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Does IT strategy of your company influence your career ?

Saturday, October 4th, 2008

Management Accountants are known for strategic accounting rather than doing mundane things. The Canadian Management Accountants recognise themselves as “Creative Accountants”. Yes, internal accounting is like that. A product may show profit by applying overheads in the traditional way but may go into loss when applied the concepts of ABC.

Do you feel advances in Information Technology has direct influence on Management Accounting ?

I have posted the point on http://cmaindia.informe.com forum and views of members are as follows:

Rajendra Patil of Appsconsulting

My primary answer would be ‘YES”.

In various areas of management accounting, it is ‘essential’ to collect, calculate and present the data to the users. The advancement in the field of harware and software solutions has helped management accountant in a great way.

First example would be the ERPs. The regular job of the management accountants in manufacturing industries is to calculate the cost of the inventories. This has become very simple (or fully automated). So the professional can look into the other areas.

With the development of various tools to generate cubes, we can now ’slice and dice’ the data very easily and can use the tool to generate views to find the possible reasons for the business pains. Using the Business Intelligence (BI) solutions we can now use the information of profitability in other areas of Customer Intelligence solutions like Customer Segmentation, Cross Sell-Up Sell, Campaign management, Customer Life cycle costs etc.

B V Prabhakar also shared the same view

IT , has no doubt, revolutionised the Management Accounting.

ERP , such as SAP helps Management Accountant to prepare separate Financial Statements for Tax laws under Local GAAP and also under International Standards such as IAS/IFRS/US GAAP. The time taken by Accounting Groups for Monthly Closing Process such as Bank reconciliation, Inter-company reconciliation, FOREX Payables/Receivables reinstatements and Consolidation, is considerably reduced.

Ashutosh Gupta had concerns

With the advancements of IT in day to day life of management accountants whether the role of Accountant has been secondary to IT professionals ?

Management Accountants roles has gone a drastic change over the years. The role of accountants has enhanced with these IT tools where we have to work with operations and business. Our role is understanding the requirements of the business and designing the solutions that would help them in decision making. ABM, EVA is a good examples.where you require details for analysis.

This leads to another question:

As Management Accounting is directly influenced by technology, does IT strategy of the company influence your career ?

I feel it does. Just like how a company scans you by looking at your CV of your achievements in past, you should review the history of the company on how it has progressed till now. A general drive in improvement of the system indicates that you will be able to demonstrate your role as a Management Accountant.

E.g. long time back, I had a interview call from a large MNC in Hyderabad where they needed Business Analyst. I went through the interview process where they told me they were using SAP 3.1h when the world had moved to 4.6C. On enquiry about the upgrade, they said, it was not on their agenda in the near future. I had terminate the interview process since I did not feel that I would be able to progress over there with the ancient technology.

Exchange your thoughts and share your experiences on

Whether IT strategy of the company influence you as a Management Accountant? Should you continue with a company or look for another opportunity ?

Regards,

Santosh Puthran

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Financial Accounting e-book project - Dr D V Ramana & Team

Thursday, September 18th, 2008

Dr D V Ramana Ph.D, Professor, Accounting, Xavier Institute of Management, Bhubaneswar.

Dr. D V Ramana has converted his teaching notes into an e-book. This is opened for the students on a pilot basis to get their feedback and suggestions for improvement.

Visit http://www.accounting-ebook.com/

Unable to see the video. Click here

The e-book contains videos on various topics on finance. Dr D V Ramana would like inputs from you on this project. You will be glad to know that he is also working on IFRS e-book project.

I congratulate him for his efforts on Financial Accounting e-book and wish him All the best for his future projects.

PS: Dr Ramana is a subscriber of Management Accountant Blog. If you are interested to make a guest post on the projects you have undertaken or your article on specific topic that would help the readers, I would be happy to post the same on the blog. Please contact me.

Regards,

Santosh Puthran

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Beyond Budgeting - A radical proposition

Tuesday, September 16th, 2008

A radical proposition? - From The Beyond Budgeting Round Table (BBRT)

Budgeting, as most corporations practice it, should be abolished. That may sound like a radical proposition, but it is merely the final (and decisive) action in a long running battle to change organizations from centralized hierarchies to devolved networks. Most of the other building blocks are in place. Firms have invested huge sums in quality programs, IT networks, process reengineering, and a range of management tools including EVA, balanced scorecards, and activity accounting. But they are unable to establish the new order because the budget, and the command and control culture it supports, remains predominant.

