Management Reporting

MANGAEMENT ACCOUNTING

LECTURE NOTES

UNIT-5 MANAGEMENT REPORTING

Meaning
Management reporting is a complex, multistage activity which takes place
in the context of other business processes and makes use of the multiple
information systems that may have been provided for other purposes -- general
documentation, project management, financial control, email communication and
business.
Reporting to management – Meaning
The reporting to management is a process of providing information to various
levels of management so as to enable in judging the effectiveness of their
responsibility centres and become a base for taking corrective measures, if
necessary.

Definition of Reporting to Management

S.N.Maheshwari- “Reporting to Management can be defined as an organized
method of providing each manager with all the data and only those data which he
needs for his decisions, when he needs them and in a form which aids his
understanding and stimulates his action”.
The reporting to management can also be called as management reporting or
internal reporting.

Objectives or Purpose of Reporting to management

A Management Accountant has to prepare the report for the following purposes.

1. Means of Communication: A report is used as a means of upward

communication. A report is prepared and submitted to someone who needs that
information for carrying out functions of management.
2. Satisfy Interested Parties: The interested parties of management report are top
management executives, government agencies, shareholders, creditors, customers
and general public. Different types of management reports are prepared to satisfy
above mentioned interested parties.
3. Serve as a Record: Reports provide valuable and important records for
reference in the future. As the facts and investigations are recorded with utmost
care, they become a rich source of information for the future.

1
Prof. Lakshmi V
Management Reporting

4. Legal Requirements: Some reports are prepared to satisfy the legal

requirements. The annual reports of company accounts is prepared to furnished the
same to the shareholders of the company under Companies Act 1946. Likewise,
audit report of the company accounts is submitted before the income tax authorities
under Income Tax Act 1961.
5. Develop Public Relations: Reports of general progress of business and
utilization of national resources are prepared and presented before the public. It is
useful for increasing the goodwill of the company and developing public relations.
6. Basis to Measure Performance: The performance of each employee is
prepared in a report form. In some cases, group or department performance is
prepared in a report form. The individual performance report is used for promotion
and incentives. The group performance report is used for giving bonus.
7. Control: Reports are the basis of control process. On the basis of reports,
actions are initiated and instructions are given to improve the performance.

The following points highlight the top nineteen requirements of a good report
of management
Form of the report should be adopted in a way that it must leave its required
impression on the user of the report. An ideal form should have a proper title,
headings sub-heading and paragraph division. The title of the report itself will
explain the purpose for which the report has been prepared. The title also enables
to point out the persons who need the report. A sales report may have a title as
“Sales Report for the month of January 2000”. This title explains the purpose and
period of preparing the report.

Good Report for Management Requirement # 2. Contents:

The following points must be kept in mind while preparing a report.
(i) If statistical figures are to be given in the report then only significant figures and
totals should be made a part of it and other detailed figures should be given in
appendix.
(ii) The reports should contain facts only and not opinions. The opinion if essential
may come as a signet to certain facts and not otherwise.

(iii) The report must contain the date of its preparation and date of submission.

2
Prof. Lakshmi V
Management Reporting

(iv) If the report is prepared in response to a request or letter then it should bear
reference number of such letter or request.

(v) The contents of a report must serve the purpose for which it has been prepared.
Separate reports be prepared for different subjects. Various aspects of the subject
should be properly conveyed.

(vi) The contents of the report should be in a logical sequence.

(vii) The contents of the report should be relevant. Irrelevant information should
not be included.

Good Report for Management Requirement # 3. Simplicity:

The Report should be presented in a simple, unambiguous and in a clear language.
The language used in report should be non- technical. If the report is loaded with
technical terminology, it will reduce its utility because the reader may be
unfamiliar with that language If technical terminology is the essential requirement
of the subject covered some explanation of technical terms must be given to make
the report understandable.

The user of the report should be able to understand the report without any
difficulty. The report should also be readable. The figures should be rounded off so
as to make them easily understandable. If possible charts, diagrams or graphs
should be used for presenting information.

Good Report for Management Requirement # 4. Promptness:

Promptness in submitting report is an essential requisite of a good report. The
reports should be sent at the earliest. Reports prepared by various responsibility
centres within the organisation are required for studying the progress and
performance of responsibility centres.

