Responsibility Accounting: An Important Device for Control and Performance Evaluation

 Q. “Responsibility Accounting is an important device for control.” Discuss. 

Ans. Meaning of Responsibility Accounting: Responsibility accounting is a specific technique of managerial control wherein responsibilities of various individuals or groups are identified in terms of work, revenue or cost so that the concerned person or group may be held responsible for cost variances, if any. Responsibility accounting refers to the various tools used by managerial accountants to measure the performance of people and departments in order to ensure that the achievement of the goals set by the top management. Therefore, responsibility accounting represents a method of measuring the performance of various departments of an organization.

In the words of William, L. Ferrara, “The essence of responsibility accounting is the accumulation of costs and revenue according to areas of responsibility in order that deviations from standard cost and budgets can be identified with the person or group responsible.”

VK. Responsibility Accounting is an important device for control. It means that responsibility accounting is used as a controlling device by top management for controlling the performance of managers. The performance is constantly compared to the standards set and it is very useful in exercising cost control. The statement “Responsibility Accounting is an important device for control.”  is clarified by the following facts:

(1) Decentralisation of Decision Making: It enables the management to consider the organisational structure to result in effective delegation of authority and placement of responsibility. So, it enables the manager to take right decision.

(2) Better System of Control: This system enables the management to delegate authority to responsibility centers while retaining overall control with itself. It is used as a controlling device by top management for controlling the performance of other managers.

(3) Comparison of Performance: In this system, the organisation has divided into various responsibility centres and each centre is responsible for its costs. The actual performance of each responsibility centre is regularly measured and compared with the budgeted figures. It encourages the setting of realistic goal. 

(4) Helpful in Planning and Decision-Making: Responsibility accounting helps not only in control but in planning and decision making also.

(5) Improves Performance: This is a system of accounting in which cost data are reported to managers of various cost centers. In this system, budgets are prepared and actual performance is recorded and reported to the top management. The assigning of tasks to the managers of different centres act as a motivational factors.  It is rightly said that “the aim of responsibility accounting is not to place blame. Instead, it is to evaluate performance and provide feedback so that future operations can be improved.”

(6) Responsibility accounting system makes easy in application of Budgetary Control System.

(7) On the basis of this accounting system, the control system may be introduced more effectively and efficiently. 

(You have to write importance of Responsibility Accounting in this question.)

Q. “The aim of responsibility accounting is not to place blame. Instead, it is to evaluate performance and provide feedback so that future operations can be improved.” Discuss.

Mention this in last. 

Hence, The aim ........... Modify as per question.

Bases for Market Segmentation in industrial markets.

 Q. Explain in detail various bases for market segmentation. 

Ans. Division of market into several segments is called market segmentation. Two broad classification of segmenting market are macro segmentation and micro segmentation. This is the one of the most common methods applied in industrial markets.

Bases for Market Segmentation in industrial markets.

1. Macro Segmentation: The macro bases of segmentation are based on the industry and organizational characteristics. Organizational characteristics include demographics, end-use markets, product applications, etc. This information can easily be collected by the industrial marketer from the secondary sources and also from the marketer’s information system. These macro variables are :

I. Industry Characteristics: An industrial marketer must list down industries, the product or service can be sold to. An industry has a unique requirements of products, purchase in a particular manner and requires certain level of quality of the product. Therefore, it is important that a company makes an in-depth study of the requirements of the industry before it starts to woo companies of that industry.

II. Organizational variables: Following features are included in this part:

(a) Organization size: The organization size is one of the most practical and easily identifiable criteria. 

(b) Geographic Location: Geographic location informs a company in detail about the culture as well as the communication requirements. It also relates to culture, language and business attitudes. For example, a company would adopt a different bidding strategy for an Asian customer with an American customer. 

III. Customer Variables: These includes the following:

(a) Level of Competition: The level of competition in the customer’s industry plays an important role in the segmentation of the industrial markets. If the market competition is higher, then it will not attract the newcomers. 