10 reasons why budgets cause problems:

Budgets are time consuming and expensive.
Budgets provide poor value to users.
Budgets fail to focus on shareholder value.
Budgets are too rigid and prevent fast response.
Budgets protect rather than reduce costs.
Budgets stifle product and strategy innovation.
Budgets focus on sales targets rather than customer satisfaction.
Budgets are divorced from strategy.
Budgets reinforce a dependency culture.
Budgets lead to unethical behaviour.

There are twelve principles (two sets of six) that govern the Beyond Budgeting Model. One set relates to adaptive management processes and the other set relates to a devolved leadership.

Process Principles

The six principles of managing with adaptive processes are as follows:

Goals - set aspirational relative goals for continuous improvement, don’t negotiate fixed contracts
Rewards - reward shared success based on relative performance, not on fixed targets
Planning - make planning a continuous and inclusive process, not an annual event
Controls - base controls on relative KPIs and performance trends, not on variances against plan
Resources - make resources available as needed, not through annual budget allocations
Coordination - coordinate interactions dynamically, not through annual planning cycles

The results of applying these principles include setting aspirational goals, reducing gaming, encouraging ambitious strategies and fast response, reducing waste, improving customer service, and promoting learning and ethical behaviour.

Leadership Principles

The evidence from our cases is that there are six principles that leaders should adopt:

Outcomes - focus everyone on the outcomes, not on hierarchical realtionships
Processes - organize as a lean network of accountatble teams, not as centralized functions
Autonomy - give teams the freedom and capability to act, don’t micro-manage them
Responsibility - create a high responsibility culture at every level, not just at the centre
Transparency - promote open information for self-management, don’t restrict it hierarchically
Governance - Adopt a few clear values, goals and boundaries, not detailed regulations

The effects of these principles include: a clear governance framework leads to the acceptance of local decision making by front-line teams throughout the organization; a high-performance climate leads to sustained competitive success; the freedom to decide fosters innovation and responsiveness; team-based responsibility results in a greater focus on creating value and reducing waste; customer accountability builds more commitment to satisfying customers profitably; and finally, an information culture based on openness and “one truth” promotes ethical behaviour.

SAS can assist with the implementation of these principles as follows:

Target setting - obtain information on competitor activity and link to external databases
Strategy - make the update and maintenance of objectives and targets an easy process
Growth and improvement - build hypotheses and scenarios and test against capabilities
Resource management - track the life time cost and value of resources
Coordination - search for and use cause and effect relationships across business units and processes
Cost management - identify areas of cost which need attention through analysis (eg. Activity Based Costing) and data mining
Forecasting - create and maintain rolling forecasts
Measurement and control - implement a balanced scorecard with leading and lagging indicators
Rewards - track actual performance against targets
Delegation - maintain personal information portals.

SAS is the only software supplier that is capable of collecting, transforming, modelling, analysing and supporting the complex information needs of organisations. Our flexible framework adapts technology to the management processes - not the other way around.

Sources:

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Emerging role of Management Accountants in the New Economy

Friday, July 25th, 2008

This is a guest post by Mr. V R Kedia B.com FICWA. He is a practising Cost & Management Accountant from Mumbai

Shape of the things to come

Effect of LPG – Liberalisation, Privatisation, and Globalisation – Global competition, Fittest will survive, sub – optimal units have to die.
Size, strong balance sheets and a history of achievements are no longer guarantees of continued success.
Global competition – strategic alliance networks and massive engineering efforts place new demand on all professionals.
Many of old hierarchies will be replaced by flat structures.
Every organisation is undergoing a process of internal churning.
Employees will be judged by their delivery of agreed output and level of services, not on spending 8 hours a day attending their place of work.
Financial information will be considered as only one portion of the balanced scorecard of measures used in organisational decision making.
Knowledge will replace physical and financial capital as an organisations primary resource.
Knowledge and application of knowledge will create competitive advantage.
People will have to be accustomed to work in permanent stage of emergency.
More empowerment at the individual level.
Adoption of team based organisation.
Internet is rapidly transitioning businesses into real time.

