Management Accountant-an accountant of the future for Governance-Both Corporate world and the Government.
Unravelling Cost-Quantum Relation .
Cost Accounting-Ultimate Tool For Business.
•The underlying subtle fact is that everything converges to cost.
•“Consumption-Cost “is a linear equation
•Resources are the base for activity-Which in-turn involves cost.
•Cost is related to some parameter and that is consumption=per unit/per process.
Cost is not stand alone.
•In that it is not incurred without an objective/purpose.If so it can be charity but they do have a purpose though not for profit.
•Cost is for the means or the resources,to an end which may be profit making /discharging social responsibility/Charity for Gods sake to cleanse from sins.
Cost is for consumption as profit is out of such consumption.
•Profit is earned out of resources spent @ a cost.
•Tracking consumption will reduce cost.
•Channelising resources is cost control.
•Consumption monitoring and cost tracking are simultaneous and not in sequence they may overlap each gearing the other.
Cost Accountant has greater role to play.
•If cost is any indicative of performance to a company then resource consumption is indication of cost involvement .Cost accountant cannot be a meek spectator of cost books alone he should be a production planner and ineffect a cost engineer.
Cost Accountant-is a Cost Engineer.
Saturday, May 13, 2006
Maintenance of Cost records and periodical Audit-Relevance in Globalised environment.
Management Accountant-an accountant of the future for Governance-Both Corporate world and the Government.
There has been a strong debate around as to whether Cost records and Audit of the same has relevance in India in the liberalised economy.This has stemed from the fact that Cost Audit has already been seen in isolation.
The GOI feels that it has the exclusive right on Cost Audit,The Industry feels that the exercise is unnecessary and subserve its interest,Though industry agrees to have a proper Cost Management system in place they are averse of Auditing for obvious reasons.However Cost records and scrutiny of the same have evolved over the years and its utility has got stabilised.
The vision of the government has been that Cost Audit is relevant for Administrative controls on the industry functioning and that is the reason still Cost audit is ordered for products not for business.Industry is apprehensive that its production and process secrets will be leaked in the name of Cost Audit.
Industry however recognises the importance of a well established cost management system .
Basically any economy can be classified as Planned(Plan Driven) economy and an Free economy(where the market force drives the economic growth).They are loosely categorised as communist and capitalist economy.India has adopted middle path and accepted Mixed economy where private enterprise had a controlled growth.
While financial accounting records the transaction as Revenue,expenditure,Deferred/Capital spending, it is Cost accounting that identifies the importance analysing Cost and driving its efficiency to the last mile.It is cost accounting that recovers and studies the efficiency aspect of value addition.
The focus is shifted from cash profits ,to how such cash profits are earned and whether there is scope for improvement(Cost Engineering).
Globalisation of the economy means removing controls(Tarriff barriers) on movement of goods and services.Now this in essence means the most efficient producer across the world will rule over the product or services whether by operating from a single location(where transportation logistics come into play)or multi locational(Strategic placement of production and service facility).Efficiency is triggered by Cost control and reduction(Cost engineering),for this, records have to be generated and system put in place to identify, classify,and analyse costs to trigger efficiency of produce and service.In this sense no Government in the globalised economic activity can afford to neglect Cost Data ,so also no Industrialist will like to be left in the lurch ,with only financial data which do not talk about efficiency parameters.The policies and decisions of the global corporates are impacted with many issues, but the focus had been only on foriegn currency differentials while Cost of production and services took to the back burner, with protectionism, but with liberalisation of the economy and the concept of patronising all as against some, will compel the industry to rethink on Cost issues.
Liberalisation also means government is trying to drag itself out of business and business controls this being the case a question may arise why should the government still hang on to controlling Cost Auditors and their report.Answer is partly government should relook the entire issue and allow appointment of Cost auditor directly by the AGM and the auditor shall furnish the report of cost audit to the management of the Company .The government may instead call for classified reports or sections of such report from the management instead of the current practice of cost auditor furnishing the report to the government.This will allow lot of innovation in the functioning of Cost auditor,build confidence in the management and improve corporate governance.
