Kamaljeet

PGP/23/086

Jay Panchal
PGP/23/099

Ankit Mahajan
PGP/23/073

Amit Lad
PGP/23/089
Introduction to Management Accounting
The business world is very competitive today. Accounting, along with Finance, holds much
importance for the business entities to present an unbiased report of the financial health of the
firm. Therefore, the accounting implications have become an essential factor in the corporate
sector. The management of a company for decision making, the company secretary, needs
precise and fair information about the financial operations and present the same to the
decision-makers. ‘Cost and Management Accounting’ thus becomes indispensable and vital
for the effective utilization of the resources of a company. The Limitations of financial
accounting have led to these costs and management branches of accounting. Due to this, the
cost and management accounting techniques have become an integral discipline for corporate
management as it solves not only specific problems but helps improve the decision-making
process.
As we have realized, the accounting information is of the utmost importance for every
business which fulfils the needs of all the interested parties involved. To quench all these
needs of the stakeholders, a sound accounting system becomes paramount.
Accounting can be categorized into three categories, namely
1. Financial accounting
2. Cost accounting
3. Management accounting.
Mostly Financial accounting includes recording business transactions in the account books
and helps in the preparation of the final accounts.
Cost accounting was developed to help internal management in the process of decision
making. The information which is provided by cost accounting is used as a managerial tool to
utilize the available resources at an optimum level. In simpler terms, Management accounting
is one of the extensions of the management aspects of the cost accounting system. It helps the
management by providing information so that planning, organizing, directing, and controlling
business processes can be carried out in the most orderly manner.

Introduction to Industry 4.0

Industry 4.0 has its origins in Germany. The term was coined by the BMBF in Germany and
consists of the entire range of cutting-edge technologies including but not limited to Internet
of Things (IoT), Block Chain technology, Cloud Computing and Artificial Intelligence (AI).
The advancements in digital industrial technologies has led to a transformation which has
enabled us to collect and analyse data across platforms enabling faster and more flexible and
efficient processes to produce higher-quality goods at reduced costs, fostering industrial
growth and changing the shape of workforce while simultaneously enhancing their
competitiveness.
Industry 4.0 is the amalgamation of production processes and operations with digital
technology solutions, machine learning algorithms and big data ecosystems to enable a more
holistic approach for the business solutions. Adopting Industry 4.0 system will lead to a
plethora of benefits for the businesses. These include:
 More collaborative and efficient cross functional teams
 Better tracking of the finances and cash flows in the organisation
 Reduce costs by adopting a leaner business framework
 More competent and better equipped to deal with the latest digital disruptions
 Enhance profits by developing more efficient processes and systems

Figure1- Industry 4.0 ecosystem

The management accountants need to embrace and exploit this wave of digital transformation
along the value chain of business. It throws up a plethora of opportunities. At the same time,
it demands for an appropriate ecosystem so that the benefits are unleashed.
Company
Initiatives/ Practices

NITI Aayog and ABB

Jointly organized workshop for facilitating adoption of Artificial Intelligence (AI)
technologies by MSMEs

Government of India (GOI)

Make in India: Developing 100 smart cities under Smart Cities Mission, Digital India:
provision of government services electronically, Skill India, GOI is proposing to establish the
National Centre on Artificial Intelligence

Indian Institute of Science (IISc)

IISC is building India’s first smart factory in Bengaluru with a seed funding from the
Boeing Company

Tata Steel
Has identified ‘Industry 4.0’ as strategic imperative to attain ‘Smart Factory’ status with
enhanced productivity, customer centricity and sustainable performance

L&T
L&T-Nxt: focuses on the areas of artificial intelligence (AI), internet of things (IoT), virtual
reality, augmented reality and automation solutions to industrial clients by leveraging its
diverse customer base

