MBE - Management By Exception - for LDCE

MBE  - Management By Exception   -  for LDCE

      Concept by Frederick W. Taylor ( 1856 – 1915) – An American Mechanical Engineer and one of the first Management Consultants.

      He was instrumental in the creation and development of branch of engineering that is now known as “Industrial Engineering”.   “The Principles of Scientific Management” authored by him was voted as the Most influential Management book of the 20^th Century by the Fellows of the Academy of Management.

      Key feature: Attention only to material deviations, which requiring investigation.

      Routine decisions making should be handled by Lower Level Managers, who report only exceptional cases to Higher Management.

      A policy by which Management devotes it’s time to investigate only those situations which actual results differ significantly from the planned results. Creating the Right conditions /Benchmarks in the first place, then only intervening when things are not going as per Bench marks.

      Use of MBE in Project Management: The Project Board should meet when key decisions about the Project should be taken, and not on regular intervals. For this, the Manager should produce “Exception Reports” (like RAR – Revenue Allocation Registers and Price Ledgers in Indian Railways) to summon the Board for such meetings.

      MBE gives Management more opportunity to evaluate the administrative ability of their lower level Managers.

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SPV - Special Purpose Vehicle

SPV – Special Purpose Vehicle

 

Key Takeaways

ü  Separate legal entity

ü  To achieve specific objectives/goals

ü  Isolated from the firm

ü  Can leverage future earnings to raise funds

Salient features

·         Definition of SPV – A fenced organization having limited predefined purposes and a legal personality.

·          Also called as SPE – Special Purpose Entity (in USA) or SPC – Special Purpose Corporation or FVC – Financial Vehicle Corporation

·         A legal entity created to fulfil single, well defined and narrow objective/purpose.

·         Typically used by firms to isolate the firm from financial risk

·        ·          Primarily, a business association of persons or entities eligible to participate in the association.

·          Usually formed to raise funds from the market by collateralizing future receivables.

·         It is independent of members subscribing to the shares of SPV.

·         Concept: Usually, a sponsoring firm hives off or transfers its assets or activities from the rest of the company into an SPV. This isolation of assets is important for providing comfort to investors. The assets or activities are distanced from the parent company; hence the performance of the new entity will not be affected by the ups and downs of the originating entity. The SPV will be subject to fewer risks and thus provide greater comfort to the lenders.

·         Basically, a company can leverage future earnings to raise funds.

 

Advantages:

 

ü  Separating the risk.

ü  Protected against risks like insolvency.

ü  Best suited for Project financing.

 

 

Examples of SPVs in India

1.       NHSRC - National High Speed Rail Corporation. The Company has been modelled as ‘Special Purpose Vehicle’ in the joint sector with equity participation by Central Government through Ministry of Railways and two State Governments viz. Government of Gujarat and Government of Maharashtra.

2.       LTMRHL – Larsen & Toubro Metro Rail Hyderabad Limited (for Hyderabad Metro)

3.       IRSDC - Indian Railways Station Development Corporation ltd (by RLDA & IRCON)

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Cash Flow Statement - Management Accounting for LDCE

Cash Flow Statement          -    Management Accounting for LDCE

 

«  Meaning: A statement which discloses the changes in Cash position between two periods (usually 31st March of previous year to 31st March of current year)

 

«  Example: A Balance sheet shows a cash balance as on 31.03.2019 at Rs. 5 lakhs, while the same position as on 31.03.2020 at Rs. 6 lakhs.  That means cash inflows during the year 2019-20 is Rs.1 lakh.

 

«  The statement also outlines the reasons for such cash inflows or cash outflows, which in turn helps to analyze the functioning of Business.

 

«  It is an important tool in the hands of Business Management.

 

«   Components of Cash are 1. Cash on Hand  2.  Cash at Bank  3. Short term, highly liquid investments that are readily convertible into cash.

 

Advantages:

 

1.       Efficient in Cash Management  - Helps how much cash will be available at a particular point of time to meet the day to day obligations.

 

2.       Helps in internal financial management.

 

3.       Discloses the movement of cash during the financial year. Understanding and analysis of what are the sources & applications of cash.

 

4.       Past years cash flow statement is used as an estimate for next year's cash flow.

 

5.       Shows the success / failure of cash management.

 

6.       Comparison between two firms.

 

7.       Analysis of relationship between profitability and net cash flow.

 

                  Limitations

 

1.       Cash flow statement cannot serve the purpose of Profit and Loss Account.  Because later covers both cash items and non cash items, whereas former covers only cash items.

 

2.       Cash  flow statement can't replace the Fund flow statement. The later one is reflecting the complete financial picture than the former one.

 

3.       Cash balance as per Cash flow statement cannot represent the real liquid position of the firm, because of postponing of purchases & other payments.

 

4.       Very difficult to define the term "Cash". whether the items like cheques, stamps, postal orders etc are comes under purview of cash or not.  