Practically Liberalisation has brought us to an earlier situation where every industry is now being monitored ny the government through pricing authority.So in essence Mixed economy is retained and globalised while pure capitalist economy have witnessed change as a shift to mixed economic status and communist have breathed fresh air of capitalism it is India that has been stable for 50 years and its vision is not defeated.
The concept of stake holder,Corporate social responsibilty and triple bottomline all points to the narrowness in approach of financial statements.While Monopolies commision had been re-named as competition commision to suit the global needs and consumers awareness have resulted in many enactments,Cost as a prime value driver(Use,Esteem,Exchange,Cost) cannot be ignored.
Since any economic activity in a democratic setup is for and on behalf of all the citizens the myopic vision of restricting the performance indicators to owners will hardly sell for long.Every citizen have been defined as equal sharing unit in the geographical boundaries of a democratic set up reposed by adult franchise and they have all the right to know the value drivers of the entire economic activity.It is the responsibility of the representatives of the people in the legislature to ensure this happens.
Cost Management Group-Governance in Government
Management Accountant-an accountant of the future for Governance-Both Corporate world and the Government.
•Recognition of Cost of Governance.
•Segregation of Planning and Cost management.
•Importance of Cost to Govern citizens
•CBA in Government.
•Cost based governance.
•Cost-Benefit analysis should form the basis of Government decisions primarily and not emotional factors though cost can be overrun with valid reasons to be recorded in writing.
•Cost of running Government Machinery.(Executive/Legislature and Judiciary-Tapering right down to Panchayat)
•Cost of social schemes Vis-Vis Benefits that accrue.
•Revenue Accretion Tax and Non-Tax and related cost involved.
•Cost of national Development expenditure.
•Cost of Defence.
•Cost of policies that are legislated.(Impact cost for the economy.
•Relative cost of international policy impact.
•Direct and indirect cost of Governance
•Right to govern is not absolute in democracy.It is related with many factors prime among them is cost.
•Cost of governance is passed on to citizens.
•Responsibility to avoid Wastes.
•Planning exercise should be segregated from cost visualisation.
•Focus on cost management through budgeting and varience analyses.
•Planning Failures to be analysed on time and cost overruns.
•Non-Starters to be critically reviewed to segregate plan mismatch with cost
•Every thing is @ a cost ignoring cost means Neglecting economic progress.
•Recognition of Cost of Governance.
•Segregation of Planning and Cost management.
•Importance of Cost to Govern citizens
•CBA in Government.
•Cost based governance.
•Cost-Benefit analysis should form the basis of Government decisions primarily and not emotional factors though cost can be overrun with valid reasons to be recorded in writing.
•Cost of running Government Machinery.(Executive/Legislature and Judiciary-Tapering right down to Panchayat)
•Cost of social schemes Vis-Vis Benefits that accrue.
•Revenue Accretion Tax and Non-Tax and related cost involved.
•Cost of national Development expenditure.
•Cost of Defence.
•Cost of policies that are legislated.(Impact cost for the economy.
•Relative cost of international policy impact.
•Direct and indirect cost of Governance
•Right to govern is not absolute in democracy.It is related with many factors prime among them is cost.
•Cost of governance is passed on to citizens.
•Responsibility to avoid Wastes.
•Planning exercise should be segregated from cost visualisation.
•Focus on cost management through budgeting and varience analyses.
•Planning Failures to be analysed on time and cost overruns.
•Non-Starters to be critically reviewed to segregate plan mismatch with cost
•Every thing is @ a cost ignoring cost means Neglecting economic progress.
Role Of Management Accountant in Tax Audit-Ideal individual for Auditing Accounts for direct tax collection.
Financial accounts has a singular goal of drawing profits out of all incomes by way of charging all expenses. Its classification is simply whether an item is a capital/revenue/deferred revenue .That is the crux of the financial statements is to match Income with expenditure to arrive at surplus or deficit.