Table 1- Indian Initiatives and Practices

Role of Management Accountants

The management accountants need to be abreast with the developments and the technological
disruptions that come their way to be in a position to reap the benefits of the Industry 4.0 and
its implications across the value chain (customers, suppliers, bankers, insurance companies,
logistics and supply chain partners, investors, employees, policy makers, government,
competitors etc) exchange, partner and network each other. The management accountants
need to upskill and continuously gain insight of technological disruptions, update, reinvent
and renovate their technology skills. Industry 4.0 digitally transforms the industry and the
large organisations are leveraging on it. Translating this to Indian context, the MSMEs that
employ the majority of Indian workforce can take help from these developments to make
themselves more competent to take on the competition imposed by the large and established
players.
When all the businesses start to equip themselves with the technology arsenal, the
differentiating factor will be the way in which they manage their resources and control and
assign costs to objects and processes in order to have a better track of their investments,
expenditure and returns. According to Chartered Global Management Accountant (CGMA),
the future finance professionals will be judged on the basis of how well they work with and
complement robotic process automation (RPA) and other digital algorithms.

Element of Industry 4.0

Role of Management Accountants

Big Data and Analytics

Make use of business analytics for aiding decision making and optimisation of physical and
human resources

Internet of Things
Pricing; insurance premium on policies depending on the usage pattern/risk assessment

Artificial Intelligence
Project management, logistics and supply chain solutions, FMCG distributions, risk
mitigation and strategy formulations

Blockchain
Participate in solution development using Blockchain and help in applications in BFSI and
real estate sectors

Quantum Computing
Relieves the finance professionals from mundane work so that of strategic business
development

Digital Manufacturing
Leveraging on it for value creation across the value chain

Table 2- Role of Management Accountants vis-à-vis Industry 4.0

Existing Cost Management Practices

The activity-based costing system assumes that products consume activities and activities
consume costs. It leads to a more precise allocation of manufacturing overheads amongst the
products. The activity-based costing system can be extended to the administration overheads
and the marketing and distribution overheads allocation amongst the products for customer
profitability analysis and channel analysis. The introduction of the ABC system in an
organisation can be either supplementary to the traditional cost accounting system as an
offline system or can be fully integrated with decision support systems such as ERP.

Traditional Cost accounting system

1. Throughput costing
2. Absorption costing
3. Variable costing
4. Standard costing

1. Throughput costing – Throughput accounting is a principle-based and simplified

management accounting approach which provides decision support information for
enterprise profitability improvement to the managers. It identifies factors that limit an
organization from reaching its goal, and then focuses on measures that drive behavior
in the key areas towards reaching the organizational goals. As such, Throughput
Accounting is neither cost accounting nor costing because it is cash focused and does
not allocate all costs to products and services sold or provided by an enterprise.
Considering the laws of variation, only costs that vary totally with units of output, are
allocated to products & services which are deducted from sales to determine
Throughput. Throughput Accounting is a management accounting technique used as
the performance measure in the Theory of Constraints. It is the business intelligence
used for maximizing profits, however, unlike cost accounting that primarily focuses
on 'cutting costs' and reducing expenses to make a profit, Throughput Accounting
primarily focuses on generating more throughput. Conceptually, Throughput
Accounting seeks to increase the speed or rate at which throughput is generated by
products and services with respect to an organization's constraint, whether the
constraint is internal or external to the organization. Throughput Accounting is the
only management accounting methodology that considers constraints as factors
limiting the performance of organizations.
2. Absorption costing – Total absorption costing is a method which entails the full cost
of manufacturing or providing a service. TAC includes not just the costs of materials
and labour, but also of all manufacturing overheads (whether ‘fixed’ or ‘variable’).
The cost of each cost center can be direct or indirect. The direct cost can be easily
identified with individual cost centers. Whereas indirect cost cannot be easily
identified with the cost center. The distribution of overhead among the departments is
called apportionment.
3. Variable costing – Under this method, manufacturing overhead is incurred in the
period that a product is produced. This addresses the issue of absorption costing that
allows income to rise as production rises. Under an absorption cost method,
management can push forward costs to the next period when products are sold. This
artificially inflates profits in the period of production by incurring less cost than
would be incurred under a variable costing system.
4. Standard costing – Standard cost accounting uses ratios called efficiencies that
compare the labor and materials actually used to produce a good with those that the
same goods would have required under standard conditions. As long as actual and
standard conditions are similar, few problems arise.Standard cost accounting was
developed when labor comprised the most important cost of manufactured goods.
 Standard methods continue to emphasize labor efficiency even though that resource
now constitutes a small part of the cost in most cases.

