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Kamal Garg email@example.com Accounting – An Introduction : 2 Accounting – An Introduction Accounting as a language of business communicates the financial results of an enterprise to various stakeholders by means of financial statements. Accounting is the process of identifying, measuring, recording, classifying, summarising, analysing, interpreting and communicating the financial transactions and events. The aim of accounting is to keep systematic records to ascertain financial performance and financial position of an entity and to communicate the relevant financial information to the interested user groups. The end product of the financial accounting is the profit and loss account for the period (showing the profits earned or losses incurred) and the balance sheet as on the last day of the accounting period (depicting the financial position). The process of financial accounting (i.e. the preparation of financial statements) is based on generally accepted accounting principles enunciated by the accounting profession and is heavily constrained by legal regulations and accounting standards. Accounting as an Information System : 3 Accounting as an Information System Accounting, as an information system is the process of identifying, measuring and communicating the economic information of an organisation to its users who need the information for decision making. It identifies transactions and events of a specific entity. A transaction is an exchange in which each participant receives or sacrifices value (e.g. purchase of raw material). An event is a happening of consequence to an entity (e.g. use of raw material for production) An entity is an economic unit that performs economic activities (e.g. Reliance Industries Limited, TATA etc.) Branches of Accounting : 4 Branches of Accounting Financial Accounting - It is the process of identifying, measuring, recording, classifying, summarising, analysing and communicating the financial transactions and events. The purpose of this branch of accounting is to keep systematic records to ascertain the financial performance and financial position and to communicate the accounting information to the interested parties. Cost Accounting – It is the process of accounting and controlling the cost of a product, operation or function. The purpose of this branch of accounting is to ascertain the cost, to control the cost and to communicate the information for decision making. Branches of Accounting....contd. : 5 Branches of Accounting....contd. Management Accounting – It is the application of accounting techniques for providing information designed to help all levels of the management in planning and controlling the activities of business enterprise and in decision making. The purpose of this branch of accounting is to supply any and/ or all information that the management may need in taking decision and to evaluate the impact of its decisions and actions. Management accounting is not only confined to the area of cost accounting but also covers other areas such as Capital Expenditure Decisions, Capital Structure Decisions, Dividend Decisions etc., as well. Process of Accounting : 6 Process of Accounting Input Accounting Cycle Output Economic events measured in financial terms Recording transactions in the books of original entry Posting to Ledger Prepare Trial Balance Prepare Final A/cs Communicating Information to users Internal Users such as BOD, Managers etc. External Users Such as Investors, Lenders, Govt., Suppliers, etc. Process of Accounting.....contd. : 7 Process of Accounting.....contd. Source Documents Books of Original Entry Ledger Accounts Trial Balance Final Accounts Represents all documents in business which contains financial records and act as evidence of the transactions which have taken place These books are used in recording transactions for the first time. These books are maintained for memorandum purpose only and will not form part of double entry system These books form part of double entry system and are used for recording the transactions for the relevant period, e.g., assets a/c, liability a/c, income a/c or expense a/c, etc. Contains the totals from various ledger accounts and act as a preliminary check on accounts before preparing final a/cs Financial Statements (P & L A/c, Balance Sheet, CFS) are prepared to show the financial performance and financial position of the enterprise Accounting Grassroots : 8 Accounting Grassroots Book Keeping: Book-keeping is mainly concerned with recording of financial data relating to the business operations in a systematic and orderly manner. Book-keeping is the recording phase, accounting is concerned with the summarising phase of an accounting system. A book-keeper may be responsible for keeping all the records of a business or only of a minor segment, such as position of the customers accounts in a departmental store. A substantial portion of the book-keepers work is of a clerical nature and is increasingly being accomplished through the use of a mechanical and electronical devices. Book-keeping provides necessary data for accounting and accounting starts where book-keeping ends. Accountants normally plan and set up the accounting and bookkeeping system for a business and turn over the day to day record keeping to the owner or one of his/her employees. In this age of computers more and more of the daily book keeping is being done using book-keeping software and computers although some businesses still maintain manual records. The recording of transactions may be done according to any of the two systems viz. Single Entry System and Double Entry System. Accounting Grassroots....contd. : 9 Accounting Grassroots....contd. Single Entry System: An incomplete double entry system can be termed as a single entry system. In the words of Kohler, It is a system of book-keeping in which as a rule only records of cash and personal accounts are maintained, it is always incomplete double entry varying with circumstances. This system is developed by business entities, who for their convenience, keep only some essential records. Single entry systems are more practical and easy for a new small business, but they do not present a complete picture of the business and do not reflect initial investments and actual worth. Accounting Grassroots....contd. : 10 Accounting Grassroots....contd. Double Entry System: A business transaction involves an exchange between two accounts. For example, for every asset there exists a claim on that asset, either by those who own the business or those who loan money to the business. Similarly the sale of a product affects both the amount of cash (or cash receivable) and the inventory held by business entity. Recognising the fundamental dual nature of transactions, merchants in medieval Venice began using a double entry book-keeping system that records each transaction in the two accounts affected by the exchange. In the late 1400s. Franciscan monk and mathematician Luca Pacioli documented the procedure for double entry book-keeping as a part of his famous ‘Summa’ work, which described a significant portion of the accounting cycle. Thereafter the system of double entry spread throughout Europe and became the fundamental of modern accounting. Double entry accounting system is an important concept in accounting which states that every accounting transaction should always be recognised in the accounts, in one as a debit and another credit. Two notable characteristics of double entry system are that (i) each transaction is recorded in two accounts, and (ii) each account has two columns. It would have been very difficult to check the arithmetical accuracy of the transactions recorded in financial statements if there was no double entry accounting system. Elements of Financial Statements : 11 Elements of Financial Statements Assets: An asset is defined as resource controlled by the enterprise as a result of past events and from which economic benefits are expected to flow to the enterprise. In simple terms an asset is defined as something valuable owned by the business. Assets are further subdivided into current and non current. Non current assets are those which are used in conducting business and are held for more than one accounting year with no intention of resale. Examples include