Management Accounting in Industry 4.

0
The Indian Context

Contents
1
Executive Summary...............................................................................................................................3
Introduction to Management Accounting.............................................................................................4
Introduction to Industry 4.0...................................................................................................................5
Role of Management Accountants........................................................................................................6
Existing CMA Practices........................................................................................................................7
Traditional Cost accounting system...................................................................................................8
Activity-Based Costing system..........................................................................................................9
Standard Costing & Variance Analysis...............................................................................................10
Budgetary Control...............................................................................................................................10
Cost Accounting Records and Cost Audit...........................................................................................11
Conclusion...........................................................................................................................................12
References...........................................................................................................................................13

2
Executive Summary

As Industry 4.0 makes its inroads into the Indian manufacturing sector, sustainability
can be built only by focusing on cost and value. Keeping this in mind in order to make a
culture of cost competitiveness in all companies in India, a shift was first made in 2011 in the
area of Cost Accounting & management accounting. After the enactment of the Companies
Act in 2013, this shift remained short-lived. Successful efforts were made to restore a
significant part in 2014 but the need of the hour is to maintain and assess where we are,
where are the cost and management accounting practices headed to in the era of industry 4.0,
what is the role of management accountants in the face of various elements industry 4.0 like
big data, IoT, A.I., machine learning etc. and how we can turnaround the future of cost
accounting in India. Also, there is a need to create well-trained cost and management
accountants, keeping in mind the regulatory framework to make sure as to not lose out on the
opportunities which industry 4.0 has to offer.

In India, industries are taking slow and steady measures for the adoption of industry
4.0. But implementing it on a large scale still looks to be some years away because of many
challenges like a need for huge investments in the infrastructure, improper knowledge of 4.0
practices, lack of infrastructure, and inadequate cybersecurity norms. But a few practices
such as cost reduction, high efficiency of operations, safe factories, and faster speeds to send
to markets, Industry 4.0 can provide the country’s manufacturing sector a platform to become
relevant and competitive in the global market. Also, with the government’s focus on
manufacturing through programs such as Make in India and policies such as the National
Policy for Advanced Manufacturing (for MSMEs as well), Industry 4.0 will play a key role in
enhancing the GDP share of the manufacturing sector from 17% to 25% around 2022. In
order to unlock the full potential of Industry 4.0, there has to be an integrated approach
targeting the large manufacturing companies as well as India’s MSME sector.

Industry 4.0 would push production processes to be integrally interconnected; real

time information will become highly efficient. The capacity optimization will go one step
beyond capacity maximization, thereby increasing profitability and value of an organization.
The importance of capacity maximization is also corroborated by lean management and
continuous improvement methods. The Internet of Things and the Internet of Services, along

3
with recent technological innovations, will make the production processes increasingly
efficient, highly autonomous, agile and customizable.

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 as far as
the corporate sector is concerned. For decision making, the management and the company
secretary, needs precise information concerning financial operations to present them 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 utmost importance for an

organisation to fulfil the needs and aspirations of all the stakeholders. To quench all these
needs of the stakeholders, a sound accounting system becomes paramount.

The existing accounting practices can be broardly classified as:

 Cost accounting
 Financial accounting
 Management accounting.

Financial accounting consists of two broad headers – recording business transactions

and preparation of the final accounts.

Cost accounting was introduced to help with the decision-making process of the
internal management of the organisation. The insights provided by the cost accounting
system can serve as a guideline for optimal utilization of the resources of the organisation,
thus enabling the managers to better plan and be ready for the fluctuations of the market.
Management accounting is an extension of the managerial aspects of the cost acconting

4
system. It aids the planning, organising and controlling business systems to ensure that the
objectives are met and the goals achieved in a time-bound and cost efficient manner.

Introduction to Industry 4.0

The term Industry 4.0 originated in Germany. It 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 made it easy to collect from multiple systems and enabled more
effective operations, enhanced the efficieny of business processes which translated to lower
production cost higher-quality goods, thus fostering industrial expansion and changing the
design of workplace 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

5
 Figure1- Industry 4.0 ecosystem

In order to make best use of these technological disruptions, the management

accountants have to constantly upgrade and embrace this wave of rapid digital transformation
along the entire spectrum of value chain of business. There is a need to develop an
appropriate ecosystem so that the benefits can be efficiently accrued.