Cost accounting is based on classification of expenditure into Direct/indirect its concern is not profit-centric since it believes that such simplistic assumption misleads the efficiency of segments/sub segments of the organization .The financial accounts can get the owners caught napping by building castles without foundation. Cost accounting is truly a test of efficiency of the going concern and the dimensions of cost accounting are ever evolving.Efficiency of the business reflects in the national performance indicators.
When we talk interms of Tax collection we talk in terms of allowances and disallowances of items occurring in the financial statements .The allowances and disallowances are to be framed scrupulously keeping in mind development and the impact of its spread .A well established cost data will reflect on the betterment of tax collection. Infact the tax authorities are concerned with actual cost under the particular head and also in some cases whether such heads of expenditure are fanciful decorator or factual. This only shows that tax authorities are at varience with financial accounting and its policies of classification of expenditure.A Management accountant is in a better position to interpret on Closing stock valuation which is an important component of profit valuation. A Management accountant again is in a better position to interpret Asset valuation its position in depreciation etc for linear method of valuation is not the goal of Tax authorities. A cost accountant is again in a better position to check the various allowances(investment) are being properly granted.
Tax revenue goes to the exchequer to finance development needs(socio-economic) of the economy.A tax payer is under obligation to pay for the rights he enjoyed to earn the revenue.The concept of egalitarianism is linked in levying taxes as well.
Basically the concept of cost is hidden in tax laws for allowance and disallowances of income and expenditure and this is where Taxman have to avail the services of Management accountant .
Cost accounting is based on classification of expenditure into Direct/indirect its concern is not profit-centric since it believes that such simplistic assumption misleads the efficiency of segments/sub segments of the organization .The financial accounts can get the owners caught napping by building castles without foundation. Cost accounting is truly a test of efficiency of the going concern and the dimensions of cost accounting are ever evolving.Efficiency of the business reflects in the national performance indicators.
When we talk interms of Tax collection we talk in terms of allowances and disallowances of items occurring in the financial statements .The allowances and disallowances are to be framed scrupulously keeping in mind development and the impact of its spread .A well established cost data will reflect on the betterment of tax collection. Infact the tax authorities are concerned with actual cost under the particular head and also in some cases whether such heads of expenditure are fanciful decorator or factual. This only shows that tax authorities are at varience with financial accounting and its policies of classification of expenditure.A Management accountant is in a better position to interpret on Closing stock valuation which is an important component of profit valuation. A Management accountant again is in a better position to interpret Asset valuation its position in depreciation etc for linear method of valuation is not the goal of Tax authorities. A cost accountant is again in a better position to check the various allowances(investment) are being properly granted.
Tax revenue goes to the exchequer to finance development needs(socio-economic) of the economy.A tax payer is under obligation to pay for the rights he enjoyed to earn the revenue.The concept of egalitarianism is linked in levying taxes as well.
Basically the concept of cost is hidden in tax laws for allowance and disallowances of income and expenditure and this is where Taxman have to avail the services of Management accountant .
Role Of Management Accountant in Banking Industry.
A management Accountant is vital individual for any organisation in that he is person who focusses attention on Value generation be it Cost or exchange.
Unlike a general financial accountant who has focus of recording transactions and presenting statements of finance a Management Accountant involves himself in Processes that drives value .So a management accountant though retains necessarily Accountant brand as he possesses the skills of a general financial accountant additionally delivers that extra bit needed by the management to take decisions on vital internal and external parameters that drives value.He thus speaks what an accountant or the barren documents do not do ,he also speaks what a floor team(technical) does and what it ought to ,to earn the Optimum value.
In this back drop letus see what a management accountant has in store for Banking Industry.
A Banking Industry is basically the financial Backbone of the economy and its prime structure Begins with Central Bank,The lead Banks,Commerical Banks,Private Banks,Focussed financial institutions,Capital markets,Non-Banking financial intermediaries,and others.
