● Financial statements unfairly raw materials
reporting the value of inventory ● Count the physical inventory on
hand to make sure that it agrees
● An employee accessing with the accounting records
unauthorized information ● Create passwords barriers that
prohibit employees from obtaining
information not needed to do their
jobs
 (8) Corporate Social
Responsibility
• Companies are responsible for producing financial results that satisfy
stockholders.
• They also have a corporate social responsibility to serve other stakeholders
—such as customers, employees, suppliers, communities, and
environmental and human rights advocates— whose interests are tied to
the company’s performance.
• Corporate social responsibility (CSR) is a concept whereby organizations
consider the needs of all stakeholders when making decisions.
• CSR extends beyond legal compliance to include voluntary actions that
satisfy stakeholder expectations.
• Numerous companies, such as Procter & Gamble,
3M, EliLilly and Company, Starbucks, Microsoft,
Genentech, Johnson & Johnson, Baxter
International, Abbott Laboratories, KPMG,
National City Bank, Deloitte, Southwest Airlines,
and Caterpillar , prominently describe their
corporate social performance on their websites.
 Examples of Corporate Social
Responsibilities
• Companies should provide customers with:
• Safe, high-quality products that are fairly priced.
• Competent, courteous, and rapid delivery of products
and services.
• Full disclosure of product-related risks.
• Easy-to-use information systems for shopping and
tracking orders.
• Companies should provide suppliers with:
• Fair contract terms and prompt payments.
• Reasonable time to prepare orders.
• Hassle-free acceptance of timely and complete deliveries.
• Cooperative rather than unilateral actions.
• Companies should provide stockholders with:
• Competent management .
• Easy access to complete and accurate financial information.
• Full disclosure of enterprise risks.
• Honest answers to knowledgeable questions.
• Companies and their suppliers should provide employees
with:
• Safe and humane working conditions.
• Nondiscriminatory treatment and the right to organize and file
complaints.
• Fair compensation.
• Opportunities for training, promotion, and personal development.
• Companies should provide communities with:
• Payment of fair taxes.
• Honest information about plans such as plant closings.
• Resources that support charities, schools, and public activities.
• Reasonable access to media sources.
• Companies should provide
environmental and human rights
advocates with:
• Greenhouse gas emissions data.
• Recycling and resource conservation
data.
• Child labor transparency.
• Full disclosure of suppliers located in
developing countries.
1-47

(9) Certified Management Accountant

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 Accountants
(CMA).

n o ma on abou becom ng a CMA and he CMA

prog am can be accessed on he MA’s websi e a
www mane o g o by ca ng 1-800-638-4427
• In addition to the prestige that accompanies a professional
designation, CMAs are often given greater responsibilities
and higher compensation than those who do not have such a
designation.
• To become a Certified Management Accountant, the
following four steps must be completed:
• 1. File an Application for Admission and register for the CMA
examination.
• 2. Pass all four parts of the CMA examination within a three-year
period.
• 3. Satisfy the experience requirement of two continuous years of
professional experience in management and/or financial accounting
prior to or within seven years of passing the CMA examination.
• 4. Comply with the Statement of Ethical Professional Practice.
1-48

End of Chapter 1