land and buildings, vehicles and machinery. On the other hand current assets are those assets held in form of cash or those which can easily be turned into cash. Examples here include stocks, debtors and cash. Liabilities: Liabilities are defined as entity’s obligation to transfer economic benefits to another enterprise or individual as a result of past transactions or events. Thus liabilities are amounts which the entity owes other businesses or individuals. Liabilities are classified into current and non current liabilities. Current liabilities are those amounts which are repayable within a period of less than 12 months while non current are those which should be repaid after more than 12 months. Elements of Financial Statements.....contd. : 12 Elements of Financial Statements.....contd. Capital: Capital represents amount which the owners have invested in the business. Capital will always equal to assets less the liabilities. Capital is also referred to as owner’s equity or net worth. It comprises the funds invested in the business by the owner plus any profits retained for use in business less any drawings distributed to the owners. Income: Income is a broad term but covers all transactions which will result in gross inflow of benefits to the enterprise. Income is subdivided into revenues and gains. Revenue is the gross inflow in economic benefits in ordinary activities of an enterprise like sales, dividends, interest, royalties or rent while gains represent other items that meet the definition of income and may, or may not arise in the ordinary course of an enterprise, i.e. profit made on the disposal of non current assets. Expense: It is a cost relating to the operations of an entity or to the revenue earned during the period or the benefits of which do not extend beyond that period. Expenses are gross outflow of economic benefits arising in ordinary course of business. Any expense to acquire a new asset or to enhance the capacity of an existing asset is called capital expenditure and should be included as part of the value of such asset. Balance Sheet Equation : 13 Balance Sheet Equation By adding up what the accounting records shows as belonging to the business and deducting what the business owe, one can identify what a business is worth. This conclusion is known as the Accounting equation or also known as the Balance sheet equation. Resources supplied by the owner = Resources in the business. Amount of resources controlled by the business are called assets and the resources supplied by the owner are called capital. Thus the equation that can be redrawn as: Capital = Assets Not all resources in the business can be supplied by the owners only, sometime the business may get supplies from other sources with the intention of future repayments. These amounts are called liabilities so the above equation can be upgraded as: Capital (owner’s equity) = Assets – Liabilities Accounting Principles : 14 Accounting Principles The term “Principles” refers to fundamental belief or a general truth which once established does not change. It is incorrect to apply the term with respect to accounting which is merely an art of involving adaptation for attainment of some useful results by its application. Application implies changing nature and hence is contradictory to the meaning of fundamental truth implied by the term “Principles.” To other, the term “Principles” means rule of action or conduct and hence can be applied to rules in accounting. AICPA defined the term “Principles” as ‘a guide to action, a settled ground as basis of conduct or practice.’ Some accountants prefer to use the term “Standards” instead of using the word “Principles.” Accounting Principles......contd. : 15 Accounting Principles......contd. The general acceptance of the accounting principles depends upon how well they meet the following criteria: Relevance – A principle is relevant to the extent it results in information that is meaningful and useful to the user of accounting information. Objectivity – A principle is objective to the extent that the accounting information is not influenced by the personal bias of those who furnish the information. Feasibility – A principle is feasible to the extent it can be implemented without much complexity or cost. Accounting Principles......contd. : 16 Accounting Principles......contd. Preparation of Financial Statements : 17 Preparation of Financial Statements The presentation of financial information in concise form is known as Financial Statement. Financial statements comprise of the balance sheet, the profit & loss account, schedule forming parts of the balance sheet and profit & loss account and the cash flow statement. Generally, these financial statements are prepared quarterly or annually depending on the relevant statutory requirements. The financial statements are helpful to the following parties: Investors – to keep a track of financial health of the organisation as well as its growth prospects. Creditors – to assess the ability of business enterprise to meet its long term and short term obligations. Employees & Trade Unions – to determine the amount of bonus payable and to have negotiations. Government Authorities – to track the taxation aspects, to sanction government grants, use of data for compiling national accounts etc. Financial Institutions – to judge the ability of the business about the repayment of loan as per the laid down schedule. Besides these advantages, the financial statements suffer from following disadvantages: Personal Bias: the financial statements are affected by the different accounting policies and practices followed by different persons. Qualitative Elements: the qualitative aspects of the business enterprise such as public relations, quality of management etc. are ignored. Price Level Changes: the financial statements are historical in nature and therefore, price level changes are ignored. Users Interest: different users have different interest. The financial statements cannot meet the purpose of all the users. It is not user specific. Preparation of Financial Statements....contd. : 18 Preparation of Financial Statements....contd. Final Accounts are prepared to achieve the objectives of accountancy. In order to know the profit or loss earned by the firm, Income Statement or Trading and Profit & Loss account is prepared. Balance Sheet or Position Statement will portray the financial condition of the enterprise on a particular date. These two statements, i.e., Trading and Profit & Loss Account and Balance Sheet are prepared to give the final results of the business. That is why both these are collectively called as final accounts. Now a days, listed companies are required to prepare a statement of changes in financial position on cash basis, i.e., Cash Flow Statement, which is also a part of financial statements. Preparation of Financial Statements....contd. : 19 Preparation of Financial Statements....contd. Capital Expenditure A capital expenditure is that which is incurred for the undermentioned purposes: Acquiring fixed assets, i.e., assets of a permanent or a semi-permanent nature, which are held not for resale but for use with a view to earning profits; Making additions to the existing fixed assets; Increasing earning capacity of the business; Reducing the cost of production; and Acquiring a benefit of enduring nature of a valuable right. Revenue Expenditure An expenditure, the benefits of which are immediately expended or exhausted in the process of earning revenue, e.g., on purchase of goods for sale, on their movement from one place to another, on maintaining assets, on keeping a business organisation going, etc. is revenue expenditure. It is to be noted that the distinction between capital expenditure and revenue expenditure is very important. While the capital expenditure is a part of the net worth of the enterprise, the revenue expenditure affects the income statement of an enterprise. Preparation of Financial Statements....contd. : 20 Preparation of Financial Statements....contd. Deferred Revenue Expenditure Deferred revenue expenditure is an expenditure which is primarily of revenue nature but the benefit whereof is not exhausted in the year in which it is incurred. Such expenditure should be written off over the period during which the benefit from it will accrue. For