Management Accounting, Ethical Issues, And Capital Budgeting Problem

Capital Cost Transparency and Management Accounting

1. Management Accounting & Budgeting?

2. Ethical Issues?

1. Capital cost transparency is the process by which CIOs can better understand the costs associated with the services they provide. We do not mean to suggest that those exposed costs are to be shown to all stakeholders. In fact, Gartner’s position is that exposing too much cost detail to stakeholders merely results in more arguments. Instead, in keeping with the move toward running Capital like a business, we recommend that Capital organizations publish Capital service “prices” for their stakeholders, even in cases where price equals cost. Moreover, Capital funding should ultimately be tied to the same business-valued service definitions (Lakshmi, 2016). Management accounting is considered to be one of the most important aspect in today’s corporation. Management of the company should be equipped enough to understand all the small nuances of the management method of accounting. Many organizations have historically focused buying F&A BPO on a business case, based solely on labor cost reduction. Rarely have they specified process improvement as a goal of these outsourced functions. Savvy F&A BPO buyers are now crafting new agreements around improving overall business outcomes and cost reductions. Focusing on outcomes is more important than where the service provider has delivery centers.

2. Ethics is defined as “systemizing, defending and recommending concepts of right and wrong behavior.” ¹Many professions have specific ethical codes: medical ethics, legal ethics, military ethics, scientific ethics, engineering ethics, accounting ethics, educational ethics and so on. Business decision making can have far-reaching implications, including the potential for highly detrimental, unintended consequences. For most CIOs, budgeting is the first major milestone on the path to ITFM. Although it may seem mundane, budgeting has a big impact on an organization’s ability to achieve its desired level of ITFM maturity. Most organizations have an existing structure for budgeting, and that structure often forms the basis of the organization’s Capital financial information. Unfortunately, in many organizations, the structure of the budget is asset-centric, high-level and not particularly meaningful from a cost transparency perspective. For example, many organizations use high-level budget categories or have separate budget line items for each Capital vendor they buy from. When developing a budgeting framework, consider what kind of information is needed to “feed” Capital financial transparency. For example, an organization seeking a service-based approach to ITFM would benefit from a budget framework that categorized costs in a way that could easily be mapped to services. Often, CIOs inherit an existing budget framework, or that framework is tied to the corporate financial system and cannot easily be changed. In such cases, it is necessary to maintain multiple “views” of the budget.

	Variance (INR lakh) – Apr’16 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Variance % – Apr’16
	w.r.t. budget	y-o-y	w.r.t. budget	y-o-y
Total Operating Income  (A+B)	2.20	67.17	1%	21%
Revenue in USD  Mn
MIS	0.01	0.07	2%	21%
MA	(0.00)	(0.01)	-2%	-9%
Covance	0.01	0.01	21%	63%
Others
Total	0.01	0.08	3%	17%
Avg Fx Rate	0.34	2.98	1%	5%
Non Operating Income	0.69	4.14	15%	339%
TOTAL INCOME	2.89	71.31	1%	22%
Expenses
Personnel Expenses	(5.80)	41.69	-3%	27%
Administrative Expenses	(3.13)	(1.52)	-8%	-4%
Other Expenses	(0.67)	9.53	-3%	70%
TOTAL OPERATING EXPENSES	(9.60)	49.70	-4%	24%
OPBDIT	11.80	17.47	10%	15%
OPM Margin			9%	-5%
Depreciation	(1.92)	7.53	-8%	53%
Interest	–	(4.57)
Prior Period Exp
PBT	14.41	18.65	14%	19%
Closing head Count			0%	9%

The format of these formal communications should be roughly 50% written communication and 50% interactive, face-to-face discussion.

Management of over-recovered (implied in the profit center model) and under-recovered (implied in the subsidy model) costs is potentially the most explosive issue in the relationship between the Capital organization and the business units (BUs) it serves. Whatever funding model Capital uses, the “rules of engagement” should be formulated and socialized to resolve how to deal with these issues when they arise.

