What is meant by Management Accounting? Discuss its main tools and techniques.

 Q. What is meant by Management Accounting? Discuss its main tools and techniques.

Ans. MEANING OF MANAGEMENT ACCOUNTING: Management accounting is also known as Management-oriented Accounting, Management Accountancy, and Accounting for Management, etc. The term ‘Management Accounting’ represents a merger of two words ‘Management’ and ‘Accounting’. Management refers to the functions of planning, direction and control, etc. while ‘Accounting’ refers to record, compilation, analysis and presentation of various financial transactions. In this context that form or system of accounting may be called management accounting which provides all such accounting informations as are required by management for planning, direction and control of business activities.

DEFINITION OF MANAGEMENT ACCOUNTING: 

1. “Management Accounting is the presentation of accounting information in such a way as to assist management in the creation of policy and the day-to-day operations of an undertaking./ of the business.” 

— Anglo-American Council on Productivity

2. “Management Accounting is concerned with the accounting information that is useful to management.” 

— Robert N. Anthony

3. “Management Accounting is the term used to describe the accounting mehods, systems and techniques which, coupled with special knowledge and ability, assist management in its tasks of maximising profits or minimising losses.” 

—J. Batty

4. “Management Accounting may be defined as the application of accounting techniques to the provisions of information designed to assist all levels of management in planning and controlling the activities of the firm.” 

—John Sizer

5. “Any form of accounting which enables a business to be conducted more efficiently can be regarded as Management Accounting.” 

— The Institute of Chartered Accountants of England and Wales 

Thus, when accounting information are collected, presented, analysed, interpreted and reported to help the management in taking various decisions, then it is known as Management Accounting. Management Accounting is the process of identification, measurement, presentation, analysis, interpretation and communication of accounting information that assists the management in planning, decision making and control to achieve the organizational objectives. 

TOOLS AND TECHNIQUES OF MANAGEMENT ACCOUNTING: Some important tools and techniques are as follows;

1) Analysis of Financial Statements: Analysis of financial statements is a systematic process of critical evaluation of the financial information given in financial statements so that these informations may be understood properly. For the purpose of analysis individual items are studied, their relationship with other relevant figures is established, the data is sometimes re-arranged to have better understanding of the informa-tion with the help of various techniques or tools, such as (i) Comparative Financial Statement or Analysis, (ii) Common-size Statement or Analysis, (iii) Trend Analysis, (iv) Ratio Analysis, (v) Funds Flow Analysis and (vi) Cash Flow Analysis.

2) Cost Accounting Technique: Cost accounting and management accounting are closely related to each other. The data of historical costing available from cost records help in determination of costs of products, processes, job and operations and preparation of budgets.

3) Budgetary Control: It is a technique which uses budgets as a tool for planning and control. The budgets of all functional departments are prepared in advance, in which limits of expenditure and targets of functions are determined. The actual performance is recorded and compared with budgetary data and on this basis management can assess the performance of various departments and officers in the organisation.

4) Standard Costing: This costing occupies an unique place among the techniques of management accounting. Under this technique, standard cost of various elements of costs are determined in advance. Such determination is based on a systematic analysis of existing conditions. The actual costs are compared with standard costs. The variances, if any, are analysed, their reasons are ascertained and necessary corrective actions are taken.

5) Marginal Costing: Marginal cost is that cost which results in the form of changes in costs due to change in volume of production. Under marginal cost the total cost is divided into two parts— fixed cost and variable (marginal) cost. The management, on the basis of marginal costing, establishes relationship among cost, volume and profit and takes decisions in respect of various managerial problem, such as change in product mix, determination of optimum product mix, decision of make or buy, evaluation of sales promotion schemes, etc.

6) Decision Accounting: Decision-making is the core function of top management and for this purpose the technique of decision accounting is used in management accounting. Decision-making involves a choice of best possible option from various alternatives, viz., which model out of various models of machine should be purchased? Whether a particular item should be produced or purchased from the market? Whether a specific order received at a lower price should be accepted or not? Decision accounting considers financial implications of each alternative course of action and enables management to select the best course of action. Marginal Costing and Differential Costing are important components of decision accounting.

7) Revaluation Accounting: Revaluation accounting is used to denote the methods employed for overcoming the problems connected with fixed asset replacement in a period of rising prices. It is, therefore, also known as 'Replacement Accounting'. Under this method, fixed assets are shown at current prices also in addition to their historical cost so as financial statements may present true and fair view of the concern. The preservation of capital in the business is the main object of revaluation accounting and for this purpose the profits are calculated in such a way that capital is preserved in real terms.

8) Financial Planning: Financial planning involves management of finance according to objectives of the business concerned. This tool is applied to determine following financial policies— (i) amount of capitalisation, (ii) sources of capital, (iii) ratio of debt and equity, (iv) limits of short-term and long-term borrowings, (v) disposal of profit and retained earnings.