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

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

6
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
Internet of Things
Artificial Intelligence
Blockchain
Quantum Computing
Digital Manufacturing
Make use of business analytics for aiding decision making and
optimisation of physical and human resources
Pricing; insurance premium on policies depending on the usage
pattern/risk assessment
Project management, logistics and supply chain solutions, FMCG
distributions, risk mitigation and strategy formulations
Participate in solution development using Blockchain and help in
applications in BFSI and real estate sectors
Relieves the finance professionals from mundane work so that of
strategic business development
Leveraging on it for value creation across the value chain

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

Existing CMA Practices

Activity-based cost system is centred around the premise that various business
activities which lead to the development of a product incur different cost under individual
cost heads. This system can be extended to include selling, administrative, marketing and
distribution overheads to which costs are allocated. The ABC system can either serve as a

7
supplement to the existing (traditional) system or as a standalone practice to be integrated
with the organisation ERP.

Traditional Cost accounting system

Traditional Cost Accounting system mainly consist of throughout costing, absorption

costing, variable costing and standard costing. These are explained in detail as below:

1. Throughput costing – It enables managers to utilize information for better decision-

making to ensure better tracking of the organisations cashflows. It helps in
identification of factors that can be an impediment for the organisation to reach its
desired goal. It focuses on generating actionable insights from simple measures that
contribute towards organisations achieving their goals. It is focused on cash and does
not allocate the entire cost-base to the products and services provided by an
organisation. It takes into account only those costs that vary with the level of
production which are then deducted from sales to determine Throughput. It is used as
the measure of performance in the theory of constraints. It utilizes business
intelligence platforms/services to generate more throughput rather than focusing only
on cost cutting or expense reduction to generate profits. It aims to enhance the rate of
Throughput generation while keeping in consideration the organisational constraints –
internal and external. It is the only accounting methodology that gives due
consideration to constraints as factors limiting the performance of organisations.
2. Absorption costing – The total manufacturing cost incurred during the manufacturing
of a product is taken as the base for absorption costing in a product based organisation
and providing a service for service-based organisation. TAC takes into consideration
all the manufacturing overheads – fixed and variables rather than being centred
around just the cost of materials. For each cost head, we can assign either a direct or
an indirect cost. While the direct cost on one hand are easily associated with cost
centre, the indirect cost have to be appropriately attributed to the concerned activity.
This assignment of overhead cost to various department is known as apportionment.
3. Variable costing – This costing method works on the principle that manufacturing
overheads are incurred in the period in which the product is produced. This is an
improvement over the absorption technique that suffers from the problem that

8
 incomes tend to rise as the production level increases. In the absorption costing
regime, the management tends to push the costs incurred within a period to the one in
which the products are actually sold. This leads to inflation of profits in the
production periods by apportioning lesser cost than is actually incurred.
4. Standard costing – This technique makes use of accounting ratios also known as
efficiencies which compare the amount of labour and material resources that are
actually used in the production process with what should have been used under
standard operating conditions. It was developed when the major portion of cost of
goods sold used to come from the labour cost. It is focused on enhancing the labour
efficiency so as to make the best of the available resources.

Activity-Based Costing system

Activity-based costing system can be classified into supplementary and cost

management. With the rising technological advancement, the financial reporting system can
be integrated with the ERP module of the organisation.

Indian organisations are slowly and steadily shifting towards the integrated
accounting systems because of its added advantage of better visibility and more efficient and
centralised control.

Impediments faced while implementing ABC

The major reason behind the failure of ABC system is the way these systems are
implemented. The primary problems faced during its implementation are:

1. Developing a proper dictionary related to the activities

2. Inability of traditional method to locate data needs of activity-based costing
3. Lack of proper review initiative

9
Standard Costing & Variance Analysis

Standard cost is the cost that the management expects to incur in order to produce
goods and services under predicted conditions. The two advantages entailed from a robust
Standard Costing System are planning and control. The planning stage consists of collection
of data for the management, while the control stage, is useful in finding how the actual cost
data deviates from the standard one. 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.

