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CHAPTER 15
The Changing Business Environment:
A Manager's Perspective

PLANNING MATRIX
Enhancing Your
Building Your Basic Knowledge Knowledge, Skills, and
Learning Objective and Skills Critical Thinking
1. Distinguish management SE 1, 2, 3, E 1, 2, 3, 4, P 1, 6 C1
accounting from financial 4, 5 5, 6, 8, 9 C2
accounting and explain how C3
management accounting supports C5
the management process. C6
2. Describe the value chain and its SE 5, 6 E 7, 8, 10 P 2, 3, 8
usefulness in analyzing a
business.
3. Identify the management tools SE 7, 8 E 9, 11 P 10 C6
used for continuous
improvement.
4. Explain the balanced scorecard SE 9 E 12, 13 P 4, 9 C5
and its relationship to
performance measures.
5. Identify the standards of ethical SE 10 E 14, 15 P 5, 10
conduct for management
accountants.
MEMORANDA:
SE: Short Exercises
E: Exercises
P: Problems (Each problem has a User Insight question.)s
All questions are in the text with related Learning Objectives (Stop, Think, and Apply).

SUGGESTED INSTRUCTIONAL STRATEGY

Output Skills Developed:
Technical, Interpersonal

Related Learning Objective:

4

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200 Chapter 15: The Changing Business Environment: A Manager's Perspective

Instructional Strategy
Learning activity: Game
Learning environment: Modified lecture, active, in-class
Learning tool: Textbook assignment Case 4

Steps to Implement
1. Assign Case 4 at least a week before you introduce this learning activity in class. Students are to
work on Case 4 individually.
2. Using the solutions for Case 4, prepare a story that you will present to the students in class. The
goal is to help students meet the learning objectives by requiring them to create questions and
answers based on the story. For example, in the story, the students might be seated next to you on
a flight to England. You are thinking about opening a McDonald’s restaurant in England, and you
talk about the kinds of information you will need to make a good decision.
3. Prepare an outline of the in-class assignment:
a. Students are to work in teams of four to six.
b. Each team is to develop five questions and answers based on the facts that you present in
your story. For example, one question might be “What are three examples of qualitative
information that affects any restaurant business?” The answer would be “Government
regulations, tariffs, political involvement.” Other possible questions are “To what degree
will political involvement in business operations influence the success of the restaurant?”
“What minimum income level is considered adequate to support a decision to open a
restaurant in the area identified in the story?”
c. Each team is to select a representative to present its questions in class. The representative
may also give the team’s responses, or students can answer individually as the questions are
posed. Responses may be made from memory or by referring to notes.
d. Teams will earn one point for each correct answer. The team with the most points will
receive a reward.
4. After dividing the class into teams, distribute the assignment and allow the teams about ten
minutes to discuss the assignment and prepare for the story.
5. Present the story to the class. Remind students to take careful notes.
6. Allow teams about five to ten minutes to develop questions and answers based on the story.
7. Allow about 15 to 20 minutes for the teams to present their questions and answers. Each team is to
ask another team one question. After all teams have asked three questions, tally the final scores.
(By preparing five questions, each team should have at least three questions that are “unique.”)
8. Present the winning team with its reward.

Assessment
Technical skills: Grade each team’s questions and answers. Give a brief quiz at the end of the period to
test recall and comprehension. Ask a related question on the next examination.
Interpersonal skills: Ask the students to answer one or more of the following questions: How well did
your group interact? How many in the group were prepared for the assignment? How many were fully
involved? What could the group do to improve its performance next time?

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Chapter 15: The Changing Business Environment: A Manager's Perspective 201