9) Control Accounting: Control accounting is not a separate accounting system but all those devices of accounting, which are used from the view of control, are collectively called as control accounting. In this context, standard costing and budgetary control both are the parts of control accounting. We can also include internal check, internal audit, statutory audit, responsibility accounting, etc. as a device of control accounting.

10. Managerial Reporting: It is an important tool of management accounting in which reporting is prepared from time to time on the basis of analysis of various informations and thereafter they are communicated to different levels of management. It may be mentioned that timely reporting and effective communication is the essence of management accounting.

11. Management Information System (MIS): With the development of electronic devices for recording, classifying and communicating data MIS has become an important technique in management accounting

12. Quantitative Techniques: Now-a-days many such quantitative techniques are also being used which are based on mathematics and statistics. Some of such techniques are: (i) Operational Research, (ii) Linear Programming, (ii) Games Theory, (iv) Queing Theory, (v) Network Analysis, (vi) Simulation Theory.

What is meant by Management Accounting? Discuss its main tools and techniques.

Management Accounting means accounting designed for the management, i.e. accounting which provides necessary information to the management for discharging its functions. It is basically concerned with presentation of accounting information in a manner which can assist the management in the creation of policy and in the day-to-day operations of an undertaking. Its aim primarily is to assist the management in performing its functions effectively.

Meaning of Sales Organisation. Steps in setting up Sales Organisation.

Q. What do you mean by Sales Organisation? Explain the various steps in setting up Sales Organisation. 

Ans. MEANING OF SALES ORGANISATION: Whenever two or more persons perform activities for the purpose of achieving any objective together, a necessity to distribute the work among them arises and the coordination between the different activities is made. The organising element is required to fulfill this necessity. Thus, organization is a coordinated effort of different individuals working in an enterprise to achieve its goals. Industrial marketing organisation in an enterprise means the integration and coordination of individual marketing efforts to achieve the cherished goals of the business enterprise. Industrial marketing organisation is a time tested mechanism that enables people to live and work together. With the help of industrial marketing, organizing the task is allocated among the employees according to their specialization. Each employee gets the work of his own interest and therefore, they perform their work efficiently. This leads to the expansion and growth of the business enterprise.

DEFINITIONS OF INDUSTRIAL MARKETING ORGANIZATION

According to C.L. Bolling. “An industrial marketing organization is one where functions of marketing department have been carefully planned and coordinated towards the objective of selling the product to the customers, the whole efforts being effectively supervised and managed so that each function is carried out in the desired manner.”

According to H.R. Tosdal, “An industrial marketing organization consists of human beings working together for the marketing of products manufactured by the firm or marketing of commodities which have been purchased for resale.”

STEPS IN SETTING UP SALES ORGANISATION: 

1. Setting the Objectives: The first step in the process of setting industrial marketing organization is to set its objectives. Top management defines the long term objectives for the enterprise like profit maximization, improving reputation, increasing size of enterprise, etc. Marketing department sets specific objectives for achieving the long term objectives set by the top management. These objectives can be: (a) To increase sales, (b) To control selling expenses, (c) To increase market share, (d) To increase profit through customer satisfaction.

2. Defining Necessary Marketing Activities: After having learnt about the objectives of the marketing organization, necessary functions are required to be performed to achieve the determined objectives. The necessary marketing activities can be personal selling. sales promotion, publicity, advertising, marketing research, distribution of goods and services, etc.

3. Grouping Marketing Activities into Jobs, Positions: After identifying various marketing activities to be performed to achieve marketing objectives, the next step is to classify and group the similar and related tasks into various jobs or positions. Some of the marketing activities are crucial in nature; these are classified as high level jobs. Others are of routine nature and are classified as lower level jobs. For proper coordination and control, jobs of similar nature are brought together to form departments.

4. Assignment of Duties: After dividing the various activities into different positions, various persons are assigned the charge of these positions. The jobs are is assigned to the marketing personnel according to their capabilities and specialization. While assignment of job, the principle of 'right man on right job' is followed. The work to be performed by every individual is clearly defined and made known to him. In order to avoid misunderstandings, duplication or overlapping in the work, every one should know what he is required to do.

5. Establishing Reporting Relationship: In this step, every individual is given the authority required to carry out the responsibility assigned to him. A hierarchical structure, i.e., a chain of command is created through successive delegation of authority. Reasonable powers are delegated to heads and supervisory staff to enable them to do their task with ease and efficiency.

What do you mean by Sales Organisation? Explain the various steps in setting up Sales Organisation. 

Material Management: Functions, Challenges.