example, expenditure on an advertisement campaign to introduce a product in the market, discount allowed on subscriptions of debentures etc. fall under the category of deferred revenue expenditure. It is to be noted that though the expenditure of exceptional nature such as exceptional losses suffered due to natural calamity, are sometimes also carried forward, but these must not be confused with the deferred revenue expenditure. The balance Sheet of every company must clearly distinguish the nature of deferred expenditure which is being carried over from that of a loss suffered which is not written off. Preparation of Financial Statements....contd. : 21 Preparation of Financial Statements....contd. Depreciation As per Accounting Standard 6 on ‘Depreciation Accounting’ issued by the Institute of Chartered Accountants of India, depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time, obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortisation of assets whose usefulness is predetermined. Preparation of Financial Statements....contd. : 22 Preparation of Financial Statements....contd. Some Important Adjustments in the Final Accounts: Stock Outstanding / Prepaid Expenses Accrued / Advance Income Depreciation Bad Debts / Provision for Discount on Debtors Provision for Discount on Creditors Interest on Capital / Drawings Abnormal Loss of Stock Goods distributed as Free Samples / taken for personal use / sent on approval Manager’s Commission Hidden Adjustments Financial Analysis : 23 Financial Analysis The analysis of financial statements is concerned with the study of relationship among the various financial factors as contained in the financial statements i.e. balance sheet and profit & loss account. The financial statement analysis can be external analysis (i.e. analysis on the basis of the published accounts and reports), internal analysis (i.e. analysis by the management itself), horizontal analysis (i.e. comparison of same items of two or more periods, popularly known as time series analysis or dynamic analysis) and vertical analysis (i.e. comparison of different items of same period, popularly known as static analysis). Objectives: It helps in assessment of the earning capacity of the enterprise. It facilitates inter firm as well as intra firm comparison. It reflects the enterprise’s ability to meet its short term and long term obligations. It helps in tracing the managerial efficiencies and inefficiencies. It also facilitates forecasting and budgeting. Tools of Financial Analysis : 24 Tools of Financial Analysis The different kinds of tools and techniques for financial statements analysis are as following: Comparative Financial Statements – Here the figures of two or more periods are taken from the balance sheet and profit & loss account to analyse the changes in absolute as well as percentage terms. Common Size Financial Statements – Here the figures of the financial statements are expressed in percentage form derived from some common base. The common base in case of balance sheet may be the total of assets or liabilities and in case of profit & loss account it may be net sales. Trend Analysis – This analysis discloses the changes in the financial and operating data between specific periods and makes possible for the analyst to from an opinion as to whether the trend reflected by the accounting data is favourable or unfavourable. Ratio Analysis – This is one of the most important tools of financial statement analysis in which relationship between accounting figures is expressed. Statements of Changes in Financial Position – This statement is prepared to show the changes in working capital position (i.e. funds flow statement) or to show the changes in the cash position (i.e. cash flow statement). Funds Flow Statement – Step 1: Calculation of FFO : 25 Funds Flow Statement – Step 1: Calculation of FFO Funds Flow Statement – Step 1: Calculation of FFO : 26 Funds Flow Statement – Step 1: Calculation of FFO Funds Flow Statement – Step 1: Calculation of FFO : 27 Funds Flow Statement – Step 1: Calculation of FFO Notes: If Profit & Loss Account is not given, the balances of Reserves may be considered. These are considered only when balance of Profit & Loss Appropriation Account is given OR balance of profit is given after their (i.e. dividend, t/f to reserves) adjustments. Otherwise, these should be ignored. If P & L Account is given in the Balance Sheet, it means that all the balance is after all appropriations. Funds Flow Statement – Step 2: Schedule of Changes in WC : 28 Funds Flow Statement – Step 2: Schedule of Changes in WC Funds Flow Statement – Step 3: Prepare FFS : 29 Funds Flow Statement – Step 3: Prepare FFS Funds Flow Statement – Step 3: Prepare FFS : 30 Funds Flow Statement – Step 3: Prepare FFS Notes: As per AS-3 on ‘Statement of Changes in Financial Position’ issued by ICAI, payment of tax and dividend must be shown as separate items of application of working capital or cash. In view of this requirement, provision for taxation and proposed dividend should be treated as non current items. These should not be shown in the schedule of changes in working capital. Issue of share capital or debentures (along with the premium on issue) for consideration other than cash will not form part of sources of funds. A change in working capital occurs only when both current items as well as non current items are involved. Sometimes the transactions are not given explicitly in the question. These transactions are called hidden transactions, which can be traced by preparing relevant accounts etc. While preparing these accounts we can get the missing figures. Some of the common accounts prepared are as follows: Funds Flow Statement –Hidden Transactions : 31 Funds Flow Statement –Hidden Transactions Funds Flow Statement –Hidden Transactions : 32 Funds Flow Statement –Hidden Transactions Funds Flow Statement –Hidden Transactions : 33 Funds Flow Statement –Hidden Transactions Funds Flow Statement –Hidden Transactions : 34 Funds Flow Statement –Hidden Transactions Funds Flow Statement –Hidden Transactions : 35 Funds Flow Statement –Hidden Transactions Funds Flow Statement –Hidden Transactions : 36 Funds Flow Statement –Hidden Transactions Funds Flow Statement –Hidden Transactions : 37 Funds Flow Statement –Hidden Transactions Cash Flow Statement –Classification of Business Activities : 38 Cash Flow Statement –Classification of Business Activities Cash Flow Statement –Classification of Business Activities : 39 Cash Flow Statement –Classification of Business Activities Notes: Cash comprises cash in hand and demand deposits with banks. Cash Equivalents are short term highly liquid investments. These are readily convertible into known amounts of cash and are subject to an insignificant risk of changes in value. The net cash flow within the activity viz. operating, investing and financing, can be positive or negative. There are two methods of preparing cash flow statement viz. Direct Method and Indirect Method. Missing information can be found out with the help of different accounts (as already discussed). Cash Flow Statement - Formats : 40 Cash Flow Statement - Formats Cash Flow Statement - Formats : 41 Cash Flow Statement - Formats Cash Flow Statement : 42 Cash Flow Statement Notes: Figures in the brackets denote negative amounts. Net Cash from Operating Activities = Operating Profits before working capital changes + Decrease in Current Assets + Increase in Current Liabilities – Decrease in Current Liabilities – Increase in Current Assets. Operating profits before W.C. changes are nothing but the funds from operations. Cash & cash equivalents at the end of period should be same as those appearing in the Balance Sheet as at 31.03........ Emerging Dimensions in Accounting I – Price Level Accounting : 43 Emerging Dimensions in Accounting I – Price Level Accounting The unit of measurement adopted in accounting is money, which has been subject to major erosion in value all over the world, especially during the last five decades or so. The existing accounting practices that are based on an important assumption of stable monetary unit (i.e. Cost Concept) totally ignores fluctuations in money value while reporting about the financial status of the business entity. Thus it fails to provide true and fair information to users. Only those business transactions that are capable of being expressed in terms of money are amenable to recording by the accounting system. It is also assumed that this monetary unit is stable in nature. But this is not true as Inflation exists which brings down the purchasing power of the monetary unit and thus makes its stability a myth. Emerging Dimensions in Accounting I – Price Level Accounting : 44 Emerging Dimensions in Accounting I – Price Level Accounting Inflation Accounting: Financial statements prepared without any regard to the current purchasing power of the monetary unit lose much of their significance. Such statements can not be properly appreciated by their users and thus, these financial statements lose their credibility. However, their credibility can be restored by making adjustments for the changes in the purchasing power of the monetary unit. Objectives of Inflation Accounting: To ensure that the capital invested is maintained intact in real terms; and To reflect a true and fair view of the results of operations and financial position for the period concerned. Emerging Dimensions in Accounting I – Price Level Accounting : 45 Emerging Dimensions in Accounting I – Price Level Accounting Methods of Inflation Accounting Current Purchasing Power Method (CPP) Current Cost Accounting Method (CCA) Hybrid Method Emerging Dimensions in Accounting I – Price Level Accounting : 46 Emerging Dimensions in Accounting I – Price Level Accounting Current Purchasing Power Method All the items in the financial statements are to be re-stated for changes in the general price level. This method adjusts historical costs for changes in the general level of prices as measured by general price level index. Steps Calculate Conversion Factor and Mid Point Conversion Factor Calculate Gain or Loss on Monetary Items Calculate Cost of Sales and Inventory Calculate Profits Prepare Balance Sheet Emerging Dimensions in Accounting I – Price Level Accounting : 47 Emerging Dimensions in Accounting I – Price Level Accounting Current Cost Accounting Method Features F.A. shown at their value to the business and not at historical cost less depreciation Inventories are valued at price on the B/S date and not as per Cost or M.P Depreciation is charged on the basis of current value of relevant F.A. COGS is calculated on the basis of prices prevailing on the date of sale Emerging Dimensions in Accounting I – Price Level Accounting : 48 Emerging Dimensions in Accounting I – Price Level Accounting Process under CCA Method: Valuation of Fixed Assets. Depreciation Adjustment. Cost of Sales Adjustment. Monetary Working Capital Adjustment. Gearing Adjustment. Emerging Dimensions in Accounting I – Price Level Accounting : 49 Emerging Dimensions in Accounting I – Price Level Accounting Why Inflation Accounting is not Popular in India: Practical difficulties in preparing such accounts and implementation of the system. Inadequacy of indices calculations and database. Lack of agreement as to the choice of methods. No legal requirement and recognition to such accounts. Absence of recognised standard on the subject, ICAI has not issued any AS on Inflation Accounting. Some finance executives also feel that such accounting is a wastage of time and effort. Emerging Dimensions in Accounting II – Human Resource Accounting : 50 Emerging Dimensions in Accounting II – Human Resource Accounting The success of any organisation to a great extent depends upon the quality, caliber and the character of the people working in it. An organisation having vast physical resources, with latest technology, may find itself in the midst of severe financial crisis in case it does not have right people to manage and conduct its affairs. Thus, inspite of all technological developments, the importance of human resources has in no way diminished. “Human resource accounting is the art of valuing, recording and presenting systematically the worth of human resources in the books of account of an organisation.” Thus, the three important aspects of HR accounting are as follows: Valuation of Human Resource; Recording the valuation in the books of account; and Disclosure of the information in the financial statements of the business. Emerging Dimensions in Accounting II – Human Resource Accounting : 51 Emerging Dimensions in Accounting II – Human Resource Accounting Approaches for Valuation of HR: Historical Cost Approach. Replacement Cost Approach. Opportunity Cost Approach. Standard Cost Approach. Present Value Approach. Total Cost Approach. Emerging Dimensions in Accounting II – Human Resource Accounting : 52 Emerging Dimensions in Accounting II – Human Resource Accounting Objections against HR Accounting: Humans cannot be owned like physical assets and therefore they cannot command any value. Tax laws do not recognise human beings as assets. No generally accepted model for valuation of HR. The valuation depends on a large number of abstract factors not measurable in precise monetary terms. Hence, valuation lacks objectivity and preciseness. Emerging Dimensions in Accounting III – Social Accounting : 53 Emerging Dimensions in Accounting III – Social Accounting Social Accounting is concerned with the measurement and disclosure of costs and benefits to the society as a result of operating activities of a business enterprise. Thus, social accounting measures social costs and social benefits as a result of business activities for communication to various groups both within and outside the business. It may be noted that social accounting is not the application of a new set of accounting principles or practices. It is the application of the same basic accounting principles for measuring and disclosing the extent to which a business enterprise has met its social responsibility. Objectives of Social Accounting: Measurement of net social contribution. Balance between firm’s strategies and social priorities. Communication of information. Emerging Dimensions in Accounting III – Social Accounting : 54 Emerging Dimensions in Accounting III – Social Accounting Approaches of Reporting Social Cost Benefit Information: Social statement approach – Two statements are prepared viz. Social Income Statement and Social Balance Sheet. The former provides information according to social benefits and costs to employees, local community and the general public. The latter portrays social investment of capital nature, i.e., social assets such as townships, roads, buildings, hospitals, schools etc. on the assets side and the organisation’s equity and social equity on the liabilities side. Operating statement approach – Here, a firm presents only the positive and negative aspects of social activities as a result of business operation. The positive aspects are broadly termed as ‘social benefits’ while negative aspects are termed as ‘social costs’ and their difference represents net social contribution by the firm. Emerging Dimensions in Accounting III – Social Accounting : 55 Emerging Dimensions in Accounting III – Social Accounting Narrative approach – Here, disclosure regarding social costs and social benefits is made in a narrative and not a quantitative form. The firm generally highlights the positive aspects of its social activities. This is one of the simplest and easiest approach. Goal oriented approach – This approach is based on the listed objectives of a firm. The firm prepares a list of its social and economic goals or objectives. At the end of accounting year, the firm prepares its annual report giving the description of the goals and the firm’s performance vis-à-vis these goals. Generally, the goals and the achievements are presented in the form of charts and graphs. Pictorial approach – Social activities undertaken are presented in the form of pictures. The annual reports contain photographs of school, hospital, clubs, public parks, etc. established and / or maintained by the firm. This being the simplest method is widely followed by many companies in our country. Emerging Dimensions in Accounting III – Social Accounting : 56 Emerging Dimensions in Accounting III – Social Accounting Social Benefits include all economic and non-economic, internal and external benefits which the society is likely to receive on the account of the enterprise’s project. Social Costs includes all the costs which the society will have to pay whether in monetary