Source: Megapixel

Present role of Management Accountants – Conceptions & Misconceptions

Cost and Management accounting system had often become of little importance to managers. Many regarded them as minor routine belonging to the accountants, used to evaluate stocks and prepare monthly results speedily.
There are all the obvious things to do: Statutory and Financial accounting, Taxation compliance, Funding, Management reporting and so on. All of this tends to be in the background; it just has to happen in any event. Management Accountants have not yet progressed more towards bridging the gap between managers and accountants and they have yet to concern more with looking towards the future – at where business is going and what is going to happen.
Very few conceptual modifications have been brought in, in the cost and management accounting in the last 40 years.
Cost is too important to be left to the cost and management accountant.

Futuristic role of Management Accountants

Most of us will be doing the job, which we have never learnt and quite different from what we have been doing so far
The illiterate of the 21^st century will not be those who cannot read and write, but those who cannot learn, unlearn and relearn.
We have to undergo the process of “Learning, Un-learning and re-learning” more frequently.
Industry will be requiring “learning” professional rather than “learned” professional.
Future will be “knowledge era”. So obsolesce of knowledge will be very fast and more visible among accounting professionals.
Management Accountant must re-orient its capabilities, otherwise he will be overtaken by other professionals.
Management Accountant has to be futuristic instead of provider of historic or current information. He should ask “how better” and help management in decision-making level and for performance improvement.
‘Imagination is more important than knowledge’. – Albert Einstein.
The responsibility of the management accountant is less on forecasting the future and more on contributing to its creation.
Management Accountant will more often play the role of a catalyst / changing agent rather than an accountant.
Management accountant will have to be more adaptable to be a versatile professional rather than an accounting specialist.
Quality of “leadership” will be more in demand than that of a “manager” or an accountant.
Out –cost ascertainment, product costing and cost control. In –cost management, activity-costing etc.
Re-positioning of the management accountant – make it more relevant and useful to the organisation.
Management accountant to change the “Accountant” from their name to information manager/Cost manager.
Shift from “informational” role to an “influential” role.
To develop alliance with- finance, MIS/IT, industrial engineering, corporate planning.
To actively participate along with managers in decision making and strategy implementation.
Change in mind-set from product profitability to customer profitability analysis.
No more a scorer of the cricket match – but to be manager advisor to develop appropriate strategy to win the match.
Management accountant needs to lead the effort in training managers to use accounting information along with balancing it with other key data sources.
FOREX and Treasury function will be important profit centres.

Training needs

“If you want to remain employed, you have to remain employable” – Jack Welch, CEO-GE.
Dilemma for the management accountant will be to either change or cease to exist.
Management accountant must learn fast, forget even faster and focus on winning.
Management accountant requires very different skills from those that accountants needed to fill the narrow role that has been adopted by many finance professionals over the last three decades.
Continuing Professional Education (CPE) programme be made compulsory by the institute for skill upgradation and aquiring the latest technology.
Able to work well under pressure.
Development of multi-disciplinary skill.
Good communication skill – oral, written and presentation and a team player.
Ability and drive to work against strict deadlines and targets.
Ability to work with minimum supervision and a busy and dynamic work environment.
Ability to prioritise multiple urgent tasks.
Possessing good public relations skill.
Adding a new skill to executive skill-set, every few years.
To develop expertise in new ‘Green Field’ projects like-

Infrastructure sector (Energy, Transport etc.)
Information and Communication sector
Service sector
Agro based industries

Source: National Geographic

Changes in tools and techniques

Target costing v/s. Historical costing.
Life cycle costing.
Activity Based Costing (ABC) – ABM.
Total Cost Management (TCM)
Business Process Re-engineering (BPR)
Benchmarking.
Kaizen costing.
EVA / CVA
Total Quality Management / ISO.
Cycle time reduction (time compression).
Supply chain management (SCM).
Just in time (JIT).
Elimination of dysfunctional activities.
Out sourcing and co-sourcing activities.
Defect prevention v/s. fault rectification.
Zero Based budgeting.
Traditional budgeting v/s. New budgeting (comparative Table enclosed).
Full year budget exercise v/s reactive rolling forecast (computer generated budgets are obsolete the minute they are printed).
Dis-continuity of time cycle – month end and year end- and to invent information system to handle multiple time horizons simultaneously.
Radical change in IT/MIS e.g.

Integrated database that meet the total business requirements (like ERP Software).
MIS that is accessible and easy to use by all staff.
Rich supply of information in the form of a variety of report.
MIS for decision-making.

‘It is never safe to look into the future with eyes of fear’. – E. H. Harriman.