 Q. Discuss the functions of ‘Materials Management’. Mention the challenges of Materials Management in today’s competitive business. 

Ans. Materials management is ideal for industries who track the flow and manage the materials in their enterprises. The functions of materials management are as follows: 

1) Material Requirement Planning: The material require planning includes production scheduling and inventory control. It is a control system through which adequate inventory levels can be maintained to assure the adequate and required material can be provided as and when needed. This is not suitable for job shops or for continuous processes that are tightly linked with each other. MRP system meets the following three objectives:

i) To ensure that materials are available for production and products are available for delivery to customers.

ii) To maintain lowest possible level of inventory.

iii) To plan manufacturing activities, delivery schedules and purchasing activities.

Or 

The basic function of material management is material requirement planning. This planning can be done with the help of computer and it includes production and inventory control scheduling.

2) Purchasing or Procuring of Materials: The materials department is supposed to provide the right material at right time in right quantity at right price. The department should procure the material from the right source. For this the materials department is to select the best sources of supply from the available alternatives. 

3) Storage of Materials: Once the material is received, its physical control, preservation, minimization of obsolescence, loss or theft or damage should be safeguarded through efficient handling. Proper records should be maintained and stocking is done in stores at proper locations. Storing function also includes inspection of material purchased and issuing of materials. This function also includes coding of items, preparing indexes showing code number and place or room number or godown number or cupboard number or preparation of bin-cards etc. 

Or 

The storage of various types of materials and spare parts as inventory is very important before delivering it to the end users and to different production centres for use by them. Proper records....... same as above.

4) Issue of Materials: Issue of materials mean supply of material from store to those various departments of the organisation who demands it. For this purpose, the department is to submit requisition slip to the store. On the basis of requisition slip, the storekeeper will issue the material to the concerned department.

5) Inventory Control: Inventory control involves the procurement, care and disposition of materials. Inventory includes raw materials, work-in-progress, and finished goods. The reasons for inventory control may be for maintaining the continuity of production and sale, minimising the stock-out cost, controlling the investment of working capital in stock, etc. Therefore, it is necessary to ensure the sufficient goods on one hand to avoid stock-outs and the safeguard the wastage of material on the other to protect the capital. Different techniques like EOQ, minimum and maximum stock levels, reorder level, ABC analyses, stock register, etc., can be followed. The process of inventory control involves the following:

(i) Determination of optimum levels of inventory,

(ii) Determination of level of control required.

(iii) Designing the inventory control system

(iv) Establishing the inventory control organisation.

6) Material Handling: After receiving the materials, the stores incharge has to check the weight and inspect the quality of them. If it is found right, then he stores them properly so that it can be issued to factory when needed for production. Material handling involves movement, packaging, transfer and delivery of materials starting from receiving of materials to final distribution of finished goods to consumers.

7) Disposal of Scrap: Scrap is the waste that either has no economic value or only the value of its basic material content by selling that. It includes wastage, spoilage, used and repairable tools, oils, equipment, etc. In addition, it also includes the obsolete parts. It is the duty of the materials manager to dispose off or selling of those materials by inviting tenders from scrap dealers or through auction.

8) Vendor Evaluation and Vendor Rating: Under this system, evaluation of a supplier is

done through recording and ranking of performance in terms of a variety of issues including quality of materials and delivery performance. This process is necessary for effective purchasing. Vendor rating is the result of a formal vendor valuation system vendors or suppliers are given standing, status or title according to their attainment of some level of performance such as delivery, lead time, quality, price, etc. The purpose of vendor rating is to improve the quality level of the suppliers performance and to use the results of the evaluation in the qualification system and when awarding contracts.

9) Purchase Analysis and Research: Analysis  and research in the purchase is the systematic investigation of all related aspects. It also includes the investigation of all sources of supply and selection of best and suitable material from the various available materials. This function also includes the analysis and research of the fact that how the prices of materials can be reduced and the quality can be improved. What can be the alternative sources of supply in case of short supply of material, etc.

10) Transport and Traffic Management: Materials manager supervise many aspects of transportation systems including planning, logistics, maintenance and repair. These managers focus on getting materials, people and goods from one place to another while considering safety, efficiency and cost. Transport management helps in enlarging the market for finished goods. Under the transport management, the materials manager has to arrange the safe, rapid and economical transportation for incoming and outgoing materials. It will help in increasing the number of perfect orders, improve the quality of customer service, etc.

CHALLENGES OF MATERIALS MANAGEMENT: The materials management has to face the following challenges: 

1) What to Stock?: The first and the most important challenge faced by materials management is what items need to be stocked? Which items are available on demand and which are not available. Whether the goods can be arranged from alternative vendors or not. 