A considerable delay in the occurrence of an event and reporting of the same will
defeat the objective and purpose of reporting. Information delayed is information
denied. The quick supply of reports will enable the management to take corrective
actions well in time. The reports are to be based on information the promptness in
reporting will depend on quick collection of facts and figures.

Following steps may help in quick reporting:

(i) A proper record keeping system should be introduced in the organisation to
meet various informational needs.

3
Prof. Lakshmi V
Management Reporting

(ii) To avoid clerical errors mechanized accounting should be used.

(iii) The accounting work should be centralized to avoid bottlenecks in collecting

information.

Good Report for Management Requirement # 5. Relevancy:

Reports should be presented only to those persons who need them. Reports should
be submitted to relevant authorities. Sometimes reports are sent to various
divisions in routine way, then it will involve unnecessary expenditure and wastage
of time. Reports will not remain secret also.

The persons or departments to whom the report is to be sent should be clear to the
sender of the report, people do not give much attention to reports coining in a
routine way. So, this type of practice involves unavoidable expenditure and
reduces the importance of reports.

Good Report for Management Requirement # 6. Consistency:

There should be consistency in the preparation of reports. For consistency, the
reports should be prepared from the same type of information and statistical data.
This will be possible if same accounting principles and concepts are used for
collecting, classifying, tabulating and presentation of information. Consistency in
reporting enhances their utility.

Good Report for Management Requirement # 7. Accuracy:

The reports should be reasonably accurate. Statistical reports may sometimes be
approximated to make them easily understandable. The production of figures
accurate up to paise may be difficult to be remembered. Their reasonable
approximation may make them readable and understandable.

The degree of accuracy depends upon the nature of information and purpose of its
collection. The approximation should not be done up to the level where
information loses its form and utility. So accuracy should be used to enhance the
use of reports.

Good Report for Management Requirement # 8. Factual:

The reports should be prepared on the basis of factual information. Any predictions
should b. avoided in reports unless and until it becomes necessity. Fictional items
should not form the content of any report.

4
Prof. Lakshmi V
Management Reporting

Good Report for Management Requirement # 9. Controllability:

The reports should be addressed to appropriate persons in respective responsibility
centres. The report should give detail of variances which are related to that centre.
This will help in taking corrective measures at appropriate levels. The variances
which are not controllable at a particular responsibility centre may also be
mentioned separately in the report.

Good Report for Management Requirement # 10. Cost Consideration:

The cost benefit analysis should be done in respect to the preparation of the
Reports. The cost of preparing and presenting the report should not be the more
than the advantages desired from such reports. The Cost should be reasonable so
that reporting may be used by all types of concerns. The cost benefit analysis will
help in deciding about the adoption of reporting system.

Good Report for Management Requirement # 11. Comparability:

The reporting system is meant to help the management in taking correct decisions
and improving the operational efficiency of the organisation. This objective will
better be achieved if reports give comparative information. The comparative
information can be in relation to previous periods, current standards or budgets.
This information helps in finding out deviations or variances.

Where performance is below standards or expectations, such variances can be

highlighted in the reports. The management by exception is possible when
exceptional information will be supplied to the management. The comparative
reporting will at once, help the user to reach at conclusions about the performance
of the responsibility centres mentioned in the report.

Good Report for Management Requirement # 12. Frequency of Reports:

Along-with promptness, the frequency of reporting is also significant. The reports
should be sent regularly when they are required. The timing of reporting will
depend upon nature of the information and its purpose. Some reports may be sent
daily, some weekly, some monthly and so on. Frequency of reports means that
these should be sent when required. The reports are prepared at appropriate times
and sent to appropriate persons as per their requirement.

Good Report for Management Requirement # 13. Decorative:

Reports particularly prepared for general public or external users should be
decorative. Various attractive pictures on front page of the report can be presented.
Pictorial information usually has more attraction of the user than descriptive
information. Any report fully loaded with statistical data presented with colourful

5
Prof. Lakshmi V
Management Reporting

diagrams and beautiful pictures on its title page will leave ever lasting impression
on external users.

Good Report for Management Requirement # 14. Clarity and Analysis:

A good report must be clear and analytical with the purpose of its use. Lack of
clear information and analysis will not be able to serve the basic purpose and
object of reporting.