‘My interest is in the future, because I am going to spend the rest of my life there.’ –

C. F. Kettering.

You can contact Mr V R Kedia on +9193241 80717 or email vrkedia@vsnl.com

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Business, Customer Value, Cost and Management Accounting

Friday, June 20th, 2008

This is a guest post by CMA Devarajan Swaminathan. He has over 10 years post qualification experience in Accounting, Auditing, Finance as well as Management Accounting. He is the proprietor of Devarajan Swaminathan & Co - Cost Accountants.

View CMA.Devarajan Swaminathan’s profile

My understanding of a BUSINESS: Back to basics

There is a customer: He has money

I am the supplier: I have the product.

The aim is to sell him my product in return for his money.

A business is not and cannot be more complicated than this. Everything revolves around this.

To do the above I have spent resources like financial, technical, physical, human to bring the product first at my doorstep and then to the customers doorstep. My aim is to sell my product and in turn take his money. The difference what we call PROFIT, is actually my earnings for (a) the efforts I have put (b) the risk I have taken.

How well I do the above is what holds the key to the success or failure of a business ?

The above is true when my product will sell. How about a scenario where my product does not sell? Not because there is no demand but because some one else sells the same or better product better than me and at a better price. I stand to loose the customer. This brings out the question what is the true value of my product and what is the true value of my customer.

PROFIT: Determined by the complex interplay of value, price and cost and its maximization are what every business tries to achieve. In other words maximization of the shareholders wealth, ROI and so on and so forth. The issue how does one go about doing this?

Source: Humming Bird

The reason for so much importance to the compliance is because of more and more weightage given to enhancing shareholder value rather than enhancing customer value. Although the irony its customer value that’s creating shareholder value. The sales value declared in the financial are taken for granted without any thought on how and why the sales value has been arrived at.

What is driving the sales?
We have a measurement of the shareholder value with all those EBIDTA, EPS, PV, ROI ratios. All these are meaningless unless we measure customer.
Do we have a measurement of CUSTOMER VALUE?
Cost based pricing and price based costing in my opinion are both insufficient.It should be customer value based costing and pricing.

In my opinion Customer value comes into play not when they are there but when they are not there. Most of the time the customer is taken for granted. Ask Dunlop tyres where they goofed up? Ask Mukand Steel where they goofed up? In fact we need to ask all those companies that were either closed down or are in the verge of closing down and the reason for the same. As the scale of operations increase the customer value increases significantly. E.g. I put a plant and mobilize resources to take my product to my customer for Rs. 10 billion. Tomorrow another player enters the market with a better product and better delivery capability due to which I loose my customers and my business, what is my loss, is my customer value.

Customer value is not the PROFIT per customer that I WOULD have earned but the LOSS per customer that I WILL incur if they are not there/ i loose them. How do I come down to a unit value is based on the capacity built up to serve customers. How well (efficiently and effectively) I either structure the Rs.10 billion or the customer base or both is what determines the cost, the premium that the customer is willing to pay for my product (which is based on his perception of the product value i.e. brand, quality, service, performance, resale value etc) is what sets my premium / margin and the addition of the two is my Price. This significantly varies between market segments. The day the business goofs up on cost structuring (which is a good quality product taken to the customer in the best possible manner and quickest possible time) and customer perception it’s got to loose both the customer and value.

The shareholders expectations is taken care by the generalists and compliance oriented accounting. In terms of money received, deployed and returns generated and reported. We as management accountants need to shift our focus from shareholders and bring it to customers for the sake of shareholders because business revolves around customers and not shareholders. Interests of shareholders are taken care automatically when the interests of the customers are taken care of. Vice versa is not true.

Management accountants as bean growers need to be customer/ business centric and focused. Strategy is how best I can add and create value to my customers and thereby my shareholders using management accounting tools and techniques. To do all that I have said above one needs to focus on management accounting, customer measurement, cost measurement, cost management and cost control. Once the focus shifts to customer value and cost, other things revolving what determines cost (i.e. financial, physical, technical and human resources) are automatically addressed to, managed and maximized. It thus adds value to the needs of the customer which in turn adds value to the shareholders.

Just a thought.

Your value additional thoughts, opinions, perspective solicited.

Regards,

CMA.Devarajan Swaminathan
Devarajan Swaminathan & Co.
Cost and Management Accountants

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Activity Based Management - Dispelling the myths - Part II

Monday, June 16th, 2008

This is a Guest Post by Rajendra Patil, Pune, India

Profile: A technocrat with 17 years of proven success in ERP Implementation, Business Analysis, Consultancy Assignments in Strategic Cost Management, Profitability Analytics, Performance Management and Business Process Management in conjunction with the enterprise wide BI solutions. Currently working as an independent consultant in the area of Performance Management and Profitability.