The definition of a bank is Accepting for the purpose of lending and investment.Be it treasury operations,Forex,project financing,Social banking,the bank is expected to abide by that conventional definition.
A bank always is in hunt for money and this it gets through various routes Deposits,Call money,Recoveries out of credit,International funding channels etc.
A bank is also in the hunt for borrowers of its idle funds.
In essence banks operate on differential revenues(Lending rate- Deposit rates).
Both these involve risks and matching risk to return is the bottom line strength of a Management Accountant.
The dynamics in Banking Industry needs constant monitoring and advise of the Portfolio risks.
Funds can be directly linked to projects but sometimes not.
Unsecured credits have been heavy risk area and usually high return zone.
Though Banking industry is heavily controlled in favour of depositors often the inbuilt cost of services or never revealed and probably not studied in a structure manner that sometimes banks are caught napping and at other times the depositors bear the burden.
Financial Accounting miserably fails in such type of analysis and hence the stakeholders are put to loss often.
Effective Cost management system will protect the interest of all concerned.
Banks now have come up with various products and services which needs costing and constant review.
NPA of the banks are better controlled with good cost-management system in place.
Depositors are often cheated in portfolio mismatch and they have to bear the loss of cross subsidisation.
Fixation of interest rate shall also take into consideration the cost data of each particualr banks once the cost management system is strengthened.
Unlike a general financial accountant who has focus of recording transactions and presenting statements of finance a Management Accountant involves himself in Processes that drives value .So a management accountant though retains necessarily Accountant brand as he possesses the skills of a general financial accountant additionally delivers that extra bit needed by the management to take decisions on vital internal and external parameters that drives value.He thus speaks what an accountant or the barren documents do not do ,he also speaks what a floor team(technical) does and what it ought to ,to earn the Optimum value.
In this back drop letus see what a management accountant has in store for Banking Industry.
A Banking Industry is basically the financial Backbone of the economy and its prime structure Begins with Central Bank,The lead Banks,Commerical Banks,Private Banks,Focussed financial institutions,Capital markets,Non-Banking financial intermediaries,and others.
The definition of a bank is Accepting for the purpose of lending and investment.Be it treasury operations,Forex,project financing,Social banking,the bank is expected to abide by that conventional definition.
A bank always is in hunt for money and this it gets through various routes Deposits,Call money,Recoveries out of credit,International funding channels etc.
A bank is also in the hunt for borrowers of its idle funds.
In essence banks operate on differential revenues(Lending rate- Deposit rates).
Both these involve risks and matching risk to return is the bottom line strength of a Management Accountant.
The dynamics in Banking Industry needs constant monitoring and advise of the Portfolio risks.
Funds can be directly linked to projects but sometimes not.
Unsecured credits have been heavy risk area and usually high return zone.
Though Banking industry is heavily controlled in favour of depositors often the inbuilt cost of services or never revealed and probably not studied in a structure manner that sometimes banks are caught napping and at other times the depositors bear the burden.
Financial Accounting miserably fails in such type of analysis and hence the stakeholders are put to loss often.
Effective Cost management system will protect the interest of all concerned.
Banks now have come up with various products and services which needs costing and constant review.
NPA of the banks are better controlled with good cost-management system in place.
Depositors are often cheated in portfolio mismatch and they have to bear the loss of cross subsidisation.
Fixation of interest rate shall also take into consideration the cost data of each particualr banks once the cost management system is strengthened.
Role Of Management Accountant in Internal Audit.
Internal Audit is basically Scrutiny and review of Functions and Controls of the organisation by Studying and checking the System and process flow through procedures established and reassuring the management and stakeholders that there is adequate Internal controls by way of checks and balances and the process flow is sufficient to deliver optimum value to the Investments.
Enterprise risks are related to the decisions of the management to earn value.
Enterprise risks control is achieved by well established CFT(cross functional team)who constantly identify ,review and monitor Potential threats in process and policies.A management Accountant is vital individual and possess the necessary skill to lead an Internal Audit team and certify the management report on Internal audit.