Good Report for Management Requirement # 15. Brevity:

A brief report is always desirable on account of various reasons as under:
(i) Lengthy reports are very costly

(ii) Lengthy reports are time consuming

(iii) Long reports reflect inefficiency

(iv) Long reports usually ignore the main issue.

Good Report for Management Requirement # 16. Planned and Organized:

A planned and organized report is always regarded a good report.

A planned report will include following points:

(i) The object of report, methodology used for collecting data.

(ii) Summary of conclusions.

(iii) Problems and solutions.

(iv) Recommendations.

(v) Annexure

Good Report for Management Requirement # 17. Properly addressed:

A report must be addressed to the users of the report, for instance, Manager, Board
of Directors, Managing Director etc.

Good Report for Management Requirement # 18. Duly signed and dated:

Report prepared by any department must be properly dated and signed by
responsible Head of the department. Undated reports may not be able to fix the
historicity of the report on some future date.

6
Prof. Lakshmi V
Management Reporting

Good Report for Management Requirement # 19. Terms of Reference:

A Report should contain various terms of reference which will explain the objects
and contents of report.

Making reporting more effective:

The following steps should be taken in order to have efficient and effective
reporting:
(a) Reporting should be the logical output of accounting routine.

(b) Duplication in work should be avoided. Various basic books of accounts i.e.
journal and ledger should be designed in such a way that data is available without
any further effort.

(c) Mechanization and codification should be used, which would be helpful in

speeding-up the routine work.

(d) Accounting process should be completed, a few days before the closing date.
For instance accounts relating to the month of March may be closed on the 20th
March. The period from 21st March to 31st March may be used for data processing
and final reports may be sent on 1st April.

(e) The interim estimates may be used in place of actual data if not readily
available. The quality of reports in such cases would depend upon quality of
estimates made. The actual data may later on be compared with estimated data and
deviations if any should be found out.

(f) Constant receiving of reports should be done so that no executive is starved of

information and no manager is fed with unwanted data.

 
A good reporting system helps the management in proper planning and controlling.
If the reports are available to every level of management at the proper time, current
activities may be regulated and controlled and necessary corrective actions may
also be taken in time. Hence, some principles have been followed for making the
reporting system more effective. Such principles are briefly explained below.

General Principles of Reporting System

1. Proper Flow of Information: The information should be free flow from the
proper place to the right end user of the report. Hence, the information should be
7
Prof. Lakshmi V
Management Reporting

presented in the right format and at a proper time so that it helps in planning and
co-ordination. The flow of report should not be delayed at any cost. Flow of
information is a continuous activity. Information may flow upward, downward
or side ways within an organization. Orders, instructions, plans etc may flow from
top to bottom. Reports of grievances, suggestions etc. may flow from bottom to
top. Notifications, letters, settlements and complaints may flow from outside.
Annual Report, Financial Statement Analysis Report, Directors Report, Auditors
report etc. may flow from inside to outside. Information flows as sideways from
one manager to another at the same level through meetings, discussion etc.
2. Proper Timing: The very purpose of preparation of report is controlling the
unfavorable activities. Hence, the report should be submitted at the required
time at any cost. If not so, there is no use of preparing such report. Moreover, the
efforts used for preparing the report and time are also waste. In the case of routine
report, the time schedule should be strictly adhered to. The absence of information
at required time leads to taking wrong decision.
3. Accurate Information: The report contains only accurate information. If wrong
information are included in the report, it may lead to take wrong decision. Hence,
the supply of accurate information helps the managerial executives to
understand the situation very clearly. At the same time, the presentation of
accurate information in the report should not involve excessive cost of preparation
and should not result in the delay in the presentation of report.
4. Relevant Information: Proper attention should be devoted to include only
relevant information in the report. The inclusion of irrelevant information is
waste one and increase the time in the report preparation. Moreover, the irrelevant
information confuse the end user of the report.
5. Basis of Comparison: The information bestowed by reports will be helpful
when it carries provision to compare with past figures, standards set or objectives.
The trend of the variation can be find out only through the comparison. Corrective
action can be taken with the help of comparative information.
6. Reports should be Clear and Simple: The very purpose of preparing a
report is helping the management in planning, coordinating and controlling.
Hence, the report should be presented in very simple terms and can be clearly
understood by anybody. If not so, there is no meaning of preparing a report. The
method of presenting a report is in such a way that attracts the eye of the readers
and enables them to arrived at a conclusion. The arrangement of information in a
report is in brief, complete, clear and simple.
7. Cost: The management incur some expenses with regard to report preparation.
Such expenses should be commensurate with the benefits derived from the report
preparation. If possible, more benefits may be available than the expenses incurred.