RESOURCE MATERIALS AND OUTLINES

OBJECTIVE 1: Distinguish management accounting from financial accounting and explain
how management accounting supports the management process.
Summary Statement
Management accounting is the process of identifying, measuring, accumulating, analyzing, preparing,
interpreting, and communicating financial and nonfinancial information. Management uses this
information to plan, evaluate, and control an organization and to ensure that its resources are used and
accounted for appropriately. In short, like financial accounting, management accounting assists decision
makers by providing pertinent information and communicating the information through reports.
Because management accounting reports are primarily for use inside the organization, their format can
be flexible. They are prepared as needed, and they can present both objective, verifiable information
and subjective, future-oriented information expressed in dollar amounts or physical measures. In
contrast, financial accounting reports provide information about an organization’s past performance to
owners or stockholders, lenders, customers, and government agencies on a periodic basis. Financial
accounting reports follow strict guidelines defined by generally accepted accounting principles and
present objective information shown in historical dollars.
Although management actions vary from organization to organization, they generally follow a four-
stage process. The four stages of the management process are planning, performing, evaluating, and
communicating. Management accounting can provide a constant stream of relevant information
throughout these four stages.
Essential to the planning process is a statement of the company’s mission, the fundamental way in
which the company will achieve its primary goal of increasing the value of the owners’ interest in the
business. The planning process involves the development of strategic objectives (broad, long-term
goals), tactical objectives (mid-range goals), and operating objectives (short-term goals for day-to-day
operations). Developing these objectives requires managers to formulate a business plan, a
comprehensive statement of how the company will achieve its objectives.
In the performing stage, managers must implement the business plan in ways that make optimal use of
available resources. Management accounting information about such matters as sales and deliveries
helps them manage the supply chain, the path that leads from the suppliers of the materials from which
a product is made to the final consumer. In the evaluating stage, managers compare actual performance
with the performance goals they established in the planning stage, analyze any significant differences,
and take corrective action. Management accounting reports communicate the results of managers’
efforts in the planning, performing, and evaluating stages.
The key to producing accounting reports that clearly communicate accurate information is to apply the
four w’s: why, who, what, and when. The why question is answered by stating the purpose of the report.
The who question requires identification of the audience for the report. The what question requires
identification of the type of information needed, reliable sources of information, and an effective
method of presentation. Finally, there is the when question: When is the report due?

New Concepts and Terminology

management accounting; mission statement; strategic objectives; tactical objectives; operating
objectives; business plan; supply chain

Related Text Illustrations

Table 1: Comparison of Management and Financial Accounting

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
202 Chapter 15: The Changing Business Environment: A Manager's Perspective

Figure 1: Overview of the Planning Framework

Focus on Business Practice: What’s Going On in the Grocery Business?
Figure 2: The Supply Chain
Focus on Business Practice: What Is Management’s Responsibility for the Financial Statements
Exhibit 1: A Management Accounting Report

Lecture Outline
I. Like financial accounting, management accounting assists decision makers by providing pertinent
information and communicating the information through reports.
II. Management accounting differs from financial accounting in many respects:
A. Primary users
1. Management accounting information: managers, employees, supply chain partners
2. Financial accounting information: owners or stockholders, lenders, customers,
government agencies
B. Report format
1. Management accounting: flexible format, driven by user’s needs
2. Financial accounting: based on generally accepted accounting principles
C. Purpose of reports
1. Management accounting: to provide information for planning, control, performance
measurement, and decision making
2. Financial accounting: to report on past performance
D. Nature of information
1. Management accounting: objective and verifiable for decision making; more subjective
for planning (relies on estimates)
2. Financial accounting: historical, objective, and verifiable
E. Units of measure
1. Management accounting: dollars at historical, current market, or projected values;
physical measures of time or number of objects
2. Financial accounting: dollars at historical and current market values
F. Frequency of reports
1. Management accounting: prepared as needed; may or may not be on a periodic basis
2. Financial accounting: prepared on a periodic basis (minimum of once a year)
III. Management accounting provides relevant information at each stage of the management process.
A. Planning stage: Management accounting provides information for the planning process,
which involves a mission statement, the development of strategic, tactical, and operating
objectives, and the formulation of a business plan.
B. Performing stage: Managers implement the business plan, using management accounting
information to manage the supply chain and make optimal use of resources.
C. Evaluating stage: Management accounting complements the efforts of managers at this stage
to compare actual performance with the performance goals they established in the planning
stage, analyze any significant differences, and correct the problems.
D. Communicating stage: Management accounting reports communicate the results of
managers’ efforts in the planning, performing, and evaluating stages.
IV. The key to producing accounting reports that clearly communicate accurate information is to
apply the four w’s: why, who, what, and when.

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 Chapter 15: The Changing Business Environment: A Manager's Perspective 203

Teaching Strategy
Refer students to Table 1 as you discuss the differences between management accounting and financial
accounting. Short Exercise 1 can be used in class to reinforce the discussion. Case 1, which asks
students to interpret an annual report, can be used to illustrate that financial accounting reports require
consistency and comparability to ensure the usefulness of information to those outside the organization.
Point out that the outcomes described in these reports are the result of various decisions that managers
and employees make on the basis of management accounting information.
Use Table 1 to discuss the uses of accounting to the management process. Use Exercise 4 to discuss the
four w’s of report preparation.