(b) Purchasing Decision: This criterion can only be applied to newcomers. In cases of long-term relationship, which is usually the objective of most industrial businesses, the qualified supplier is normally aware of the purchase requirement.

IV. Application Variables: Following variables are included in this:

(a) Product Application: Various products are used in different ways. For example, the small electrical switches are used in the production of small household appliances, computers, televisions, etc. Hence, markets can segmented on the basis of product application.

(b) Purchasing Situation: Another real life criterion for the market segmentation is the purchasing situation. The purchasing situations can be classified as new task, modified re-buy or straight re-buy. Due to increased competition and globalization in most of the established industries, companies are focusing on small number of markets, analyze them and then establish long-term relationship with the customers. This is because they believe that it is cheaper to keep an existing customer than to find a new one. Analyzing purchase situation helps the companies to maintain good relations with their customers.

Purchase Situation Variables: The following are the different purchase situation variables:

(i) Purchasing Policies: Market segmentation may also be based on the purchasing process of the customers. While some customers prefer agreement based on supplier’s cost, other purchasers negotiate from a market based price. Some also use bids or prefer to take on lease.

(ii) Purchasing Criteria: Market can be further segmented on the basis of the purchasing criteria employed by the buyers across organizations. This criteria can be performance, economic, integrate, adaptive or legalistic criteria. This criteria vary in their degree of importance, depending on the purchase situation.

(iii) Organization of Purchasing Function: The organization of the purchasing function to some extent determine the size and operation of a company’s purchasing unit. While in some buying, centers plant managers and top managers would be involved, in some others, the external sources of expertse would be depended upon for making purchase decisions.

(iv) Inventory Requirements: Segmentation can also be made on the basis of inventory requirements of the various firms. Organizations can be segmented so as to avoid targeting those customers whose inventory requirements cannot be met. However, if the supplies are capable enough, then markets that use MRP and JIT systems can be targeted. Search targets are required to be highly competent.Suppliers who can deliver defect free products,  on time and on a regular schedule basis. 

2. Micro Segmentation: Micro segmentation include the understanding of markets, market information, decision making unit, etc. This type of segmentation requires the collection of large amount of primary data. “Micro segments are homogeneous groups of buyers within the macro segments” (Webster, 2003). Following are the basis of micro segmentation:

I. Purchasing Objectives: The objectives of purchasing are different from organization to organization. Companies have different purchasing philosophies. Large organisation stresses upon quality as well as service, on the other hand, the small organization look for better bargain and discounts. Further, the order supply, quality and servicing are also essential variables. If marketers are not able to meet the requirements of buyers, they should avoid such customers. 

II. Choice criteria: A company’s choice criteria will depend on how it has decided to compete in its own market. Therefore, a buyer will not Budge on quality because it is making a premium product and another will not budge (change one’s position, opinion or demand, especially unwillingly / compromise on price) on price because it is making a value for money product. A seller needs to understand what each of its buyer is trying to achieve. The buyer who is buying premium products will be willing to pay a higher price if the seller offers ti increase the quality of its products, and the buyer who is buying value for money products will be willing to buy products of lower quality if the seller offers to reduce its price. Therefore, a seller needs to have different marketing mix when its buyers have different choice criteria, and salespeople will need to emphasize on different benefits with different clients.

III. Buying Decision Criteria: It includes product quality, delivery,  technical support, price, supply continuity. The marketer miĝht divide the market based on supplier profiles that appear to be preferred by decision-makers, e.g. high quality, prompt delivery, premium price vs. standard quality, prompt delivery, low price.

IV. Structure of the Decision-Making Unit: It can be one of the most effective criteria. Buying in an individual unit is done by the group of members and is not the task of an individual. There are multiple factors which affect the buying as the members can be different from different departments like marketing, production, engineering, research and development and also purchase. So, when marketer understands the members involved in purchase, it can lead to the identification of meaningful segment.

V. Personal Characteristics: Decision-making is done by the human beings and the personal characteristics of the decision maker play a great role in this process. So, it is also possible to segment the market on the basis of the personal characteristics of the individuals involved in purchasing. For example, segmentation can be done on the basis of demographics, personality, non-task motives, individual perceptions and risk management strategies. But the problem in this basis is that data would be literally impossible to obtain.