Improving Capital cost transparency is a key step on the journey to running Capital like a business. Communicating the total cost of Capital in a way that is meaningful and transparent to the business is a process that is still elusive for most Capital organizations. The traditional view of Capital costs provides very limited visibility, and often the wrong detail, to support the direction in which most Capital organizations are heading. Many CIOs and Capital leaders have discovered that the journey to business value entails higher maturity budgeting practices and better financial transparency, enabling Capital organizations to more accurately create service costs — the fundamental missing ingredient to business value. Service costing of shared services — and continuous financial exercises that enable allocation of direct business expenses — will allow business stakeholders to see the portfolio of Capital spending and expenses, using it to drive priorities, decisions and resource allocation to what is most important. The ability to divide the Capital estate into a mosaic of opportunities and percentages will remove the Capital “black box syndrome” — a poorly understood and qualified asset — allowing stakeholders to design the future of the enterprise with Capital as a valued business partner.

Improving Capital Cost Transparency

CIOs and their corporate finance partners have not revisited their fundamental approaches to budgeting and transparency for decades. With most enterprises anticipating digital business transformation, these disciplines must be revisited with the aim of enabling business agility. Adding more funding or increasing budgets alone will be insufficient to drive creation and sustainment of new business models. Dynamic budgeting is required to meet the change needs of the enterprise; transparency is mandatory to drive accountability, legitimacy and partnership with business stakeholders. To give meaning to unstructured Capital data, and to perhaps act as a test bed for future digital business product and services pricing, all forms of transparency must be improved to provide changing organizations a form of insurance from negative and positive change.

Transparency is a stress test for digital business transformation. Few businesses can manage dynamic complexities of renovating legacy businesses and raising new business models without concurrent transparency maturity improvement. Without more transparency to drive Capital-enabled decisions, stakeholders will not have the confidence and inspiration to experiment with and exploit competitive applications of technology. Many organizations have information about Capital costs scattered in multiple systems, and these various systems can expose costs in different ways. For example, most organizations have some Capital cost data that is mapped to an enterprise or Capital chart of accounts. However, this data, in and of itself, may not provide a complete picture of the total cost of Capital services. It is often the combination of information from various sources — financial systems, an asset management system and the service catalog — that provides the most complete Capital cost transparency to CIOs.

Responding to specific CFO questions and doing the Capital cost analysis that are essential to CIO success are challenging in the absence of systems for tracking Capital costs and allocating them back to users. CIOs must work with the finance department to develop an Capital cost tracking system that meets the needs of the enterprise. Capital executives must also “enlighten” their business executive colleagues to the challenges of capturing hidden Capital costs, such as telecommunications and other BU Capital charges that often reside outside the central Capital budget.

Sr. #	Description	Responsibility	Reference
7.1	Budgeting
7.1.1	Assist CFO and CEO in budget planning and forecasts         i.            Consider past year results for the framework. Conduct a trend analysis for last few years to get inputs for the coming year       ii.            With inputs from LoB Heads and Marketing team, forecast revenue for the upcoming year     iii.            Take inputs from CFO and Head – Capital Infra & Data Security for Capital and Non-Capital expense needs.     iv.            Take Manpower inputs from the LoB Heads in consultation with HR. Create the budget model based on the trend analysis and on the inputs mentioned above Send first draft of the budget to CEO and CFO.	Business Planning Analyst
7.1.2	If approved, forward to board for approval.	CEO
7.1.3	If not approved, note comments, make necessary changes and resubmit to CEO.	Business Planning Analyst
7.2	Variance Analysis
7.2.1	Conduct variance analysis by comparing the budgeted numbers with actual for each monthly period by following the below steps:        I.            Gather actual numbers for the following data points: a.       Revenue for the concerned period b.      Expense for the concerned period from Tally. ERP 9 version, post confirmation from the CFO that the accounts for the concerned period have been closed.     II.            Compare the actual numbers with budgeted numbers and discuss reason of variance                     i.      For expense – CFO                   ii.      Revenue – LoB Heads.  III.            Present the findings of Variance analysis in BCM on monthly basis (Lustig, 2013).	Business Planning Analyst
7.3	Follow the corrective steps taken to check the variance If the budget variance is too high then some control needs to be put in to check the same. This is then discussed with CEO and CFO and necessary checks are implemented either to identify the core reason for the high variance or to reduce the variance.	Business Planning Analyst
7.4	Internal Operating MIS
7.4.1	Prepare Internal Operating MIS on monthly basis by the 15th working day of each month for the preceding month and share with the business planning team of COMPANY. 1.      Seek inputs from LoB Heads, HR, CFO and Head -Marketing. Various heads covered under the MIS are: Delivery Commitment: This section provides information on breach of SLA / failure of delivery commitments. on account of error or TAT, updated on Monthly basis. Order Book information: This section contains details about the order book of Data Services on quarterly basis. Renewal Rate: This section contains information regarding the renewal rate of products and services provided by ICRON, updated on quarterly basis. New Sales Tracker: This section provides information about any new sales executed by ICRON, updated on monthly basis. Cross Sales Tracker: This section provides information about any cross sales executed by ICRON, updated on monthly basis. Utilization Rate: This section provides information about the utilization rate of the manpower, updated on quarterly basis. Annualized attrition Rate & Manpower Update: This section contains updated information regarding deployment of manpower across Company’s project, Non Company’s Project and Support Services, update on quarterly basis. 2.      After collating data send to CEO for confirmation. Once confirmed, share with COMPANY business planning team. This data is collected by business planning analyst from the business operation team on monthly basis. The business planning analyst sends the previous month’s updated file, requesting for current data to the team members.	Business Planning Analyst