OBJECTIVE 2: Describe the value chain and its usefulness in analyzing a business.
Summary Statement
The value chain conceives of each step in the manufacture of a product or the delivery of a service as a
link in a chain that adds value to the product or service. These value-adding steps—research and
development, design, supply, production, marketing, distribution, and customer service—are known as
primary processes. The value chain also includes support services—human resources, legal services,
information services, and management accounting. Support services are necessary adjuncts to the
primary processes, promoting efficiency and effectiveness, but they do not add value to the final
product.
An advantage of value chain analysis is that it enables a company to focus on its core competencies; a
core competency is an area in which a company excels. Outsourcing—meaning that a company engages
another company to produce goods or services that are not among its own core competencies—is a
common result of value chain analysis, one that can also benefit a company.

New Concepts and Terminology

value chain; primary processes; support services; core competency; outsourcing

Related Text Illustrations

Figure 3: The Value Chain
Exhibit 2: Value Chain Analysis

Lecture Outline
I. The value chain conceives of each step in the manufacture of a product or the delivery of a service
as a link in a chain that adds value to the product or service.
II. The primary processes that add value to a product or service include research and development,
design, supply, production, marketing, distribution, and customer service.
III. The value chain also includes support services (such as human resources, legal services,
information services, and management accounting); these services are necessary for promoting the
effectiveness and efficiency of the primary processes, but they do not add value to the product or
service.
IV. Value chain analysis enables a company to focus on its core competencies.
V. Value chain analysis often results in a decision to outsource a product or service.

Teaching Strategy
In discussing the value chain, use Figure 3 to illustrate how the primary processes add value to a
product or service, how the support services facilitate those processes, and how the value chain relates

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204 Chapter 15: The Changing Business Environment: A Manager's Perspective

to a business’s mission and strategic and operating objectives. Short Exercises 5 and 6 are appropriate
for use in class. Exercise 7, Problems 2 and 8 are also geared to this learning objective.

OBJECTIVE 3: Identify the management tools used for continuous improvement.

Summary Statement
The concept of continuous improvement evolved in response to a significant increase in global
competition. Organizations that adhere to continuous improvement are never satisfied with what is;
they constantly seek improved efficiency and lower cost through better methods, products, services,
processes, or resources. Continuous improvement has given rise to several important management tools,
all of which rely on the information that management accounting provides. They include the just-in-
time (JIT) operating philosophy; total quality management (TQM), which relies on accounting
information about the costs of quality; activity-based management (ABM), which uses a management
accounting practice called activity-based costing (ABC); and the theory of constraints (TOC). All these
tools are designed to increase product or service quality and customer satisfaction and to reduce
resource waste, inefficiency, and cost. Activities that add value to a product or service, as perceived by
the customer, are value-adding activities; activities that do not add value are called nonvalue-adding
activities.

New Concepts and Terminology

continuous improvement; just-in-time (JIT) operating philosophy; lean production; total quality
management (TQM); costs of quality; activity-based management (ABM); value-adding activities;
nonvalue-adding activities; activity-based costing (ABC); theory of constraints (TOC)

Related Text Illustrations

Figure 4: The Continuous Improvement Environment

Lecture Outline
I. The concept of continuous improvement, which evolved in response to an increase in global
competition, has given rise to several important management tools, all of which rely on
management accounting information:
A. Just-in-time (JIT) operating philosophy
B. Total quality management (TQM)
1. Costs of quality
C. Activity-based management (ABM)
1. Value-adding activities
2. Nonvalue-adding activities
3. Activity-based costing (ABC)
D. Theory of constraints (TOC)
II. All these tools are designed to
A. Reduce production or service costs and delivery time
B. Improve product or service quality
C. Increase customer satisfaction

Teaching Strategy
Identify the principal characteristics of JIT, TQM, ABM, and TOC. Discuss how each of these
management tools promotes continuous improvement. Exercises 9 and 11 provide a good illustration of
the material in this learning objective.