Activity-Based Costing system

1. Supplementary / offline
2. Fully integrated cost management and financial reporting system with enterprise
resource planning (ERP) system.

The activity-based costing system introduced in corporate India has picked up momentum as
companies are using it as supplementary/offline and some of them have integrated the
activity-based costing systems with ERP systems.

Problems in the implementation of activity-based costing

The activity-based costing systems fail because of the poor implementation process. The
major problems faced during the implementation of activity-based costing by the ABCM-user
respondent firms are developing activity dictionary, inability of the traditional costing system
to capture the information needs of ABC and lack of review of ABC implementation
initiative.

Motivation

1. Focus on profitable customers

2. Changed pricing strategy
3. Outsourced activities / processes
4. Changed strategic focus
5. Eliminated redundant activities through the entire value chain
6. Changed product mix
7. Changed distribution channels
8. Changed processes
9. Changed sourcing decisions
10. Changed incentive compensation

Standard Costing and Variance Analysis

Standard cost is the cost that the management expects to incur in order to produce goods and
services under predicted conditions. A well-established Standard costing system is useful in
both planning and control. In the planning stage, it provides the Management with the
necessary data; while at the control stage, it is helpful in finding the deviations between the
actual cost data and the standard cost data. Such deviations are measured through the
variance analysis techniques.
Standard costing technique is used widely as a part of management control system in
corporate India. According to a Business Today survey (1999) of 113 companies (large-
sized), 53 percent of the companies had used it; while according to an ASCI study in 2005,
77.36 percent respondents had used it. In the same study, there was no significant difference
in the use of standard costing amongst Activity Based Costing system users and that for the
non-ABC users.
Out of all the variances, sales price variance and selling volume variance are considered of
highest importance, followed by material price and material usage variance. On an aggregate
basis, material variances were more prominent for the respondents over overhead variances.
But when ABC users and non-ABC users’ data were compared, it was observed that ABC
users had more concerns about overhead variances than non-users.
One more important observation from the study was that the biggest motivations for
implementing standard costing were Cost management, and budgetary planning and control
against inventory valuation, performance measurement and Product pricing decision. Also,
performance measurement was significantly higher motivation for implementation of
standard costing for ABC users when compared with the non-ABC users.

Budget, Budgeting and Budgetary Control

Budget is the financial and quantitative statement of the course of action that the management
decides to implement in the next period. It is the basis used by the Management to evaluate
how the organization has been functioning i.e. whether the set targets are achieved or not. It
is a very effective control tool.
Budget is different from forecast in that forecast is just an estimate of what is likely to
happen. It is a statement of the events that are likely to happen under anticipated conditions
during a specified period of time. Budget, on the other hand, shows what are the policy and
programme that are to be followed in a future period under planned conditions.
According to the ASCI study (2005), the master budget is widely used as a part of
management control systems. The firms were using more than one budget goal to formulate
the master budget. Maximizing economic profit was the most important objective function on
aggregate basis when considered the top three goals, while for 39.6 percent respondents EBIT
was the most important budget goal.
The effectiveness of budgeting was linked with well-defined strategy by 73.6 percent
respondents, while 64.1 percent linked it to clear linkages of strategy to operational plans and
meaningful performance measures, and 51 percent linked it to management control and
coordination.
In India, the physical measures based joint cost allocation methods were popular same as
market-based estimated Net Realizable Value (NRV) method. In contrast to the worldwide
(Ireland, Japan, and the UK) trend where market-based factors were the starting point for
product pricing decision, in India the present study found that cost-based factors are equally
important.