8
Prof. Lakshmi V
Management Reporting

In this way, reporting system can be installed. In other words, there should be
an endeavor to make the system as economical as possible.
8. Evaluation of Responsibility: The reporting system has been installed in such a
way to evaluate the managerial responsibility. The standards or targets are fixed
for each functional department. The record of actual performance is monitored
along with the standards so as to enable management to assess the
performance of different individuals.

Types of Reports Prepared for Management

The following points highlight the top four types of reports prepared for
management, i.e, (1) Classification on the Basis of Object and Purpose (2)
Classification on the Basis of Nature (3) Classification on the Basis of Period
(4) Classification of Reports on the Basis of Functions.
Reports for Management Type # 1. Classification on the Basis of Object and
Purpose:

(a) External Reports:

The reports prepared for external users or for the persons outside the business are
known as external reports. External users may include shareholders, investors,
creditors, suppliers and bankers. Though company may not be answerable to
outsiders but still some reports are meant for outsiders.

The company publishes income statement and balance sheet at the end of every
financial year and these statements are filed with the Registrar of companies and
stock exchanges. Final statements of accounts are expected to conform to certain
basic details in India Companies Act 1956 has made it obligatory to disclose some
minimum information in final accounts. Following is an instance of Balance Sheet

9
Prof. Lakshmi V
Management Reporting

and Income Statement presented for external users through annual report of MRO-
TEK LIMITED 2007- 2008.

(b) Internal Reports:

Internal reports refers to those reports which are meant for different level of
management. Internal reports are not public documents and they are not expected
to conform to any standards. These reports are prepared by keeping in view the
needs of disposal for scanning them.

These reports may be meant for top level, middle level and lower level. The report
meant for different levels of management may be regarded as internal reports. The
frequency of these reports vary in accordance with purpose they serve.

Some of the internal reports that are commonly used are! Period report about profit
and loss account and financial position, statement of cash flow, changes in working
capital, report about cost of production, production trends and utilization of
capacity.Labour turnover reports, material utilization reports, periodic reports on
sales, credit collection periods and selling and distribution expenses, report on
stock position etc.

Reports for Management Type # 2. Classification on the Basis of Nature:

According to nature, reports can be classified into three categories:
(a) Enterprise Reports:
These reports are prepared for the concern as a whole. These reports serve as a
channel of communication with outsiders. Enterprise reports may concern all
activities of the enterprise or may be related to different activities. Enterprise
reports may include balance sheet, income statement, income tax returns,
employment report, chairman’s report.

These reports contain standardized information and are beneficial to outsiders. The
interpretation of financial statement can also be undertaken from these reports. The
reports are important from financial analysis point of view. For instance following
is chairman’s report presented by ShashiRuia Chairman of Essar Steel Ltd.
reproduced for information:

Chairman’s Statement:
Dear Shareholder,

It is now well accepted by economic pundits and studies conducted across the
globe that India and China will dominate the world economy in the 21st century.

10
Prof. Lakshmi V
Management Reporting

India is today the fourth largest economy in terms of purchasing power parity and
is expected to overtake Japan and become third largest economic power after the
United States of America and China, before the end of the decade. As India
prepares to become an economic super power, it must further quicken the pace of
reform and liaberalization by enabling the development of world class
infrastructure, competitive manufacturing in scale and technology and sustainable
development.

GDP growth of over 6.5% significant investments in infrastructure, a good

agricultural output and a spurt in consumer demand across all sectors augurs for
industry. If we are able to achieve a GDP growth of 8% annually, India will be the
fastest growing free market democracy in the world.

Steel the backbone of Industry:

The steel industry is crucial to a nation’s economic competitiveness and security.
Steel is integral to building of bridges, railroads, homes, automobiles, appliances
and much more. Today’s steels are radically different than what was available ten
years ago. They are lighter, higher in strength and more versatile.