terms or otherwise for such project. Indicators / Criteria for measuring the social costs and benefits: Employment potential Capital Output ratio Value added (i.e., Total value of Production less Total value of bought out inputs) per unit of capital Savings in foreign exchange Cost Benefit ratio Cost Management : 57 Cost Management Cost management (CM) is the process whereby companies use cost accounting to report or control the various costs of doing business. The term CM is widely used in business today. Unfortunately there is no uniform definition. We use CM to describe the approaches and activities of managers in short run and long run planning and control decisions that increase value for customers and lower costs of products and services. For example, managers make decisions regarding the amount and kind of material being used, changes of plant processes, and changes in product designs. Information from accounting systems helps managers make such decisions, but the information and the accounting systems themselves are not cost management. Cost management has a broad focus. It includes – but is not confined to – the continuous reduction of costs. The planning and control of costs is usually inextricably linked with revenue and profit planning. For instance, to enhance revenues and profits, managers often deliberately incur additional costs for advertising and product modifications. Cost management is not practiced in isolation. It’s an integral part of general management strategies and their implementation. Examples include programmes that enhance customer satisfaction and quality as well as programmes that promote blockbuster new product development. Basic Cost Concepts : 58 Basic Cost Concepts Cost refers to the expenditure incurred in producing a product or in rendering a service. It is expressed from the producer’s viewpoint and not that of consumer’s viewpoint. Costing is the technique and process of ascertaining costs. Cost Accounting is the process of accounting for cost which begins with recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and controlling costs. Cost Accountancy is the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived therefrom for the purpose of managerial decision making. Basic Cost Concepts....contd. : 59 Basic Cost Concepts....contd. Basic Cost Concepts....contd. : 60 Basic Cost Concepts....contd. Classification of Costs Basis of Classification Time Period Variability / Nature Elements Relation- ships Controllability Normality Functions Basic Cost Concepts....contd. : 61 Basic Cost Concepts....contd. Recent Development in Cost Management I – Target Costing : 62 Recent Development in Cost Management I – Target Costing Target Costing is defined as “a structured approach to determine the cost at which a proposed product with specified functionality and quality must be produced to generate a desired level of profitability at its anticipated selling price.” Target Cost is a function of the sales price and the organization’s target profit margin. Target Cost is profit management. The four major steps of target costing are as follows: Determine the target price – this is the amount customers are willing to pay for a product or service with specified features and functions Set the target cost per unit and in total – the target cost is the market price less the required return. The total target cost is the per unit target cost multiplied by the expected number of sales units of product or service over its life. Compare the total target cost to the currently feasible total cost to measure the cost reduction target – currently feasible total cost is the cost to make the product given current design and process capabilities. The difference between the total target cost and currently feasible cost is the cost reduction target. Redesign or design products and processes to achieve the cost reduction target – this can be an iterative process until both the product or service and its cost meet marketing and financial objectives. Recent Development in Cost Management I – Target Costing : 63 Recent Development in Cost Management I – Target Costing Setting Cost Reduction Targets: The difference between Current Cost and Target Cost indicates the required cost reduction. This amount may be divided into two constituents viz. Target Cost Reduction Objective and Strategic Cost Reduction Challenge. The former is viewed as being achievable (yet still a very challenging target) while the latter acknowledges current inherent limitations. After analysing the cost reduction objective, a Product Level Target Cost is set which is the difference between the current cost and the target cost reduction objective. Once the product level target cost is set, it generally cannot be changed, and the challenge for those involved is to meet this target. Recent Development in Cost Management I – Target Costing : 64 Recent Development in Cost Management I – Target Costing Identifying Cost Reduction Opportunities: After the product level target cost is set, a series of intense activities commence to translate the cost challenge into reality. These activities continue through out the design stage until the point when the new product goes into production. The total target is broken down into its various components, each component is studied and opportunities for cost reductions are identified. These activities are referred to as Value Engineering (VE) and Value Analysis (VA). Recent Development in Cost Management I – Target Costing : 65 Recent Development in Cost Management I – Target Costing VE VA Involves searching for opportunities to modify design of each component or part of a product to reduce cost, but without reducing the functionality or quality of the product Entails studying the activities that are involved in producing the product to detect non value adding activities that may be eliminated or minimised to save costs, but without reducing the functionality or quality of the product Cost Value Added Cost : If eliminated, would reduce the value or utility of the product Non Value Added Cost : If eliminated, would not reduce the value or utility of the product. Customer is not willing to pay this cost Recent Development in Cost Management I – Target Costing : 66 Recent Development in Cost Management I – Target Costing Issues in VE Review: Elimination of unnecessary functions from the product process, e.g., interim quality review before further processing and final quality check. Elimination of unnecessary product qualities, e.g., excessive degree of sturdiness in consumable item as opposed to a durable item. Thus, properly study the nature of product’s use and its longevity. Design minimisation, as minimal design is easy to manufacture and assemble resulting in lower components purchase costs and associated overheads. Substitution of Parts / Components Parts Analysis. Combination of Steps / Process Centering. Search for better way of doing things. Recent Development in Cost Management II – Kaizen Costing : 67 Recent Development in Cost Management II – Kaizen Costing “Kaizen” is the Japanese word for improvement. Kaizen Costing is the process of cost reduction during the manufacturing phase of an existing product. The Japanese word kaizen refers to continual and gradual improvement through small betterment activities, rather than large or radical improvement made through innovation or large investments in technology. Kaizen costing is most consistent with the saying "slow and steady wins the race.