This is the concluding part of earlier post Activity Based Management - Dispelling the Myths - Part I

Myth: Cost systems play a limited role

Fact:

Traditionally this has been true and it has its own reasons. The calculations were not accurate. As it was based on putting overheads as ‘peanut butter’, it did not reflect the changes in the business scenario into the costs.

ABM benefits the organization in various ways like

Information for effective decision-making
Information to continuously improve processes and reduce costs
A focus on significant costs
A relationship between organizational cost and organizational value
Methods to measure performance with accountability
ABM can be used strategically to understand and improve profitability of the organization, operational performance and resource planning.

Myth: We cannot do anything about fixed costs;

Fact:

We can look at fixed costs in couple of ways

Fixed costs are fixed eternally. If we take into consideration a longer time horizon, then we can see the fixed costs are also changing. In that case we have to understand the reasons that are changing the ‘Fixed’ costs.
Fixed costs are generally attached with corresponding capacities. The investment should match with the required capacity. Alternatively the organization should look for the business that uses maximum if the installed capacity.
These fixed costs have to be taken to the products, customers or channels according to the ‘Cause-and-Effect’ relationship.

Myth: Only manufacturing costs are product costs; and Product costs are not useful for managing overhead activities.

Fact:

ABC is based on the ‘Cause-and-Effect’ relationship. The costs can be caused by product, customer, vendor, channel etc. We have to trace the expenses to the proper origin. This helps us to understand the relationship of the costs with the business scenario. With the help of this information we can take current business decisions as well as plan our costs in the future.

The companies that have implemented SAS Activity Based Management Solution

Lakshmi Machine Works
ING Vysya Life Insurance

On MS Excel

Kirlosakar Brothers
Thermax
Suzlon Energy
NCDEX
Wockhardt Hospitals
Kores
Syngenta
Merck
Crompton Greeves

If you have any questions on Activity Based Management and its implementation, you may post your comments on this blog post or write to Rajendra Patil on rajendra@appsconsulting.in on specific issues or concerns.

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Activity Based Management - Dispelling the myths - Part I

Friday, June 13th, 2008

This is a Guest Post by Rajendra Patil, Pune, India

Profile: A technocrat with 17 years of proven success in ERP Implementation, Business Analysis, Consultancy Assignments in Strategic Cost Management, Profitability Analytics, Performance Management and Business Process Management in conjunction with the enterprise wide BI solutions. Currently working as an independent consultant in the area of Performance Management and Profitability.

The list of myths on Activity Based Costing for discussion was posted by CMA.Siva Rama Krishna Srirangam. Rajendra Patil of AppsConsulting dispels the myths in two part series on the Management Accountant Blog and companies in India that have implemented ABM.

We have to understand the characteristics of the customers in each quadrant. We have to try to bring them in the ‘Top-Right’ quadrant.

Myth : All that we need are more cost centers;

Fact :

More cost centers would help you to get more accurate ‘Cost center accounting’. ABC is based on the ‘Cause-and-effect’ relationship. This causal relationship is lost when we try to relate the costs at various cost centers directly to the products.
When we use the ‘Cause-and-effect’ relationship, we understand that, the products are not the only entities that are causing the costs. With this reasoning we can segregate the costs as Product Costs, Customer Costs, Business sustaining Costs and Available to use Costs. Use this information to improve the performance of the organization.

Myth: Machine-hour systems save the time; and

Fact:

Machine hour system is related to the calculation of cost of production only. The experience has shown that we can take the cost of production from the conventional costing system. The accuracy is enough for the ABC models used for strategic decisions purpose. The accuracy of the production cost can also be improved, if needed using ABC. ABC is actually for assigning the ‘overheads’ with a causal relationship.

Myth: A cost system should be kept simple.

Fact:

This is true. It is actually true for any system. As it has been earlier explained, it is the skill of the implementation team to keep the model simple. At the same time is has to be seen that the results expected are not be compromised.
Alternatively, the complexity of the model in the conventional terms can be kept with the analysts and the business users are not exposed to it. The business users can use the various reports in different formats.