Budgetary Control

A forcast gives us an estimate of the likelihood of an event to occur. It majorly deals

with the events that are likely to unfold under the expected conditions within a given period
of time. On the oter hand, budget deals with the policies and future course of actions that
should be undertaken for a given period in the given conditions.

10
 According to the ASCI study (2005), the master budget is widely used as a part of
management control systems. The firms were using several budget goals as inputs to come up
with the master budget. Among the top three goals, the profit maximization was voted as the
most important objective by majority of the respondants, 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 the strategy undertaken to achieve the operational
plans for a meaningful financial performance, and 51 percent linked it to effective control and
co-ordination between the management functions.

In the Indian context, joint cost allocation methods have been predominantly used as
market-based NRV (net realisable value) method. On the contrary, countries like United
Kingdom, Japan and Ireland have been using market-based factors as the basis of pricing
their products. In the course of our study, we found that cost-based fectors hold equal
importance in the Indian business scenario.

Cost Accounting Records and Cost Audit

In India, Section 2(13)(iv) of the Companies Act 2013 has provisions for maintaining
cost accounting data. Information regarding Cost Audit is available in the act. Government
has the objective of ensuring that the companies keep proper records with the introduction of
maintenance requirement for cost accounting. Also, a cost accountant does proper audit of the
organisation. This was done to inculcate a culture of better resource management in the
industries, for the possibility of efficiency audit, and availing the data of cost available to
Government .

As per Section 128 on the Companies Act, 2013 it is a mandate for all organisations to
prepare and store account books, financial papers and other relevant financial instruments at
their registered office for each financial year which enables the stakeholders to have a better
understanding of the company’s internal and external state of affairs, which includes but is
not limited to the branch office or offices. Also, these books have to be maintained as per the
double entry accounting system.

11
Conclusion

With the advent of new technologies in the manufacturing sector it needs to be identified
what is the sustainable value of the cost and management services. This will help us address
the issues related to building the skills of cost and management accountants in line with
practices of industry 4.0. Cost and management accountants will have the task of aligning the
traditional and activity-based costing methods with various elements of industry 4.0 to ensure
sustainability. Also, budget making and budget control measures in this scenario will be very
crucial as identifying newer sources of capital, and prioritizing the investments for long-term
plans, will be vital for the success of companies.

12
References

1. Management control in multinational companies: a systematic literature review-

https://link.springer.com/article/10.1007/s11846-018-0276-1
2. AIMA-KPMG-industry-4.0-report- http://resources.aima.in/presentations/AIMA-

KPMG-industry-4-0-report.pdf
3. Costing models for capacity optimization in Industry 4.0: Trade-off between used capacity

and operational efficiency- http://bit.ly/2OQqdAL

4. Cost Management Practices in India: An Empirical Study. ASCI Journal of Management,
33(1&2), 2004, 1-13-

https://www.researchgate.net/publication/228292131_Cost_Management
_Practices_in_India_An_Empirical_Study_ASCI_Journal_of_Manageme
nt_3312_2004_1-13
5. Cost and Management Accounting-

https://www.icsi.edu/media/webmodules/publications/FULL_BOOK_PP-
CMA-2017-JULY_4.pdf
6. Economic transition, strategy and the evolution of management accounting practices: the
case of India-

https://ideas.repec.org/a/eee/aosoci/v24y1999i5-6p379-412.html
7. The international diffusion of new management accounting practices: the case of India-

https://www.researchgate.net/publication/223860432_The_International_
Diffusion_of_New_Management_Accounting_Practices_The_Case_of_I
ndia
8. Cost and Management Accounting Practices: A Survey of Manufacturing Companies in India-
http://www.irdindia.in/journal_ijrdmr/pdf/vol4_iss4/2.pdf

13