As against a general financial accountant whose skill is preoccupied in booking revenue and expenditure and preparation of financial statements a qualified Management Accoutant is ideal in assessing the Document flow/Process or service flow/Synergise with reengineering of these flows with technical team and generate a periodical report for the management on the internal controls .
Internal Audit by a management accountant should begin with :
1.Identification of activity centres.
2.Identification of Flow/Path that generate intermediate value to final value for stake holders.
3.Identifying the network and critical path in the flow.
4.Segregating Process/service flow from documents flow.
5.Matching of documents and process/service.
6.Identifying Human interference and system energised activities.
7.Identifying Potential risks and costs involved.
8.Identifying and establishing Controls through checks and balances.
9.Periodical assessment and suggestion for re-engineering of process/service or documents strengtheningor systems or human vigilance.
10.Internal audit also extends to the area of system development cycle and system audit is a subset of internal audit.
11.Internal audit also attacks efficiency area where a management accountant already is dosed in the Cost accountant and efficiency auditor.As an internal auditor he will play a complimentary role for Value addition to stake holders.
Ideally Organisation should be confident in appointing a Qualified Management Accountant for Internal Audit as he possess necessary skills in the area.
Enterprise risks are related to the decisions of the management to earn value.
Enterprise risks control is achieved by well established CFT(cross functional team)who constantly identify ,review and monitor Potential threats in process and policies.A management Accountant is vital individual and possess the necessary skill to lead an Internal Audit team and certify the management report on Internal audit.
As against a general financial accountant whose skill is preoccupied in booking revenue and expenditure and preparation of financial statements a qualified Management Accoutant is ideal in assessing the Document flow/Process or service flow/Synergise with reengineering of these flows with technical team and generate a periodical report for the management on the internal controls .
Internal Audit by a management accountant should begin with :
1.Identification of activity centres.
2.Identification of Flow/Path that generate intermediate value to final value for stake holders.
3.Identifying the network and critical path in the flow.
4.Segregating Process/service flow from documents flow.
5.Matching of documents and process/service.
6.Identifying Human interference and system energised activities.
7.Identifying Potential risks and costs involved.
8.Identifying and establishing Controls through checks and balances.
9.Periodical assessment and suggestion for re-engineering of process/service or documents strengtheningor systems or human vigilance.
10.Internal audit also extends to the area of system development cycle and system audit is a subset of internal audit.
11.Internal audit also attacks efficiency area where a management accountant already is dosed in the Cost accountant and efficiency auditor.As an internal auditor he will play a complimentary role for Value addition to stake holders.
Ideally Organisation should be confident in appointing a Qualified Management Accountant for Internal Audit as he possess necessary skills in the area.
Friday, May 12, 2006
Money Theory
Money Theory
Medium, measure, standard and store.Money in circulation has multiplier effect.Money printed is presumed to be money in deficit by virtue of non-circulation/improper-circulation/Hiding and genuine demand forgrowth.
Inflation will not result(too much money chasing too little goodsand services)if all monies are generating genuine growth in otherwords money is growth driven whether in circulation or underprinting. Objective assessment of requirement for saving and growthis utmost important for retaining value of money.
Money Vs Money
Demand for one money over the other arises out of contemporaryPolity as well as emerging globalization.People normally prefer one money over the other for reasons ofsuperiority, acceptability, availability, and the value it commandsacross Borders.
Monies vs Goods
Goods and services are driven by money and sometime monies for valueand relative superiority of one money over the other determines thebest value for the goods.Preference over monies has to balance between availability,acceptability,optimal value for goods and services.
Deciding Global Money.
This has been the subject matter of debate, political rivalry foratleast 100 years now from gold standard, to basket of currencies,to free float,to now choice of international currencies(euro-dollar)and now again to prefer Gold for Dollar.
Future of Rupee:
Rupee like any Currency has two facets 1.Internal. 2.International.