The industry has undergone a major transformation in the last few years with
companies investing in new process and product technologies, capacity
enhancements and customer service initiatives. Indian steel companies are at the
‘leading edge’ of technology and spend considerable amounts on research and
development.

The industry and particularly your company are able to compete internationally on
technology, quality and price and have demonstrated that the India of tomorrow
belongs to Indian entrepreneurs and Indian consumers. The Government needs to
encourage and support the industry with a more realistic iron ore policy that creates
level playing field.

Essar Steel- an eventful year:

Essar Steel’s excellent results demonstrate the company’s success in structurally
improving its operating performance as a result of strategic actions and timely
execution of projects. We have seen some signs of over-supply in international
markets, but we do not see this as a long term issue. Your company is also much
better prepared to manage cyclically in markets due to its geographic coverage and
product portfolio.

11
Prof. Lakshmi V
Management Reporting

Essar Steel is now a fully integrated producer with end-to-end control of all
operations related to steel making. The acquisition of Hy-Grade Pellets Ltd. and
Steel Corporation of Gujarat Ltd. make your company a totally integrated steel
producer. The company has taken a number of initiatives in its manufacturing
facilities to fulfill its mission of being one of the most cost efficient producers of
steel globally.

From Bailadilla- where the iron ore beneficiation plant is located, close to the iron
mines- to the final stage where the end products are dispatched to domestic and
international destinations, your company has ensured that every stage of
manufacture is seamlessly integrated. This will enable us to offer high quality,
customized products for use by wide range of industries such as automobile and
auto components, white goods, construction and consumer durables.

We focus on value addition at every stage of manufacture and also direct our
efforts to high revenue generating markets. We do this by targeted marketing in
specialized customer segments and technical and aftermarket support. We expect
these value added products to contribute over 35% of the company’s revenues in
the coming year.

Looking Ahead:
Currently we are producing at a capacity of 3 million tonnes and we have planned
to augment this to 4.6 million tonnes by June 2006, making us the largest producer
of flat steel in the private sector in India. This will involve an incremental
investment ofRs 2000 crore, which is much below industry average and will
considerably reduce our cost of production. We also plan to increase the pellet
making capacity at Visakhapatnam from 4 to 8 million tonnes in this fiscal year.

The acquisitions, capacity expansions, technology upgradation and other

productivity improvement measures will give you company a significant
competitive edge in domestic and international markets. Our thrust on maintaining
cost leadership through integrated manufacturing processes, research and new
innovation and high productivity will provide a hedge against cyclically.

Managing Financial Turnaround:

Your company has been able to build a platform for consolidation and sustain the
rejuvenation of its performance. In October 2002, at the time of the announcement
of the CDR package, the Company had a term debt of? 5371 crore, which has been
reduced to Rs 4262 crore as at March 31, 2005, a reduction of over Rs 1100 crore.
The significant financial turnaround by the Company in such a short period of time

12
Prof. Lakshmi V
Management Reporting

is indeed noteworthy. With all other parameters of financial performance showing

considerable improvement, your company is in a much stronger position to plan for
more aggressive growth.

Our Driving Force:

Essar Steel is today at a significant point in its history. The past has given us
learning’s that we have used to build a platform of security from the future. I must
acknowledge the tremendous efforts put in by employees at all levels, who have to
admirably risen to the challenges that change inevitably brings. Organizations must
continuously change in order to survive and prosper. The Essar family has shown
the capability and resilience to manage this change. We look to the future with
confidence that arises out of our actions and the achievements of our people, as we
prepare to face the “Brave New World”.

I also take this opportunity to thank our customers, vendors, business associates
and bankers who have helped us come this far and look forward to their continued
support in our journey to globalization.

Thank You.

ShashiRuia Chairman

(b) Control Reports:

Control reports deal with two aspects. One aspect relates to the personal
performance and the other aspect deals with the economic performance. The first
type of reports are prepared and reported to judge performance of managers and
heads of various responsibility centres with what performance should have been
under the prevailing circumstances.

The reasons for deviations in performance are also identified. The second type of
reports shows how well the responsibility centre has fared as an economic activity.
Such analysis is made periodically. This type of analysis requires the use of full
cost accounting rather than responsibility accounting.