“ In other words, it refers to the ongoing continuing improvement program that focuses on the reduction of waste in the production process, thereby further lowering costs below the initial targets specified during the design phase. This Japanese term refers to the number of cost reduction steps that can be used subsequent to issuing a new product design to the factory floor. Kaizen Costing......contd. : 68 Kaizen Costing......contd. Why Kaizen Costing: The initial VE review may not be complete and perfect in all cost aspects. There may be further chances of waste reduction, cost and time reduction and product improvement. Such continuous cost reduction technique is called as kaizen Costing. It implies that the review of product costs under the target costing methodology is not reserved for the period up to the completion of design work on a new product, rather, there are always opportunities to control costs after the design phase is completed, though these opportunities are fewer than during the design phase. Kaizen Costing......contd. : 69 Kaizen Costing......contd. Kaizen Costing Process: Activities in kaizen costing include elimination of waste in production, assembly and distribution processes, as well as the elimination of work steps in any of these areas. Thus, kaizen costing is really designed to repeat many of the value engineering steps for as long as a product is produced, constantly refining the process and thereby stripping out extra costs at each stage. Savings from Kaizen Costing: The cost reductions resulting from kaizen costing are much smaller than those achieved with value engineering. But these are still significant since competitive pressures are likely to force down the price of a product over time, and any possible cost savings allow a company to still attain its targeted profit margins while continuing to reduce cost. Kaizen Costing......contd. : 70 Kaizen Costing......contd. Multiple Versions of Products – Continuous Kaizen Costing: Multiple improved versions of products can be introduced to meet the challenge of gradually reducing costs and prices. The market price of products continues to drop over time which forces a company to use both target and kaizen costing to reduce costs and retain its profit margin. However, prices eventually drop to the point where margins are reduced, which forces the company to develop a new product with lower initial costs and for which kaizen costing can again be used to further reduce costs. This pattern may be repeated many times as a company forces its costs down through successive generations of products. Kaizen Costing......contd. : 71 Kaizen Costing......contd. Timing of switching to a new product: The exact timing to switch to a new product is easy to determine well in advance since the returns from kaizen costing follow a trend line of gradually shrinking savings. Since prices also follow a predictable downward track, plotting these two trend lines into future reveals when a new product version must be ready for production. (See the figure in the next slides) Kaizen Costing......contd. : 72 Kaizen Costing......contd. Rs. Product Version 1 KCRs Product Mkt. Price Version 2 KCRs Time Kaizen Costing......contd. : 73 Kaizen Costing......contd. Kaizen Costing......contd. : 74 Kaizen Costing......contd. Recent Development in Cost Management III – Activity Based Costing : 75 Recent Development in Cost Management III – Activity Based Costing Introduction: Activity Based Costing (ABC) is an alternative to the traditional costing system. Under traditional costing system, the indirect expenditure (i.e. overheads) are allocated and apportioned/ reapportioned to the production and service cost centers. These expenditure are then ultimately charged to the cost objects (or cost unit) by using any of the cost driver (or absorption) rate namely unit of output rate, % of direct wages rate, % of direct material rate, machine hour rate, labour hour rate, etc. Under this system, the overhead charged to the cost objects reflects less accuracy as the cost allocations normally ignores the cause and effect. Recent Development in Cost Management III – Activity Based Costing : 76 Recent Development in Cost Management III – Activity Based Costing What is ABC: Under ABC, the overheads are assigned to each major activity rather than to the departments. Overheads are thus first assigned (or allocated) to these activities and then each activity expenditure are charged to the cost objects (or cost unit) on the basis of an appropriate cost driver. This system uses the cause and effect in cost allocations. It has more potential to provide the managers with more accurate cost of a cost object and thus help in bringing the stronger cost management in the organisation. Recent Development in Cost Management III – Activity Based Costing : 77 Recent Development in Cost Management III – Activity Based Costing Steps involved in ABC: Identification of major activities. Assignment of cost to all the major activities. Selection of cost drivers for charging cost to the cost objects. Charging the cost of an activity to cost objects on the basis of cost driver rates. Recent Development in Cost Management III – Activity Based Costing : 78 Recent Development in Cost Management III – Activity Based Costing Cost Object – It is an item for which cost measurement is required, e.g. a product, a job or a customer. Cost Driver - It is the factor that causes a change in the cost of an activity, e.g. for the R & D activity, the cost drivers may be number of research projects, or personnel hours on a project. Recent Development in Cost Management III – Activity Based Costing : 79 Recent Development in Cost Management III – Activity Based Costing Activity Based Cost Management (ABM) The use of ABC as a costing tool to manage costs at activity level is known as ABM. Through various analyses, ABM manages activities rather than resources. It determines what drives the activities of the organisation and how these activities can be improved to increase the profitability. ABM utilises cost information gathered through ABC. ABM is a discipline that focuses on the management of activities as the route to improving the value received by the customer and the profit achieved by providing this value. Recent Development in Cost Management III – Activity Based Costing : 80 Recent Development in Cost Management III – Activity Based Costing Analysis under ABM Discipline Cost Driver Analysis Activity Analysis Performance Analysis Identifies the factors that cause activities to be performed in order to manage activity costs Identifies the activities of an organisation and the activity centers and also identify VA and NVA activities Identifies the best ways to measure the performance of factors that are important to organisation in order to stimulate continuous improvement VA activities necessary for performance of a process, e.g., making a product more versatile for other uses. NVA activities not so fully necessary, e.g., moving materials and machine set up for a production run. Recent Development in Cost Management III – Activity Based Costing : 81 Recent Development in Cost Management III – Activity Based Costing Budgeting Concepts : 82 Budgeting Concepts Budgeting involves planning for the various revenue producing and cost generating activities of an organization. The importance of budgeting is emphasized by an old saying, "Failing to plan, is like planning to fail." Budgeting is essentially financial planning, or planning for financial performance. Consider the conceptual view of financial performance presented in Exhibit 9-1. As illustrated in the exhibit, financial performance depends on revenue and cost. Revenue is provided from sales of merchandise by retailers, sales of products, harvested, mined, constructed, formed, processed or assembled by farms, mining companies, construction companies and manufacturers and from sales of various services by firms involved in activities such as banking, insurance, accounting, law, medical care, food distribution, repair and entertainment. In addition to producing revenue, all of these companies generate three types of costs including discretionary, engineered and committed costs. Various costs fall into one of these three categories based on the cause and effect relationships involved. Budgeting Concepts....contd. : 83 Budgeting Concepts....contd. Budgeting Concepts....contd. : 84 Budgeting Concepts....contd. Discretionary Costs Many activities are viewed as beneficial to an organization, even thought the benefits obtained, or value added by performing the activities cannot be defined precisely, either before or after the activity is completed. The costs of the inputs, or resources required to perform such activities are referred to as discretionary costs. These costs are discretionary in the sense that management must choose the desired level of the activity based on intuition or experience because there is no well defined cause and effect relationship between cost and benefits. Discretionary costs are usually generated by service or support activities. Examples include employee training, advertising, sales promotion, legal