 

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Working Capital Management Accounting for LDCE

                                                      Working Capital Management Accounting for LDCE

1991 LDCE SCR - 5 marks

 

ü  Meaning:  Represents the amount of funds required to finance " the day to day activities".

 

ü  Excess of Current Assets over Current Liabilities.

 

ü  It should be ideal/sufficient.  That means neither more nor less to the correct requirements of working capital.

 

ü  Shortage - Difficult to manage day to day activities/payments.

 

ü  Surplus - Capital will be blocked / unutilized.

 

ü  So it should be sufficient to meet current obligations  ( not long term obligations)

 

ü  The difference between Gross Working Capital and Net Working Capital is "Current Liabilities". Total sum of all current assets is called Gross Working Capital.  The difference between Current Assets & Current Liabilities is called Net Working capital.

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ROCE - Management Accounting for LDCE

ROCE     -     Management Accounting for LDCE

·         Full form is Return On Capital Employed

 

·         It is most important Ratio among all the Financial Ratios

 

·         ROCE = Return /Capital Employed  x 100

 

·         Expressed in Percentage.  Example  Return is 200 rupees against the capital 2000 rupees employed. ROCE is 200/2000 x 100 = 10 %. 

 

·         Return = Net Profit + or - Non Trading adjustments + Interest on Long term debts + Provision for tax - Interest/Dividend from non trade investments

 

·         Capital Employed = Equity share capital + Reserves & Surpluses + Preference share capital + Debentures & other long term loan - Misc Expenditure & loss - Non trade investments.

 

ROCE in Indian Railways

 

·         Para 511 of Indian Railway Finance & Administrate Code mentions Return on Capital.

 

·         Return on Capital = Percentage of Revenue Surplus/Net Receipts to Capital at charge and Investments from Capital Fund.

 

·         Revenue Surplus/Net Receipts = Total Revenue Receipts - Total Revenue Expenditure

 

·         Since element of Dividends is not there (from 2017-18 onwards due to merger of Railway Budget with General Budget), the Net Receipts and the Revenue Surplus are one and same.

 

·         Total Revenue Receipts = Gross Earnings (X, Y & Z) minus  Suspense

 

·         Total Revenue Expenditure = Gross Working Expenses ( OWE + Appropriation to DRF & Pension Fund) minus Suspense.

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Marginal Costing for LDCE

Marginal Costing

·         Total cost + Profit  = Sales   

  

·         Total Cost = Variable Cost   +  Fixed Cost  

·         So, Variable Cost + Fixed Cost + Profit  = Sales

·         Sales = Variable Cost + (Fixed Cost + Profit)

·         Contribution = (Fixed Cost + Profit)

·         Sales - Variable Cost = Contribution

·         I.e., S - V = (F + P)

or

·         S - V = C

or

·         C = S - V

·         Contribution = Sales - Variable Cost

·         Contribution = (Fixed Cost + Profit)

·         (Fixed Cost + Profit) = Sales - Variable Cost

·         Profit Volume Ratio (PV Ratio) = Contribution / Sales

·         BEP - Break Even Point = Where No Profit or No loss.

·         BEP - Break Even Point = Fixed Cost / P V Ratio

Problem:

Sales - Rs. 100,  Variable Cost - Rs. 80,  Fixed cost - Rs. 10.   Find the Sales at Break Even Point

Answer:

Contribution = Sales - Variable Cost

C = Rs. 100 - Rs. 80 = Rs. 20

PV Ratio = Contribution / Sales = Rs. 20/ Rs.100  = 0.20

BEP = Fixed Cost / PV Ratio

BEP Sales = Rs.10 /0.20  = Rs. 50

To Prove:

If Sales is Rs. 100,  Variable Cost is Rs. 80

If Sales is Rs. 50, Variable Cost is ?   = 50/100 x 80  = Rs. 40

Contribution = Sales - Variable Cost   Rs. 50 - Rs. 40 = Rs. 10

In Break Even Point, Contribution equals Fixed Cost.  Here too Contribution (Rs. 10) and Fixed Cost (Rs.10) are equal. That means No Profit or No loss at Sales Rs. 50.

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Social Cost Benefit Analysis

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Social Cost Benefit Analysis

LDCE 2015 - Southern Railway

·         A social cost benefit analysis is a systematic and cohesive method to survey all the impacts caused by an development project or other policy measure.

·         Also known as Economic analysis.

·         A decision-making strategy  - assessing the impact of Investments/Projects on the Society as a whole.

·         It evaluates not just the financial benefits/costs (profits /losses), but all economical benefits/costs (pollution, health, safety, travel times etc)

·         Social Benefit  - if it is positive impact

·         Social Cost       - if it is negative impact

·         Main objective:  To attach a price to as many effects as possible in order to uniformly weigh all the mixed (i.e., positive and negative) effects.

·         Example: PRS (Passenger Reservation System) project in Indian Railways.