VI. Evaĺuating Potential Segments: Industrial markete has an array of segmentation variables to choose from. Research may be worthwhile to identify the most appropriate of those variables. Moreover, since customer’s need and competitor’s activities are constantly changing, a marketer must review his segmentation strategy periodically. After identifying target segments, the marketer must access their profitability by differentiating the marketing program to each multiple target segments.  Hence, a first approximation of cost benefit analysis is necessary before a detailed segment issue analysis is begun. The potential profit and competitive situation of various segments may then be evaluated. 

VII. Market Profitability Analysis: Four primary elements are involved in analyzing the profitability of any potential segments:

• Market potential, the most optimistic estimate of the amount of product that an entire market will purchase in a given period of time.

• Sales potential, the most optimistic estimate of company's share of market potential in a given time period.

• Sales forecast, the estimate of a company's expected sales in a given time period.

• Profitability, the differences between potential renew and the cost of serving and manufacturing customers. 

Purchasing: Meaning and Principles of Purchasing

Q. What do you mean by Purchasing ? Explain the principles of purchasing.

Ans: MEANING OF PURCHASING: Purchasing is the process of buying material, parts and components, etc., in the right quantity at right time and place for the production of goods. The term purchasing is used in two senses– narrow sense and broader sense. In narrow sense, it means to buy an item and in broader sense it means a manerial activity including planning and policy formulation.

According to Prof. K. Shridhara Bhat & Sowmya R. Rao, “Purchasing refers to the functions of procuring of materials, supplies, machines, requirements, tools, spare parts and services required for meeting the needs of production department and maintenance department.”

As per Prakash Jai, “Purchasing is defined as the activity of acquiring goods and services at optimum cost from a competent and reliable source.”

Purchasing should not be confused with procurement. Purchasing is a narrow term and is included in procurement. Procurement is a broader term and includes the total responsibility of acquiring goods and services. Procurement include additional activities such as supervision, inspection, inventory control, etc. in addition to purchasing.

PRINCIPLES OF PURCHASING: Purchasing is the most important function in all types of firms whether it is small or large doing manufacturing or trading etc. Therefore it is essential that certain principles should be followed at the time of purchasing. These are:

1. Right Quality: Right quality means the suitability of item for the purpose (for which) it is required. It may either be of low quality, medium quality or best quality as per the product to be manufactured. Quality of the final product will depend upon the quality of the input. The quality of the item is expressed in terms of grades. The quality of the materials may be measurable or attributable. The quality can be measured by physical tests or checking, chemical analysis, etc. Use of brand name, standardising specification like height, weight, etc., can be helpful in maintaining quality of materials. The quality needed are specified by the concerned departments.

Factors Affecting Quality: The cost is the major factor which can affect the quality. The parum has to price the product keeping in view the competitors. Therefore, the purchase department cannot purchase the high priced quality items. The second factor is the suitability. A high quality item may not be suitable for production.

2. Right Quantity: The second principle is, purchasing the material in the right quantity. Right quantity refers to the quantity that may be purchased at a time with minimum total cost. When a purchase is made then two types of costs are to beard – one is carrying cost and the another is ordering cost. The purchase manager should maintain a balance between the two to keep the cost of material at minimum. Simulultaneously the material should be made continuously available so that stock short costs could be avoided. Therefore , the purchase manager should use his knowledge, experience and common sense to determine the right quantity.

Classification of Quantity: The order quantity can be classified into three classes:
(a) Economic Order Quantity (EOQ): It helps in determining the right quantity of material. The following formula is used to determine the EOQ.



(b) Bulk Order Quantity: Bulk order quantity means the large quantities. This quantity will be more than the EOQ. It gives the advantage of discount or low prices but increases the carrying and storage cost. 

(c) Arbitrary Order Quantity: the future is uncertain and there may be varying market conditions, uncertain availability of material and funds, uncertain lead time, uncertain consumption. Thus in those cases, the purchase manager has to apply its own discretion and order the material in varying quantities from time to time.