2) How Much to Stock?: After deciding the goods to be stocked the materials manager has to decide how much stock is to be maintained in the store. For this purpose, they have to calculate minimum and maximum inventory levels, reorder points safety stocks economic order quantity, etc., for each type of raw material separately. 

3) Inventory Turnover: Inventory turnover ratio is very important from the view point

of profitability and liquidity. Higher ratio indicates that the less amount is locked up in inventory and as quickly as the stock is converted into sales, it will result in profits. Therefore materials management has to fix the desired turnover ratio. They also have to develop the techniques for improving the ratio without impacting maintenance and operations.

4) Forecasting of Demand: Materials planning is done on the basis of short-term sales forecast. Hence the materials planners have to always find out how much material will be required because neither the material supply should be in short nor in excess.

5) Government Policies: If the material is to be imported from other countries. Then the materials department may have to depend on the import policy of the government, foreign exchange availability, credit availability, etc.

6) Scarce Financial Resources: Scarce financial resource is the another challenge for materials management as on the one hand money/finance is limited and on the other hand sufficient material should be available for production on right time. Thus the materials manager has to maintain the balance between the two and has to arrange the material within limited resources.

7) Storage Space: Storage space is the another challenge for materials management. As everyone knows the prices of land and building are rising, therefore the management may allocate a little space for storage. The materials manager has to keep the stock of raw-materials and spare parts in the allocated space.

8) Obsolete and Surplus Material: The presence of obsolete and surplus material is a problem for all the companies. Obsolete materials may exist due to change in engineering activities. Whereas surplus material may be due to over procurement, uncontrolled production operations and inefficiency. In both the cases firm has to bear the expenses for space as well as for wastage of material. The materials manager has to plan for reducing such type of costs.

9) Selection of Appropriate Vendors: The another challenge for materials manager is the selection of appropriate vendors. Evaluation of suppliers is a process that leads companies to select their desired suppliers. It has two objectives, to reduce all costs of purchasing and to increase the overall value of engineering. Thus the materials manager has to maintain a balance between the cost and quality.

10) Managing Information: The materials manager has to keep himself updated always regarding new materials, new spare parts, new machinery, new techniques so that they could be implemented in the organisation.

Discuss the functions of ‘Materials Management’. Mention the challenges of Materials Management in today’s competitive business. 

Best Judgement Assessment.

Q. What is meant by the expression ‘Best Judgement Assessment’? Under what circumstances can recourse be had to this method of assessment? Are there any remedy open to the assessee against such assessment? 

Ans. MEANING OF BEST JUDGEMENT ASSESSMENT: In Best Judgement Assessment, assessing officer should really base the assessment on the best of his judgement. The law states he must act honestly not vindictively (बदला लेते हुए). He must make fair estimate of the income for the proper assessment. For that, he must be able to take into consideration the local knowledge and repute in regard of assessee’s circumstances and his own knowledge regarding previous returns and assessments of the assessee and other matters which he thinks will help him in making proper assessment. It is purely a guess work. It is also known as ex-parte assessment. If appeal is file against Best Judgement Assessment, the assessing officer shall have to disclose the basis of a judgement befote appellate authority. 

Best Judgement Assessment can be compulsory or discretionary. 

Compulsory Best Judgement Assessment: Sec. 144 empowers the Assessing Officer to make assessment to the best of his judgement in the following circumstances:

(i) Where assessee has failed to file voluntarily return u/s 139(1) or no return has been made in response of the notice of the Assessing Officer.

(ii) Where there has been failure to comply with the terms of notice issued u/s 142(1) requesting the assessee to produce the books of accounts or he fails to get his accounts audited u/s 142(2A).

(iii) To verify the correctness of the return, assessing officer serve the notice upon the assessee u/s 143(2) asking him to attend the office or to produce the evidences in support of the return but the assessee does not comply with the terms of such notice. 

Consequences of Best Judgement Assessment: There are four consequences of a Best Judgement Assessment: 

(i) The assessee becomes liable to penalties u/s 272A. 

(ii) The assessee becomes liable to prosecution u/s 276CC and 276D.

(iii) A refund may not be granted.

(iv) The assessee is prevented (रोक दिया जाता है) from bringing on record any new facts before the appellate authority if appeal is filed under best judgement assessment. 

Remedies against Best Judgement Assessment: If assessee is in opinion or feels that excess tax has been imposed by the assessing officer then–

(i) He can appeal to the Commissioner (appeal) against the order of assessing officer.

(ii) He can appeal to the Tribunal against the order of Commissioner (appeal).

(iii) He may go to high court.

(iv) He may apply to the Commissioner for revision.

Discretionary Best Judgement Assessment: If assessing officer is in the opinion that the accounts maintained by the assessee are incorrect or no proper system employ for maintaining accounts ot income has not been computed in proper way, he can make the assessment at his own discretion.