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 Chapter 15: The Changing Business Environment: A Manager's Perspective 205

OBJECTIVE 4: Explain the balanced scorecard and its relationship to performance

measures.
Summary Statement
Performance measures are quantitative tools that gauge how well an organization is performing in
relation to a specific objective or expected outcome. Performance measures may be financial or
nonfinancial. Financial performance measures include return on investment, net income as a percentage
of sales, and the costs of poor quality as a percentage of sales. Nonfinancial measures include the
number of times an activity occurs (such as the number of orders shipped in a day) and the time taken
to perform a task (such as filling an order). Performance measures are useful in reducing waste and
inefficiencies in operating activities.
Performance measures are used in all stages of the management process. In the planning stage,
managers establish performance measures that will support the organization’s mission and objectives.
During the performing stage, performance measures guide and motivate actual performance and assist
in assigning costs. In the evaluating stage, managers use performance measures to analyze significant
differences between actual and planned performance. In the communicating stage, performance
measurement information is used in communicating performance evaluation and developing new
budgets.
Effective performance measurement requires an approach that uses both financial and nonfinancial
measures that are tied to a company’s mission and objectives. One such approach is the balanced
scorecard. The balanced scorecard links the perspectives of an organization’s stakeholders to the
organization’s mission, objectives, resources, and performance measures. It acknowledges the
interdependence of the four stakeholder groups: employees, internal business processes, customers, and
investors.
The balanced scorecard enables a company to determine whether it is making continuous improvement
in its operations. But to ensure its success, a company must also compare its performance with that of
similar companies in the same industry. Benchmarking is a technique for determining a company’s
competitive advantage by comparing its performance with that of its closest competitors. Benchmarks
are measures of the best practices in an industry.

New Concepts and Terminology

performance measures; balanced scorecard; benchmarking; benchmarks

Related Text Illustrations

Figure 5: The Balanced Scorecard for Good Foods Store
Focus on Business Practice: How Does the Balanced Scorecard Measure Success at Futura Industries?

Lecture Outline
I. Performance measures
A. Quantitative tools that gauge an organization’s performance in relation to a specific process,
activity, or task
B. May be financial or nonfinancial
C. Financial performance measures include
1. Return on investment
2. Net income as a percentage of sales
3. Costs of poor quality as a percentage of sales
D. Nonfinancial performance measures include
1. Number of customer complaints

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206 Chapter 15: The Changing Business Environment: A Manager's Perspective

2. Number of orders shipped the same day

3. Hours of inspection
4. Time to fill an order
E. Performance measures are useful in reducing waste and inefficiencies in operating activities.
II. Performance measures are used in all stages of the management process.
A. Planning stage: Managers establish performance measures that will motivate employees to
fulfill the company’s mission and achieve its objectives.
B. Performing stage: Performance measures guide and motivate actual performance and assist
in assigning costs.
C. Evaluating stage: Managers use performance measures to analyze significant differences
between actual and planned performance.
D. Communicating stage: Performance measurement information is used in communicating
performance evaluations and developing new budgets.
III. Balanced scorecard
A. Approach to performance measurement that links the perspectives of an organization’s four
stakeholder groups to the organization’s mission, objectives, resources and performance
measures.
B. Stakeholders have one of four perspectives:
1. Financial perspective
2. Learning and growth perspective
3. The business’s internal procedures
4. A customer perspective
C. The balanced scorecard enables a company to determine whether it is making continuous
improvement in its operations.
IV. Benchmarking is a technique for determining a company’s competitive advantage by comparing
its performance with that of its closest competitors in the same industry.
A. Benchmarks are measures of the best practices in an industry.

Teaching Strategy
Ask students to give examples of nonfinancial data of relevance to managers. Then ask them to think
about the advantages of using nonfinancial performance measures in an international business
environment. Such measures would eliminate some problems associated with different currencies and
different accounting standards.
Refer students to Figure 5 as you explain the components of the balanced scorecard.
Problem 4 illustrates the use of the balanced scorecard, its relationship to performance measures, and
the role of benchmarking. Short Exercise 9, Exercises 12 and 13, and Case 5 are also appropriate for
this learning objective.

OBJECTIVE 5: Identify the standards of ethical conduct for management accountants.

Summary Statement
Standards of ethical conduct for management accountants emphasize practitioners’ responsibilities in
the areas of competence, confidentiality, integrity, and credibility. These standards help management
accountants recognize and avoid situations that could compromise their ability to supply management
with accurate and relevant information.

Related Text Illustrations

Exhibit 3: Statement of Ethical Professional Practice
Focus on Business Practice: How to Blow the Whistle on Fraud

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 Chapter 15: The Changing Business Environment: A Manager's Perspective 207