Control reports should consider the following:

(i) Control reports should be related to personal responsibility.

(ii) They should compare actual performance with the standards.

(iii) They should highlight significant information.

13
Prof. Lakshmi V
Management Reporting

(iv) These reports should be sent at a proper time as to enable taking corrective
measures.

(v) If possible various accounting ratios like, capacity, efficiency, activity and
calendar ratios may be calculated.

(c) Investigating Reports:

These reports are linked with control reports. In case some serious problem arises
then the causes of this situation are studied and analyzed, investigative reports are
based on outcome of special solution studies. These reports are intermittent and are
prepared only when a situation arises. They are prepared according to the nature of
every situation. They are helpful to the management in analyzing the causes of
some problem.

Example of Investigating Report:

The following information is available from monthly cost report of M/s Hard
Engineering Co.:—

14
Prof. Lakshmi V
Management Reporting

Reports for Management Type # 3. Classification on the Basis of Period:

According to the period repots can be classified as under:
(a) Routine Reports:
These reports are prepared about day to day working of the concern. They are
periodically sent to various levels of management. These persons may differ
according to the nature of information about details to be reported so far as the
timing is concerned they may be sent daily, weekly, monthly or quarterly.

Routine reports may relate to sales information, production figures, capital

expenditures, purchases of raw materials, market trends etc. There is a tendency to
ignore routine reports by all recipients because of their routine nature. Important
information in the report should be high-lighted or presented in a different way or
may be written in a different ink.

15
Prof. Lakshmi V
Management Reporting

Example of two routine reports are:

1. Statement of Production

2. Statement of Expenses

(b) Special Reports:

The management may confront some difficulties and routine report may not give
sufficient information to tackle such situations. Under such circumstances, special
reports are called for. Special reports are required for special purposes only.

These reports are prepared according to the need of situation. Available accounting
information may not be sufficient, so data may have to be specially collected.
There may be need to put extra staff for compiling these reports. It may also
involve co-ordination of different departments and different levels of management.
According to J. Batty33 special reports should be divided into sections each
covering the following main purposes: 1. Reason for the report 2. Investigation
made 3. Finding a conclusion and recommendations.

16
Prof. Lakshmi V
Management Reporting

Special reports may deal with following topics:

(i) Information about market analysis and methods of distribution of competitors.

(ii) Technological changes in industry.

(iii) Problems about the purchase of materials.

(iv) Reports about change in methods of production and their implications.

(v) Trade association matters.

(vi) Report by secretary on company matters.

(vii) Political development at home and abroad having impact on business.

(ix) Report effect of idle capacity on cost of production.

(x) Make or buy decisions.

(xi) Report most suitable method of raising funds.

(xii) The effect of labour disputes on production and cost of production.

(xiii) Report on general economic forecast.

(xiv) Feasibility study for a project.

(xv) Report on effect of change in Government Policy.

Reports for Management Type # 4. Classification of Reports on the Basis of

Functions:
According to function the reports may be divided into two categories:
(a) Operating Reports

(b) Financial Reports

(a) Operating Reports:

These reports provide information about operations of the concern.

The operating reports may consist of the following:

(i) Control Reports:

17
Prof. Lakshmi V
Management Reporting

These reports are used for management control purposes. They are intended to spot
deviations from budgeted performance without loss of time so that corrective
action can be taken. Control reports are also used to assess the performance of
individuals.

(ii) Information Reports:

These reports are prepared to provide useful information which will enable
planning and policy formation for future. Information reports can take the form of
trend reports and analytical reports. Trend reports provide information in
comparative form over a period of time. Graphic presentation can be effectively
used in trend reports. As opposed to trend reports, analytical reports provide
information in a classified manner about composition of certain results so that one
can identify specific factors in the overall total.

(b) Financial Reports:

These reports provide information about the financial position of the concern on
specific dates or movement of finances during a specific period. The Balance Sheet
provides information about a concern on a specific date. On the other hand Cash
Flow Statement provides data about the movement of cash during a particular
period. These reports can be either static or dynamic. Balance Sheet and other
subsidiary reports are examples of static reports; Cash Flow, Fund Flow
Statements and other reports showing financial position as compared to the
budgeted are examples of dynamic reports.

18
Prof. Lakshmi V