advice, preventive maintenance, and research and development. The value added by each of these activities is intangible and difficult, if not impossible to measure, where value added refers to the benefits obtained by either internal or external customers. In terms of cost behavior, discretionary costs may be fixed, variable or mixed. Budgeting Concepts....contd. : 85 Budgeting Concepts....contd. Engineered Costs Engineered costs result from activities with reasonably well defined cause and effect relationships between inputs and outputs and costs and benefits. Direct material costs provide a good example. Engineers can specify precisely how many parts (inputs) are required to generate a specific output such as a microcomputer, a coffee maker, an automobile, or a television set. Direct labor also falls into the engineered cost category as well as indirect resources that vary with product specifications and production volume. Although the cause and effect relationships are not as precise for indirect resources, these relationships can be established using statistical techniques such as regression and correlation analysis. A key difference between discretionary costs and engineered costs is that the value added by the activities associated with engineered costs is relatively easy to measure. Engineered costs are variable in terms of cost behavior. Budgeting Concepts....contd. : 86 Budgeting Concepts....contd. Committed Costs Committed costs refers to the costs associated with establishing and maintaining the readiness to conduct business. The benefits obtained from these expenditures are represented by the company's infrastructure. For example, the costs associated with the purchase of a franchise, a patent, drilling rights and plant and equipment create long term obligations that fall into the committed cost category. These costs are mainly fixed in terms of cost behavior and expire to become expenses in the form of amortization and depreciation. Budgeting Concepts –Types of Budget : 87 Budgeting Concepts –Types of Budget Appropriation Budgets The oldest type of budget is referred to as an appropriation budget. Appropriation budgets place a maximum limit on certain discretionary expenditures and may be either incremental, priority incremental, or zero based. Incremental budgets are essentially last year's budget amount plus an increment, i.e., small increase. Priority incremental budgets also involve an increase, but require managers to prioritize, or rank discretionary activities in terms of their importance to the organization. The idea is for the manager to indicate which activities would be changed if the budget were increased or decreased. Zero based budgeting technique is expensive to use because zero based budgets theoretically require justification for the entire budget amount. From a control perspective, appropriation budgets are effective in limiting the amount of an expenditure, but create a behavioral bias to spend to the limit. Establishing a maximum amount for an expenditure encourages spending to the limit because spending below the limit implies that something less than the maximum appropriation was needed. Spending below the limit might result in a budget cut in future periods. Since nearly every manager views a budget reduction in their discretionary costs as undesirable, there are frequently crash efforts at the end of a budget period to spend up to the limit. Budgeting Concepts –Types of Budget : 88 Budgeting Concepts –Types of Budget Zero Based Budgeting Zero-based budgeting is a method of producing a budget which ignores what has happened in the past. Instead, each element of the budget is built up from a new set of assumptions. This process is inevitably more time-consuming but is often used where previous budgets in a business have proved significantly different from actual results. Budgeting Concepts –Types of Budget....contd. : 89 Budgeting Concepts –Types of Budget....contd. Flexible Budgets The flexible budgets are based on a cost function such as Y = a + bX, where Y represents the budgeted cost, or dependent variable. The constant "a" represents a static amount for fixed costs and the constant "b" represents the rate of change in Y expected for a unit change in the independent variable X. The expression " bX" is the flexible part of the budget cost function. The flexible budget technique is used for planning and monitoring all types of costs. The static amount "a" includes both discretionary and committed costs, while the flexible part "bX" includes various types of engineered costs. The flexible characteristic of the technique enables the flexible budget to play a key role in both financial planning and performance evaluation. Budgeting Concepts –Types of Budget....contd. : 90 Budgeting Concepts –Types of Budget....contd. Capital Budgets Capital budgets represent the major planning device for new investments. Discounted cash flow techniques such as net present value and the internal rate of return are used to evaluate potential investments. Capital budgets are part of a somewhat more encapsulating concept referred to as investment management. Investment management involves the planning and decision process for the acquisition and utilization of all of the organization's resources, including human resources as well as technology, equipment and facilities. The concept of investment management includes the discounted cash flow methods, but is more comprehensive in that the organization's portfolio of interrelated investments is considered as well as the projected effects of not investing. Budgeting Concepts –Types of Budget....contd. : 91 Budgeting Concepts –Types of Budget....contd. Master Budgets The fourth type of budget is referred to as the master budget or financial plan. The master budget is the primary financial planning mechanism for an organization and also provides the foundation for a traditional financial control system. More specifically, it is a comprehensive integrated financial plan developed for a specific period of time, e.g., for a month, quarter, or year. This is a much broader concept than the first three types of budgeting. The master budget includes many appropriation budgets (typically in the administrative and service areas) as well as flexible budgets, a capital budget and much more. A diagram illustrating the various parts of a master budget is presented in the next slide. Budgeting Concepts –Types of Budget....contd. : 92 Budgeting Concepts –Types of Budget....contd. Fixed and Variable Costs : 93 Fixed and Variable Costs Fixed Cost A fixed cost is one which, within certain output or turnover limits, tends to be unaffected by fluctuations in the levels of activity (output or turnover). A good example would be the rent and rates charge for an office, or the employment costs of staff who provide services not directly related to production or output (e.g. the accounting department). Variable Cost A variable cost is one which changes with change in the output or turnover limits. For example, raw material costs. Step-up Costs : 94 Step-up Costs These are the costs, the amount of which remain fixed in a given output range and beyond this output range take a jump to a new amount. For example, for producing 1000 to 5000 units of a product only one supervisor is required on a fixed salary of Rs. 10,000 p.m. Beyond this range additional supervisor would be required for upto next 5,000 units and so on. The concept can be depicted in the form of a graph as given in the next slide: Step-up Costs....contd. : 95 Step-up Costs....contd. Step-up Costs....contd. : 96 Step-up Costs....contd. Semi Variable Costs : 97 Semi Variable Costs The costs which are partially fixed and partially variable. For example, royalty payments made under an agreement that a fixed sum would be paid irrespective of production made and Rs. X per unit would be paid on the number of units produced. Variable Costs = Change in T.C. / Change in no. of units Fixed Costs = Total Costs – Variable Costs (See next slide for example and diagram) Semi Variable Costs....contd. : 98 Semi Variable Costs....contd. Semi Variable Costs....contd. : 99 Semi Variable Costs....contd. Total Costs : 100 Total Costs Total Costs (T.C.) = Fixed Cost (F.C.) + Variable Cost (V.C.) Consider the following example: Total Costs.....contd. : 