Factors Affecting Quantity: There are different factors like cost of mederial, nature of material, manufacturing process, storage capacity, market conditions, availability of funds, etc., affect to the purchasing quantity.

3. Right Price: The right price doesn't mean the lowest price rather, it is the price which provides value for money. The cost structure of the product can guide to arrive at right price. The right price is that lowest possible price where the item is available as per standardised quality. The right price may differ from person to person, item to item, etc. Although the right price is an individual opinion yet it depends not only on market conditions but also on knowledge of price movements. 

Factors Affecting Pricing: There are certain factors like quantity, quality, delivery time, life of the material, demand and supply curve, competition, discounts, terms of purchase, business relations, after-sales service, etc. which affect the pricing of the product. While making purchase, these factors should be kept in mind to determine the right price.

The organisations generally follow the tender system for making purchase. For obtaining the right price, the following documents can be referred.

(i) Catalogue price

(ii) Quotations

(iii) Previous purchased records

(iv) Letter of offer from supplier

(v) Prevalent market price.

4. Right Time: The time at which the purchase should be made is very important. The right time means the time at which the item should be made available. The right time of making order depends upon the lead time. Lead Time is the time between record recognition of the need and the item available for use. The right time will be the time when the stock reaches the minimum level. The inventory cost involves carrying cost and it goes on increasing in case of holding more stock than required. It will also block the capital of the firm. The chance of waste and obsolcence will also increase. Therefore the concept of right time is very important. 

Factors Affecting Right-Time: The following factors affect right time.

(i) Lead time

(ii) Re-Order Level

(iii) Production cycle

(iv) Market Conditions 

(v) Contingencies 

Today many options such as integrated supply, vendor-held inventory, just in time and other practices are available which require more up-to-the minute supplier flexibility than just meeting a date on purchase order as was in classic delivery model.

5. Right terms or Right Contract: The purchase order, issued by a firm for making purchases, is a legal contract. This contract binds the seller and the buyer with the terms and conditions mentioned on it. Actually the terms and conditions should be mentioned on the quotation letters and tenders. These terms and conditions may be regarding insurance, sales tax, octroi, freight, excise duty, custom duty, etc. Sometimes the terms and conditions mentioned in the contract may too hard to complete. In that case, the suppliers may not send their quotations, etc. 

It decreases the number of suppliers and ultimately the bargaining power of the buyer decreases. It is desirable that separate policies should be followed for making contracts of capital goods and raw materials. The terms and conditions of the contract should not be one-sided and unreasonable.

6. Principle of Right Place: It will be appropriate for the buyer to have the products at the right place. The right place means the place which is most convenient to him from the view point of location of store houses or the place of production or place of plant location. It will help in reducing the cost of internal freight and time. It will also save the items from deterioration due to repeated handling. 

7. Principle of Right Mode of Transportation: Right mode of transportation needs to be identified as this includes the critical cost profile of an item. 

Factors Affecting Right Mode of Transportation: There are three main factors which affect the transportation. These are:

(i) Cost

(ii) Time

(iii) Availability of Alternating Modes. 

Sometimes the material needed to be transported urgently or the nature of material is perishable. Then the week for cost effective mode cannot be opted and has to be sent immediately. Otherwise the least cost mode of transport can be chosen. The availability of alternative modes of transportition is also important and the buyer should have the knowledge of alternatives available. He should make a comparison of costs, schedules, merits and demerits. The transportation affects the quality of service to customers also. If the delivery is made on time to customers, then it will help in improving the image of the concern also.

8. Principle of Right Source: Source means from where the material can be procured. Thus, source is the other meaning of supplier. Selecting the right source or supplier is an important consideration in the materials purchase procedure. Therefore, the purchase manager must investigate and evaluate its possible external suppliers for the specific materials. It is necessary to assess their legitimacy, evaluate their performances, technical abilities and costs. Thus, purchasing department tries to select a responsible and responsive supplier who can provide the best combination of quality, quantity and price at the same time. In addition to that, the delivery time and ability to provide material on time should also be carefully evaluated.