Ø  PRS started as a pilot project in 1985 on two trains between Delhi and Chennai with a few reservation centres in Delhi. In 2003–04, it was operational at 1,200 centres, had 4,000 terminals, covered 3,000 trains and handled one million reservations per day.

Ø  Financial benefits: cost savings, staff reduction and increase in revenue.

Ø  Economic benefits: Improved customer service, higher quality of information, improved work environment, streamlined operations, and higher employee self-esteem and morale

Ø  “from anywhere to anywhere reservations”,

Ø  With IRCTC online ticketing, the booking of train tickets is much more easier.

Ø  An approximate estimate that about Rs. 250 crore was spent on the PRS up to the CONCERT stage.  At proposal stage, it was observed as negative Rate of Return from the point of financial returns.   

Ø  A very significant intangible benefit is national pride.

Ø  The Indian Railways management and staff are justifiably proud that they have successfully implemented a world-class, state of-the-art system in a developing country.

Ø  The success of the railway PRS provided the launch pad for India’s software industry exports.

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Ratio Analysis - LDCE

RATIO ANALYSIS

(Frequently asking and Most Important Essay Question - 25 marks asked in Management accounting section of LDCE)

v  Definition: 

                        I.        A relationship expressed in mathematical terms between two figures having Cause and Effect relationship or connected in some way or other.

                      II.        An expression of the quantitative relationship that exists between two numbers.

v  One of the very effective tool of financial analysis.

v  It is useful for various groups of people, say creditors, investors, management etc, who are interested in financial statements.

v  Provides clues and symptoms of underlying conditions.

v  Computation of ratios is relatively an easy exercise.

v  The usefulness of ratio analysis depends on its intelligent and judicious interpretation. Ratios by themselves carry little sense.  Comparisons are essential for making inferences.

v  Comparisons can be with:

1. Past ratios of the same enterprise.  This shows a trend within the organization.

2. Ratios of other companies in the same Industry.  It gives insight into the relative financial health & performance of the Organization.

3. Comparisons with Pre-determined Standard Ratios ( say Benchmarks), which may be Company/Industry accepted general standards.

v  Accounting Ratios  - Different types.

Balance Sheet Ratios	Income Statement or Revenue Statement Ratios	Composite Ratios
Both items available in the  Balance Sheet only	Both items available in the  Profit & Loss A/c only	One item from Profit & Loss A/c and another item from Balance Sheet
Examples - a) Current Ratio - Assets & Liabilities b) Proprietorship Ratios - Proprietor's Assets & Total Assets	Examples - a) Gross Profit Ratio  - Gross Profit & Sales. b) Optg. Profit  -  Cost of Goods sold to Net Sales. c) Stock Turnover Ratio - Cost of Goods sold & Average Stock carried.	Examples - a) Turnover of Debtors  -  Debtors & Net Sales. b) ROCE - Return On Capital Employed  - Net profit & Proprietor's Capital

v  Financial Ratios - Different types.

Category	Examples
1. Liquidity	1. Current Ratio  2. Acid Test/Quick/Liquidity Ratio
2. Activity/Turnover	1. TOR/Investor Turnover Ratio 2. Capital employed Turnover Ratio. 3. Total Assets Turnover Ratio   4. Debtors Turnover Ratio.
3. Leverage	1. Debt: Equity Ratio
4. Profitability	1.ROCE-Return On Capital Employed 2. Return on Net Worth
5. Investment/Investors related	1. Dividends pay out Ratio 2. Dividends Yield Ratio

Advantages:

1. Facilitates understanding of Financial Statements.
2. Narrates the whole story of changes in financial condition of the Business.
3. Facilitates Inter-Firm comparison.
4. Helps in planning the operations of the firm.
5. Facilitates "Management by Exception" .  Higher management can concentrates only at the area where its intervention is narrated.  The promoters has better utilisation of time and resources.
6. Compares with standard benchmarks.  During the period of existence, the firm develops certain standards/norms. Any change in the norms passes on the right message to the Management for the course of action to be initiated.

Limitations:

1. Communicates only a relative interpretation. Every Organization has its own uniqueness and comparisons may not be valid.

Example: Government company with limited freedom cannot be compared with Private company having lot of freedom though both are in same Industry.

2. Ratios are only a tool.  Their ultimate use depends on the craftsmen who use it.  Hence ratios are not an end in themselves.  Rather they are means to an end.  They pass only guiding / warning signals.

3. Window Dressing :  Sometimes companies do Window Dressing by manipulates accounts to show the outside a better or gloomy picture as the case may be they required. Such things cannot be disclosed by Ratio Analysis ( as Ratios depends on figures available in Financial Statements)

4. Inflation distorts/misleads financial ratio analysis. Spectacular performance is enabled due to inflation, not by Management.

                                                However companies may use "Replacement Cost Method" to prevent/obviate the above limitation.

CONCLUSION

"In a nutshell, the advantages clearly outweighs limitations, considering over all benefits".