Internal:
Money in the economy should generate growth not only forproducing goods and services but also in empowering thepeople.Growth Big and Beyond without limits of money should be Buzzfor the Economist.Lateral growth of money preferred over vertical.Weneed more entrepreneur,more consumers(not population withoutpropensity to consume),More money above all.
International:
Rupee slide is linked to rupees dependence to anothermoney which again is dependent on Rupees inability or deficiency tocommand required goods and services internally vis-vis producingcompeting goods and services for exchange internationally.
Solution:
Produce competing goods and services for exchange to stabilize rupee.
Path:
Generate Money and Generate value for Money
Medium, measure, standard and store.Money in circulation has multiplier effect.Money printed is presumed to be money in deficit by virtue of non-circulation/improper-circulation/Hiding and genuine demand forgrowth.
Inflation will not result(too much money chasing too little goodsand services)if all monies are generating genuine growth in otherwords money is growth driven whether in circulation or underprinting. Objective assessment of requirement for saving and growthis utmost important for retaining value of money.
Money Vs Money
Demand for one money over the other arises out of contemporaryPolity as well as emerging globalization.People normally prefer one money over the other for reasons ofsuperiority, acceptability, availability, and the value it commandsacross Borders.
Monies vs Goods
Goods and services are driven by money and sometime monies for valueand relative superiority of one money over the other determines thebest value for the goods.Preference over monies has to balance between availability,acceptability,optimal value for goods and services.
Deciding Global Money.
This has been the subject matter of debate, political rivalry foratleast 100 years now from gold standard, to basket of currencies,to free float,to now choice of international currencies(euro-dollar)and now again to prefer Gold for Dollar.
Future of Rupee:
Rupee like any Currency has two facets 1.Internal. 2.International.
Internal:
Money in the economy should generate growth not only forproducing goods and services but also in empowering thepeople.Growth Big and Beyond without limits of money should be Buzzfor the Economist.Lateral growth of money preferred over vertical.Weneed more entrepreneur,more consumers(not population withoutpropensity to consume),More money above all.
International:
Rupee slide is linked to rupees dependence to anothermoney which again is dependent on Rupees inability or deficiency tocommand required goods and services internally vis-vis producingcompeting goods and services for exchange internationally.
Solution:
Produce competing goods and services for exchange to stabilize rupee.
Path:
Generate Money and Generate value for Money
Income Accounting-A New Dimension to 'Cost and Management Accountant'
Income Accounting-Inseparable to Cost accounting.A paradigm study.
Cost Accounting is Related to Study of Cost parameters to arrive at optimisation of revenue .There is dimension to the efficiency .
Income accounting is related to study of external factors that will fetch maximum revenues out of available opportunities.There is dimension again to earnings efficacy.
§ Income Accounting is a process of analysing and arriving at a choice of Maximising revenues from Opportunities.
§ While Cost Accounting Addresses Cost Minimisation issues.Management accounting Reposes Faith on effective reporting of management concerns on Opportunities and impact of management decisions.Financial management concerns with Risk-Return to optimise revenue.Financial Accounting Concerns matching of Revenues with Expenses.Income accounting is a system of Assessing “What if” and “Why Not” of opportunities of earnings.
Revenue Realisation is Impacted by market sentiments.
Differential pricing due to segmentation.
Opportunities of Globalisation.
Overall strength of the market that is addressed-Recovery aspect.
Market sentiments-Maxim “Right product,Right Time,Right Place”-Cost triggered Product mix issues.
Segmentation of market-Production related Sales decision as well as market expansion aim.
Emerging Global opportunities-Revenue of currency differentials.
Strength of revenue realisation in the market.
Did Cost Accounting Miss it?
Yes-Its focus had all along been Cost engineering in the process it neglected Income analysis.
Profit centre identification and segmentation of revenue to match with cost collection is one aspect and talking of Maximising through income-mix is another.
No-Cost accounting consisting of methods of accounting and its technique are sufficient to be extended to income-concept analysis.