Cost Accounting Records and Cost Audit

In India, Section 2(13)(iv) of the Companies Act 2013, contains the provisions related to
maintenance of cost accounting records while Section 148 of the Act contains the provisions
relating to Cost Audit. Government has the objective of ensuring that the companies keep
proper records by introducing the statutory requirement of maintenance of cost accounting
records and audit by a qualified cost accountant. This was done to inculcate a culture of better
resource management in the industries, to make efficiency audit possible, and to make cost
data available to the government.
According to section 2(13) on the Companies Act, 2013 records need to be maintained in
respect of-
1. All sums of money that is received and expended by a company and matters in relation to
which the receipts and expenditure take place;
2. All sales and purchases of goods and services by the company;
3. The assets and liabilities of the company; and
4. The items of cost as may be prescribed under section 148 in the case of a company which
belongs to any class of companies specified under that section;
Section 128 on the Companies Act, 2013 mandates for every company the preparation and
storage of books of account and other relevant books and papers and financial statement for
every financial year, at its registered office, which give a true and fair view of the company’s
state of the affairs, including that of its branch office or offices and also elaborate the
transactions effected both at the registered office and its branches. Also, such books are to be
kept on accrual basis, according to the double entry system of accounting.
As per the Companies (Cost Records and Audit) Rules, 2014, cost audit is to be performed by
a Cost auditor who shall be a Cost Accountant in practice. “Cost Accountant in Practice”
means a cost accountant defined in section 2(1)(b) of the Cost and Works Accountants Act,
1959, that owns a valid certificate of practice under section 6(1) of that Act and is deemed to
be in practice under section 2(2) thereof, and also includes a firm or limited liability
partnership of cost accountants.
The companies which are covered under the Cost audit category, have to appoint a cost
auditor within 180 days of the commencement of every financial year.
For the purpose of sub-section (3) of section 148 of the Companies Act, 2013 —
 In the case of companies that are required to constitute an audit committee —

1. i. The Board shall appoint an individual, who is a cost accountant in

practice, or a firm of cost accountants in practice, as cost auditor on the
recommendations of the Audit committee, which shall also recommend remuneration
for such cost auditor;
2. ii. The remuneration recommended by the Audit Committee under (i) shall be
considered and approved by the Board of Directors and ratified subsequently by the
shareholders;

 In the case of other companies that are not required to constitute an audit committee,
the Board shall appoint an individual who is a cost accountant in practice or a firm of
cost accountants in practice as cost auditor and the remuneration of such cost auditor
shall be ratified by shareholders subsequently.
Cost Audit Report is a duly signed cost auditor’s report on the examined cost records and cost
statements prepared as per these rules, including annexure, attachment, qualifications or
observations that are attached with or included in such report.
Every cost auditor, who conducts an audit of the cost records of a company, shall submit the
cost audit report along with his or its reservations or qualifications or observations or
suggestions, Form CRA-3 is to be used to show qualifications, observations, reservations, or
suggestions (if any) by cost auditor and it is submitted along with Cost Audit Report.
A duly signed report is forwarded by the cost auditor to the Board of Directors of the
company within a period of 180 days from the closure of the financial year to which the
report relates. The Board of Directors shall consider and examine such report, particularly
any reservation or qualification contained therein.
Every company that is covered under the companies (cost record and audit) Rules, 2014, shall
furnish the Central Government with such report along with full information and explanation
on every reservation or qualification contained therein, within a period of 30 days from the
date of receipt of a copy of the cost audit report, in Form CRA-4 in Extensible Business
Reporting Language format in the manner as specified in the Companies (Filing of
Documents and Forms in Extensible Business Reporting language) Rules, 2015 along with
fees specified in the Companies (Registration Offices and Fees) Rules, 2014.
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