101 Total Costs.....contd. Absorption Costing : 102 Absorption Costing Absorption costing is a method of identifying and ascertaining the cost of products or services. This is done by including both fixed and variable costs. The absorption method of costing can be contrasted with variable or marginal costing methods where costs of products or services are calculated using variable costs only. The absorption costing method requires the choice of an “absorption basis” by which fixed costs can be allocated appropriately. For example, the fixed costs of factory equipment repairs and maintenance may be allocated to the cost of producing specific products on the basis of their use of machine time. In another example, the cost of factory rent and rates may be allocated to products based on the amount of factory space that their production takes up. Marginal Costing / Variable Costing : 103 Marginal Costing / Variable Costing Marginal cost The variable costs per unit of production. The variable costs are usually regarded as the direct costs plus the variable overheads. Marginal cost represents the additional cost incurred as a result of the production of one additional unit of production Marginal costing Marginal costing is a costing method whereby each unit of output is charged with only the directly-attributable variable production costs. Using this method, fixed production costs (such as the factory rent and rates) are not considered to be real costs of production, but costs which provide the facilities for an accounting period that enable production to take place. Break Even Analysis : 104 Break Even Analysis Introduction Break-even analysis is a technique widely used by production management and management accountants. It is based on categorising production costs between those which are "variable" (costs that change when the production output changes) and those that are "fixed" (costs not directly related to the volume of production). Total variable and fixed costs are compared with sales revenue in order to determine the level of sales volume, sales value or production at which the business makes neither a profit nor a loss (the "break-even point"). Break Even Analysis....contd. : 105 Break Even Analysis....contd. The Break-Even Chart: The break-even chart is a graphical representation of costs at various levels of activity shown on the same chart as the variation of income (or sales, revenue) with the same variation in activity. The point at which neither profit nor loss is made is known as the "break-even point" and is represented on the chart below by the intersection of the two lines: Break Even Analysis....contd. : 106 Break Even Analysis....contd. Break Even Analysis....contd. : 107 Break Even Analysis....contd. Cost Control Techniques –Standard Costing : 108 Cost Control Techniques –Standard Costing Standard Costing is a management tool used to estimate the overall cost of production, assuming normal operations. TYPES OF STANDARD COSTING There are many ways to use standard costing in terms of the timeliness and completeness of the information recorded. However, it is convenient to separate standard costing into two general categories: 1) complete methods, and 2) partial methods. The difference between these concepts is illustrated in next slide. Cost Control Techniques –Standard Costing....contd. : 109 Cost Control Techniques –Standard Costing....contd. Cost Control Techniques –Standard Costing....contd. : 110 Cost Control Techniques –Standard Costing....contd. Complete Standard Cost Methods When a complete standard cost method is used, standard costs are charged to work in process (WIP). The differences between actual and standard costs are charged to variance accounts. This method is illustrated in the top section of Exhibit 10-1 where the materials, payroll and overhead accounts are aggregated into a summary account to simplify the illustration. The debits to WIP represent the standard costs allowed for all finished and partially finished units during the period. The credits to the materials, payroll and factory overhead accounts represent the cost of all work performed during the period. This method is said to be complete because all work performed during the period is represented and evaluated in the performance measurements, i.e., variance analysis. Partial Standard Cost Methods When a partial method is used only part of the productive work performed during the period is evaluated during the period. In the partial method illustrated in the middle section of Exhibit 10-1, actual costs are charged to work in process. Standard costs are not recorded until the completed units are transferred to finished goods. Variances are calculated and recorded at the time of the transfer. This is a partial method because the work remaining in WIP is not evaluated. From the performance measurement point of view, a complete standard cost method is better because: 1.) it identifies the variances or differences between actual costs and standard costs in a more timely manner and 2.) the variances are based on all productive work performed during the period, not just the work performed on the completed units. Another partial method is illustrated in the bottom section of Exhibit 10-1. In this approach, actual costs flow into finished goods. Then standard costs are charged to cost of goods sold and the variances are recorded at the time of sale. The credit to finished goods represents the actual cost of the units sold. One reason for using this method is to avoid having to adjust the inventory accounts from standard to actual costs for external reporting purposes. However, for internal evaluation and control purposes this is even less useful than the second method illustrated, because only the work performed on the units sold is evaluated. Again, from a performance evaluation perspective, it is better to evaluate all productive work, not just the work performed on the units completed as in the first partial method, or only the work performed on the units sold as in this approach. For this reason, the illustrations in this chapter are based on a complete standard cost method, rather than either of the partial methods. Cost Control Techniques –Responsibility Accounting : 111 Cost Control Techniques –Responsibility Accounting Responsibility accounting is an underlying concept of accounting performance measurement systems. The basic idea is that large diversified organizations are difficult, if not impossible to manage as a single segment, thus they must be decentralized or separated into manageable parts. These parts, or segments are referred to as responsibility centers that include: 1) revenue centers, 2) cost centers, 3) profit centers and 4) investment centers. This approach allows responsibility to be assigned to the segment managers that have the greatest amount of influence over the key elements to be managed. These elements include revenue for a revenue center (a segment that mainly generates revenue with relatively little costs), costs for a cost center (a segment that generates costs, but no revenue), a measure of profitability for a profit center (a segment that generates both revenue and costs) and return on investment (ROI) for an investment center (a segment such as a division of a company where the manager controls the acquisition and utilization of assets, as well as revenue and costs). Cost Control Techniques –Responsibility Accounting....contd. : 112 Cost Control Techniques –Responsibility Accounting....contd. Controllability Concept An underlying concept of responsibility accounting is referred to as controllability. Conceptually, a manager should only be held responsible for those aspects of performance that he or she can control. However, this concept is rarely, if ever, applied successfully in practice because of the system variation present in all systems. Attempts to apply the controllability concept produce responsibility reports where each layer of management is held responsible for all subordinate management layers as illustrated in the next slide. Cost Control Techniques –Responsibility Accounting....contd. : 113 Cost Control Techniques –Responsibility Accounting....contd. References : 114 References www.maaw.com P.C. Tulsian published by M/s TATA McGrawhill. You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.