Current Practices:
Off Balance-sheet approach:A decision to earn is often left to top management(The Board).Financial analysis comprising of IRR/NPV for capital investment decision.”Stabilised revenue” or “mean recovery” approach on the premise of Perfect competition-Seller sets the price and thus impacts Income ,approach is adopted.
Revenues do not reflect volatility of earning and opportunity availed to earn them.It is just a mere consolidation of receipts from area-wise/customer-wise/product-wise/Preference to sell –wise.
Do Income need break-down analysis and reflection in Integrated Cost-management system.Answer is yes!
Recognise Revenues as improvables.
Match revenues with cost.
Create Profit centres.
Use activity Based Cost-revenue matching.
Study Revenues from maximising perspective in coordination with sales department.
Revenues –Matrix.
Matching revenue with Cost-Cost accounting is identification classification and allocation of cost to product and processes as to arrive at true picture of Profit when matched with activity.The process is not complete without identification of cost centres,Profit centres and Activity centres where inflow and out flow can be matched.While Cost is broken-down to product and processes .Income should also be broken down into Opportunities and activity centres that are linked to profit centres should now be linked to new concept of Opportunity(for maximisation of revenue)centres cost should be prorated to find and concentrate on the best available opportunity –Eliminating bottlenecks to opportunity of earning higher revenues.
Matching of Opportunity centre with Cost.
§ An Opportunity centre is one from where the revenue is actually realised.
§ It could be with reference to a product a single product/similar product/Market/Customer/Place.
§ A single product is an Opportunity when it fetches revenues differently when focussed.
§ A similar product is one when it earns incremental revenue to the one normally produced.
§ A market in relation to product is one that generates incremental revenue when focussed.
§ A customer or group similarly enjoys incremental revenue status.
§ So is a place in relation to Product and resultant revenue
Constraints to Opportunity
§ Time of delivery and advantage to competitors.
§ Barriers of space-Political/inaccessible.
§ Perishable product itself.
§ Taxation.
§ Cost of transportation and logistics.
§ Cost of customer and market retention.
§ Threat of loosing next best and stable opportunities.
§ Loss of buffer in the long run(MRP and its related benefits).
Methods of Income accounting
§ Like methods of Costing-Job costing/process costing/contract-costing/lifecycle costing methods of Income depiction involves “single product many opportunities analysis”’Similar product best opportunity analysis”’Differential pricing for markets and customer analysis”.The accountal of these will be segmented with cost spread on the basis of actual sales realisation in case of each opportunities instead of “mean spread”earlier adopted and “activity spread method” currently used.
Techniques of Income accounting
§ The techniques of costing like marginal costing/Budgeting/Standard costing can be employed for revenue generation as well where standards of revenue can be fixed for a product based on expectation of yield and related cost incurred and realisation can be compared to ascertain whether the product continuance is justified.
§ Similarly Marginal revenue is the minimum required for sustenance of the product or that revenue required to continue with the opportunity in segmented condition
Conclusion
§ Income Accounting enables realistic assessment of Product sustainability.
§ It dispels the Notion that revenues are of a fixed pattern and probes into a possible improvement in maximising revenues.
§ It accepts the fact that revenues follow a complex structure as cost do.
§ It tries to classify revenues into opportunities and matches with related cost.
§ It is global in application for product and services where competition is matured
Cost Accounting is Related to Study of Cost parameters to arrive at optimisation of revenue .There is dimension to the efficiency .
Income accounting is related to study of external factors that will fetch maximum revenues out of available opportunities.There is dimension again to earnings efficacy.
§ Income Accounting is a process of analysing and arriving at a choice of Maximising revenues from Opportunities.
§ While Cost Accounting Addresses Cost Minimisation issues.Management accounting Reposes Faith on effective reporting of management concerns on Opportunities and impact of management decisions.Financial management concerns with Risk-Return to optimise revenue.Financial Accounting Concerns matching of Revenues with Expenses.Income accounting is a system of Assessing “What if” and “Why Not” of opportunities of earnings.
Revenue Realisation is Impacted by market sentiments.
Differential pricing due to segmentation.
Opportunities of Globalisation.