For routine purchases, the purchase department maintains a list of suppliers from whom the purchase may be made. If the purchase is made for the first time for an item, then the suppliers are to be evaluated.

Types of Source: The types of sources are as follows:

(i) Sole Sourcing: It means only one supplier is available. It may be due to several reasons such as technical specification, raw material, location and so on.

(ii) Single Sourcing: It means the selection of one supplier for an item from the several sources available.

(iii) Multiple Sourcing: It means to purchase an item from more than one supplier. It helps in continuity of supply and the lowering of prices due to competition. 

Factors Affecting Selection of Source: The factors like (i) Technical ability (ii) Manufacturing capability (iii) Reliability (iv) After sales service (v) Supplier location (vi) JIT capability (vii) Price and (viii) Other considerations affect the selection of source.

Types of suppliers: The suppliers may be of following types:

(i) Manufacturers 

(ii) Distributors or Commission Agents

(iii) Stockist or wholesalers

(iv) Retailers

Purchasing: Meaning and Principles of Purchasing

Q. Write short notes on the following : (a) Working partner and his remuneration. (b) Assessment as a Firm u/s 184.

Q. Write short notes on the following :
(a) Working partner and his remuneration.
(b) Assessment as a Firm u/s 184.

Ans. 

(a) Working partner and his remuneration 

‘Working Partner’ means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner. A non-working partner may be financing partner, dormant or sleeping partner. 

Sometimes, the amount of remunation payable to each working partner is not specifically is stated in the partnership deed. It contains only the fact that the “ Working partners shall be paid the remuneration permissible u/s 40(b).” Similarly, in some cases it is mentioned in the deed that the remoneration payable to working partners shall be decided at the end of accounting year.

In this connection, the board has clarified that the partnership deed must specifically state the amount of remuneration payable to each working partner or how the remuneration will be computed otherwise no deduction will be allowed u/s 40(b) regarding remuneration to working partners. 

(b) Assessment as a Firm u/s 184

1. A firm shall be assessed as firm, if : OR A firm shall be assessed as firm if it satisfies the following conditions : 

(i) the partnership is evidenced by an instrument.

(ii) the individual shares of the partners are specified in that instrument. 

2. A certified copy of the instrument of partnership deed shall accompany the return of income of the firm for the previous year relevant to the assessment year in respect of which assessment as a firm is first sought.

3. If once a firm is assessed as a firm for any assessment year, it shall continue to be assessed as a firm for every subsequent year if there is no change in the constitution of the firm. 

4. If any change occurs in the previous year, the firm shall furnish a certified copy of the revised partnership deed along with the return of income for the relevant previous year. 

5. If there is, on the part of the firm, any failure to comply with the provisions of section 144 [viz., failure to file the return of income, failure to comply with the terms of a notice issued under section 142(1) or 143 (2)], the firm shall be assessed as a firm. In such a case the following provisions shall apply : 

(a) No deduction by way of payment of interest, salary, bonus, commission or remunration, by whatever name called, made by the firm to its partners shall be allowed in computing, the income chargeable under the head ‘Profits and Gains of Business or Profession’.

(b) Such interest, salary, bonus, commission or remunration shall not be chargeable to tax in the hands of partners under the head ‘Profits and Gains of Business or Profession’ u/s 28(v).

Assessment of firm u/s 185: [K.U 2012M] 

1. Where a firm does not comply with the provision of section 184 for any assessment year, the forum shall be assessed for the assessment year as a firm. 

2. No deduction by way of payment of interest, salary, bonus, commission or remunration, by whatever name called made by the firm to its partners shall be allowed in computing the income chargeable under the head ‘Profits and Gains of Business or Profession’.

3. Such interest, salary, bonus, commission or remunration shall not be chargeable to tax in the hands of partners under the head ‘Profits and Gains of Business or Profession’. [u/s 28(v)].

working partner remuneration assessment as firm section 184 185