Myth: We do not need more accurate product costs:

Fact:

Yes, this true in case if the complexity of design to delivery of the products does not vary largely. If it is not so, then the typical revelation is that the products with higher volume get higher costs and those with lower volume (may be with higher complexity) get lower costs.

Myth: We know what our products cost; and

Fact:

It is not only the products that cause overheads. The complexity of the business causes overheads in the organization. This complexity is brought by the multiple products, customers, channels, regions etc. We should be able to segregate the costs that caused by the reasons other than the products only. Once we are able to do that, then we can understand the reasons for the same and business decisions can be taken. There is more to understand than only the product costs in ABM.

Myth: The market sets prices, so we do not need product costs.

Fact:

Let me take this statement as understanding or managing profitability of the organization. Firstly to understand the profit, one has to understand the proper costs. ABC helps to calculate cost more accurately. We have to also understand that the product profitability is different from customer profitability. The same product sold to different customers can bring different level of profit.
All customers are not equal. Generally the customers that bring more revenue are taken as most profitable customers. This may not be true, as various customers ask different prices, discounts, make changes in the schedule, ask non-standard products, order small quantities large number of times etc. This changes the profitability of the customers.
It has been observed typically that the top 15 percent of the customers bring the current level of profit. Top 45 percent of the customers bring 450 percent of the profit and last 20 percent of the customers take away the 350 percent of the profit away from the organization.
The best information for an organization is to understand whether their best customers are buying their best products.

Continued… in Part II

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Activity Based Management - How to Collect Information

Wednesday, June 11th, 2008

This is a Guest Post by Rajendra Patil, Pune, India

Profile: A technocrat with 17 years of proven success in ERP Implementation, Business Analysis, Consultancy Assignments in Strategic Cost Management, Profitability Analytics, Performance Management and Business Process Management in conjunction with the enterprise wide BI solutions. Currently working as an independent consultant in the area of Performance Management and Profitability.

This is a reply to the earlier post on “Activity Based Costing - How to collect information“. Rajendra answers few questions:

Q. How would a management accountant gather information and set rules for cost allocation ?

A. There are various techniques experts have created to collect the information starting from interviewing people, surveys, story-boarding to auto data transfer from the back-end processing business applications. The rules are defined in the paper model that is created for the organization. This paper model depends on the objectives that the organization has decided for the assignment. This model is different for different objective like profitability, cost improvement, resource planning etc. Sometimes the main model remains the same but multiple small models can be created for specific business pains. The logic for flowing the costs depends on the objective and the model.

Q. If the company has the good information system (ERP), then setting the rules are important. Then it would be an overnight job to run to allocate the costs based on set rules. Otherwise ABC will be labour-intensive with Management Accountants spending lot of time gathering the information rather than analysis them.

A. Yes if the organization has a good OLTP then collecting the data from the system is comparatively easier. Now we have various ETL tools to get the data. Some of the ABM solutions have created their own adapter for the ERPs like SAP or Oracle etc. Even if the organizations has any ERP, there is some part of the data that is still not available in those systems like the time spent on various activities or the no.of visits to a prospect (if CRM is also not present). This data has to come from various persons in the organization. Hence, the success of this assignment lies in the participation of the key personnel from various departments.

Technically this kind of data can be collected via web-based survey systems. The organization has to spend some time in the initial model creation and data collection systems, once that is done then the frequency of data collection is once in a quarter. So the people get ample time to analyze the data.

There are implementation methodologies like ‘Rapid Prototype’, where a first model which is very raw can be build in as less as two days. Then this model is expanded as required by the organization in those areas only. In the modeling the definition of the driver (the logic with which the cost flows) should be as accurate as possible. The corresponding data may not be accurate to start with. The accuracy of the data can be improved, but only when it is required. One should not wait for the accuracy for the data to the last minute or Re etc. This is used take business decisions and 80% accuracy in primary data is also good enough.

Now-a-days this collection of data and processing of it is being outsourced and various KPO organizations are eying that business.

Q. Or is ABC feasible for a company ?

A. Yes, it is feasible for all the organizations, which have multiple products, customers, channels, locations etc. These type of multiple options create the overheads in the organization which ABC puts using cause-and-effect logic. It would be easier if one takes professional help in the initial implementation as well as using commercial software for the same. It helps the internal team on understanding how to analyze the data. The calculation of the numbers is better left to the software application.

I hope these answers will help you to understand the practical solutions for the implementation as well to create new questions in your mind. Do let me know and I will try to answer them.