Overall strength of the market that is addressed-Recovery aspect.
Market sentiments-Maxim “Right product,Right Time,Right Place”-Cost triggered Product mix issues.
Segmentation of market-Production related Sales decision as well as market expansion aim.
Emerging Global opportunities-Revenue of currency differentials.
Strength of revenue realisation in the market.
Did Cost Accounting Miss it?
Yes-Its focus had all along been Cost engineering in the process it neglected Income analysis.
Profit centre identification and segmentation of revenue to match with cost collection is one aspect and talking of Maximising through income-mix is another.
No-Cost accounting consisting of methods of accounting and its technique are sufficient to be extended to income-concept analysis.
Current Practices:
Off Balance-sheet approach:A decision to earn is often left to top management(The Board).Financial analysis comprising of IRR/NPV for capital investment decision.”Stabilised revenue” or “mean recovery” approach on the premise of Perfect competition-Seller sets the price and thus impacts Income ,approach is adopted.
Revenues do not reflect volatility of earning and opportunity availed to earn them.It is just a mere consolidation of receipts from area-wise/customer-wise/product-wise/Preference to sell –wise.
Do Income need break-down analysis and reflection in Integrated Cost-management system.Answer is yes!
Recognise Revenues as improvables.
Match revenues with cost.
Create Profit centres.
Use activity Based Cost-revenue matching.
Study Revenues from maximising perspective in coordination with sales department.
Revenues –Matrix.
Matching revenue with Cost-Cost accounting is identification classification and allocation of cost to product and processes as to arrive at true picture of Profit when matched with activity.The process is not complete without identification of cost centres,Profit centres and Activity centres where inflow and out flow can be matched.While Cost is broken-down to product and processes .Income should also be broken down into Opportunities and activity centres that are linked to profit centres should now be linked to new concept of Opportunity(for maximisation of revenue)centres cost should be prorated to find and concentrate on the best available opportunity –Eliminating bottlenecks to opportunity of earning higher revenues.
Matching of Opportunity centre with Cost.
§ An Opportunity centre is one from where the revenue is actually realised.
§ It could be with reference to a product a single product/similar product/Market/Customer/Place.
§ A single product is an Opportunity when it fetches revenues differently when focussed.
§ A similar product is one when it earns incremental revenue to the one normally produced.
§ A market in relation to product is one that generates incremental revenue when focussed.
§ A customer or group similarly enjoys incremental revenue status.
§ So is a place in relation to Product and resultant revenue
Constraints to Opportunity
§ Time of delivery and advantage to competitors.
§ Barriers of space-Political/inaccessible.
§ Perishable product itself.
§ Taxation.
§ Cost of transportation and logistics.
§ Cost of customer and market retention.
§ Threat of loosing next best and stable opportunities.
§ Loss of buffer in the long run(MRP and its related benefits).
Methods of Income accounting
§ Like methods of Costing-Job costing/process costing/contract-costing/lifecycle costing methods of Income depiction involves “single product many opportunities analysis”’Similar product best opportunity analysis”’Differential pricing for markets and customer analysis”.The accountal of these will be segmented with cost spread on the basis of actual sales realisation in case of each opportunities instead of “mean spread”earlier adopted and “activity spread method” currently used.
Techniques of Income accounting
§ The techniques of costing like marginal costing/Budgeting/Standard costing can be employed for revenue generation as well where standards of revenue can be fixed for a product based on expectation of yield and related cost incurred and realisation can be compared to ascertain whether the product continuance is justified.
§ Similarly Marginal revenue is the minimum required for sustenance of the product or that revenue required to continue with the opportunity in segmented condition
Conclusion
§ Income Accounting enables realistic assessment of Product sustainability.
§ It dispels the Notion that revenues are of a fixed pattern and probes into a possible improvement in maximising revenues.
§ It accepts the fact that revenues follow a complex structure as cost do.
§ It tries to classify revenues into opportunities and matches with related cost.
§ It is global in application for product and services where competition is matured
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