Most CIOs who expose copious cost details to stakeholders do so in an attempt to “justify” the cost of their services. However, this approach almost never works, and in fact tends to result in more arguments over why Capital is not procuring specific assets in a certain way. Rather than justify Capital costs through greater transparency, we recommend that CIOs focus on developing and delivering business-essential services at market-competitive prices. The best justification for the cost of a service is for that service to be of high value to consumers.

CIOs and Corporate Finance Partners: Revisiting their Fundamental Approach

Cost transparency is not simply the act of exposing Capital costs at any or all levels of detail, but rather to expose the cost of business-valued Capital goods and services supported by the appropriate level of cost detail. Similar to the purchase of a new car, as buyers we look at the total price and the top-level cost elements. Few of us want a detailed price breakdown of the fuel systems, hydraulics, drivetrain, or other subassemblies and individual parts. Most car buyers look first for a class of vehicle, then a model that fits their needs, before adding desired upgrade options.

Dynamic budgeting is required to meet the change needs of the enterprise; transparency is mandatory to drive accountability, legitimacy and partnership with business stakeholders.

To give meaning to unstructured Capital data, and to perhaps act as a test bed for future digital business product and services pricing, all forms of transparency must be improved to provide changing organizations a form of insurance from negative and positive change.

Dynamic budgeting is required to meet the change needs of the enterprise; transparency is mandatory to drive accountability, legitimacy and partnership with business stakeholders. To give meaning to unstructured Capital data, and to perhaps act as a test bed for future digital business product and services pricing, all forms of transparency must be improved to provide changing organizations a form of insurance from negative and positive change. Many Capital organizations have multiple methods of tracking costs and allocating them to users.

These methods, however, are still technology-focused, largely manual and often driven by simple spreadsheet management. The ad hoc nature of Capital cost tracking and a general lack of automation are problematic for CIOs; they can result in a poor level of visibility into Capital costs for the CIOs who must price these services.

Many organizations have information about Capital costs scattered in multiple systems, and these various systems can expose costs in different ways. For example, most organizations have some Capital cost data that is mapped to an enterprise or Capital chart of accounts. However, this data, in and of itself, may not provide a complete picture of the total cost of Capital services. It is often the combination of information from various sources — financial systems, an asset management system and the service catalog — that provides the most complete Capital cost transparency to CIOs.

References:

Lakshmi, T. M., Martin, A., & Venkatesan, V. P. (2016). A Genetic Bankrupt Ratio Analysis Tool Using a Genetic Algorithm to Identify Influencing Financial Ratios. IEEE Transactions on Evolutionary Computation, 20(1), 38-51.

Damodaran, A. (2016). Damodaran on valuation: security analysis for investment and corporate finance (Vol. 324). John Wiley & Sons.

Lau, C. (2016). Financial Management.

Khan, M. N., & Khokhar, I. (2015). THE EFFECT OF SELECTED FINANCIAL RATIOS ON PROFITABILITY: AN EMPIRICAL ANALYSIS OF LISTED FIRMS OF CEMENT SECTOR IN SAUDI ARABIA. Quarterly Journal of Econometrics Research, 1(1), 1-12.

Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial statement analysis. John Wiley & Sons.

Hoberg, G., & Maksimovic, V. (2015). Redefining financial constraints: a text-based analysis. Review of Financial Studies, 28(5), 1312-1352.