Lecture Outline
I. Explain why management accountants must adhere to standards of ethical conduct.
II. Standards of ethical conduct for management accountants emphasize competence, confidentiality,
integrity, and credibility.
A. Competence standards require management accountants to
1. Develop their knowledge and skills on an ongoing basis.
2. Perform duties in accordance with relevant laws and technical standards.
3. Provide decision support and recommendations that are accurate, clear, concise, and
timely.
4. Recognize and communicate professional limitations or other constraints that would
preclude performance of responsibilities.
B. Confidentiality standards require them to
1. Refrain from disclosing confidential information except when authorized or legally
required to disclose it.
2. Inform all relevant parties regarding appropriate use of confidential information. Make
sure that subordinates refrain from disclosing confidential information.
3. Refrain from using or appearing to use confidential information for unethical or illegal
advantage.
C. Integrity standards require them to
1. Avoid conflicts of interest and mitigate any actual conflicts of interest.
2. Refrain from activities that would prejudice their ability to carry out their duties
ethically.
3. Refrain from activities that would discredit the profession.
D. Credibility standards require them to
1. Communicate information fairly and objectively.
2. Fully disclose all relevant information that could influence a user’s understanding of
the material.
3. Disclose delays or deficiencies in information, timeliness, processing, or internal
controls in conformance with organization policy and/or applicable law.

Teaching Strategy
Using Exhibit 3, outline the four types of standards: competence, confidentiality, integrity, and
credibility. Discuss each one. Short Exercise 10 and Problems 5and 10 pertain to this learning
objective.

REVIEW QUIZ

True-False
1. T F Financial accounting reports may be prepared using either historical or future-oriented
information without any formal guidelines or restrictions.
2. T F Management accounting reports are directed primarily to persons inside the
organization, whereas financial accounting reports are directed primarily to persons
outside the organization.
3. T F Management accounting can provide relevant information in each of the four stages of
the management process—planning, performing, evaluating, and communicating.
4. T F Work in process inventory is maintained at maximum levels in a just-in-time operating
environment.

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208 Chapter 15: The Changing Business Environment: A Manager's Perspective

5. T F When the just-in-time operating philosophy and total quality management are applied
in a work environment, workers are likely to function as team members and to have the
power to make operating decisions that improve the quality of products or services and
the work environment.
6. T F Activity-based management and activity-based costing can reduce costs by identifying
and eliminating nonvalue-adding activities.
7. T F The key to successful report preparation is to apply the four w’s—that is, to ask who,
what, why, and where.

Multiple Choice
8. To eliminate waste in organizations, management may use
a. a just-in-time operating philosophy.
b. total quality management.
c. activity-based management.
d. the theory of constraints.
e. all of the above.

9. Nonfinancial performance measures include all of the following except

a. time to fill an order.
b. hours of inspection.
c. costs of poor quality as a percentage of sales.
d. number of customer complaints.
e. number of defects.

10. Reducing or eliminating the need for rework should reduce

a. storage costs.
b. product movement.
c. throughput time.
d. all of the above.
e. none of the above.

11. All of the following are major considerations in the planning process except
a. strategic objectives.
b. a business plan.
c. the supply chain.
d. operating objectives.
e. a mission statement.

12. Which of the following is not a primary process in the value chain?
a. Research and development
b. Management accounting
c. Design
d. Customer service
e. Distribution

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 Chapter 15: The Changing Business Environment: A Manager's Perspective 209

13. The characteristics of management accounting include all except which of the following?
a. Preparation of reports whenever needed
b. Reliance on the criterion of usefulness rather than formal guidelines or restrictions for
gathering and reporting information
c. Adherence to generally accepted accounting principles
d. A focus on various segments of the business entity
e. Provision of information for decision making

14. The balanced scorecard links the perspectives of which of the following stakeholder groups?
a. Investors
b. Employees
c. Internal business processes
d. Customers
e. All of the above

15. Zapp Company provides pest control service to homeowners. Which of the following activities is
nonvalue-adding for Zapp Company?
a. Same-day service
b. Closed on weekends
c. Free inspection
d. One-year guarantee
e. All of the above

16. Advantages of value chain analysis are that it helps a company

a. identify value-adding activities.
b. focus on its core competencies.
c. identify products or services that should be outsourced.
d. decrease the time it takes to execute the primary processes and get a product to market.
e. do all of the above.

17. The ethical standards for management accountants established by the Institute of Management
Accountants emphasize
a. competence, licensing, integrity, and planning.
b. competence, confidentiality, integrity, and credibility.
c. planning, executing, reviewing, and reporting.
d. disclosure, objectivity, decision making, and education.
e. communication, planning, reviewing, and decision making.

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210 Chapter 15: The Changing Business Environment: A Manager's Perspective

ANSWERS TO REVIEW QUIZ

True-False Multiple Choice

1. F 8. e
2. T 9. c
3. T 10. d
4. F 11. c
5. T 12. b
6. T 13. c
7. F 14. e
15. b
16. e
17. b

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.