If you have any questions on Activity Based Management and its implementation, you may post your comments on this blog post or write to Rajendra Patil on rajendra@appsconsulting.in on specific issues or concerns.

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Posted in Cost Accounting, Management Accounting, SAP | No Comments »

Porter’s Diamond

Sunday, March 30th, 2008

If a strategic plan is going to have any chance of being useful, it has to be based on gathering and analysing information. Michael Porter, has explained how an organisation can analyse:

PESTEL Model: This model looks at the macro-environment, using the following headings

Political
Economics
Social
Technological
Ecological
Legal

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Porter’s Diamond

Porter tried to answer the following questions:

Why does a nation become the home base for successful international competitors in an industry ? Germany is renowned for car manufacture;
Why are firms based in a particular nation able to create and sustain competitive advantage against the world’s best competition in a particular field ?
Why is one country often the home of so many of an industry’s world leader ?

Porter called the answers to these questions the determinants of national competitive advantage. He suggested that there are four main factors which determine national competitive advantage and expressed in the form of diamond.

Factor Conditions: Include availability of raw materials and suitable infrastructure.
Demand Conditions: The goods or services have to be demanded at home: this starts international success.
Related and supporting industries: These allow easy access to components and knowledge sharing.
Firm strategy, structure and rivalry: If the home market is very competitive, a company is more likely to become world class.

Examples are:

Porter found that countries with factor disadvantages were forced to innovate to overcome problems e.g. Japanese companies experienced high energy costs and were forced to develop energy efficient products and processes that were subsequently demanded everywhere in the world.
Sweden’s global superiority in its pulp and paper industries is supported by a network of related industries including packaging, chemicals, wood-processing, conveyor systems and truck manufacture. Many of these supporting industries have also achieved leading global positions. ( Indian IT companies and Automotive - Tata Motors are in process of doing so.)

Porter found that domestic competition was vital as a spur to innovation and also enhanced global competitive advantage.

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Waiver of cost audit, rules for industries not producing essential goods: CII

Thursday, January 31st, 2008

I read the Article “Waiver of cost audit, rules for industries not producing essential goods: CII” by Ganesh on 29-Jan-2008 and could not help pondering over the following point.

“Maintenance of cost accounting records entails a huge cost for companies in terms of time and money since they are required to be maintained in very minute and detailed manner. Details of all components of cost have to be included even though it may be insignificant. It may, at times, not be possible to extract such minute details even through a sophisticated ERP system. Maintenance of cost records is difficult for companies that produce multiple commodities, as actual consumption records have to be maintained for power, fuel and utilities per unit of production for each type of product. Moreover, non-application of these Rules to traded imported goods put our local industry to an unfair cost disadvantage, by unnecessarily increasing its transaction costs.”

When I read this, I have ask a simple question, “Is there any company in the world that does not maintain Cost Accounting Records ?”. In Middle East, it is not legal to get the Accounts Audited, but still the companies do it. Moreover they have Cost Accounting Records in place for decision making.

There was far cry in 1980s when the Railway was computerised in India and similar in 1990 in Banking Sector when Nationalised Banks were to be computerised - Loss of Jobs etc. You will notice now the private banks in India increased their business by the IT initiative bringing the Nationalised Banks to their knees by wooing their customers with superior services they can provide via their IT infrastructure.

I am not in favour of Tax Audit or middle men like CAs hired for dealing with government regulations by individuals and companies. They are a huge burden to the business in dealing and meeting up with Government regulations. In US, the companies have to comply with SOX and it is perculated in all American business across the world. Moreover the world is moving towards IFRS and segmental reporting which places increased responsibility on the business for comprehensive reporting. These inititatives were to contain the frauds that occured in large corporations like Enron, World.com etc. India should be proud that they have the Cost Audit Regulations in place from year 1959.

Management Accounting is required for the business (no one can argue). When MNCs operate, they implement the best information system in the world and their internal reporting is more focussed in Management Accounts rather than Financial Accounts.

The conclusion from report by Ganesh indicates that some companies wants to avoid Cost Audit with a excuse that it is too expensive to maintain. Internally, if you ask, these companies Financial Controllers, they will tell you how many they spend Excel to provide the same information to their management.

The only difference at the end of the day when the companies avoid investing in an ERP system with proper management accounting is whether they are going to survive in the long run. As Napolean said, “War is 90% information.”

Write to Ganesh - Click here

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Regards,

Santosh Puthran
Management Accountant Blog

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