Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
 
 
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
 
 
 
 
Popular Search: Central Excise rule to resale the machines to a new company :: articles on VAT and GST in India :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: cpt :: due date for vat payment :: TAX RATES - GOODS TAXABLE @ 4% :: VAT Audit :: form 3cd :: TDS :: VAT RATES :: empanelment :: ARTICLES ON INPUT TAX CREDIT IN VAT :: ACCOUNTING STANDARDS :: ACCOUNTING STANDARD :: list of goods taxed at 4%
 
 
News Headlines »
 Securities excluded from GST ambit in revised Bill
 GST dilemma: Hope fades for new tax regime
 5nance.com launches tax investment platform
 Is government tapping your phone?
 Income tax department to use analytics to look for discrepancies in bank accounts
 GST Council fails to break deadlock over indirect tax regime, next meet on Dec 11 and 12 to hammer out differences
 Invoking Writ Jurisdiction For Income Tax Matters
 How to file income-tax returns online
 How Income Tax Returns Are Scrutinised
 All About New Income Disclosure Scheme to make Demonetisation successful
 Your deposit may draw income tax notice

Transformation of a profession
December, 31st 2007
The species called cost accountant is on its way to extinction. You rarely find them in successful companies. That was not the case even twenty years back. You could always find cost and works accountants in companies, particularly in manufacturing companies.
 
At the close of the year, they used to be busy with inventory valuation and reconciliation of bin card balances with stores ledger balances.
 
During the year, they used to play an important role in price fixation, because cost used to be the basis for establishing the price of new products or for submitting bids against tenders.
 
They used to be highly respected (feared!) people in the organisation because they use to report variances against standard cost. And perhaps they were one of a small number of people capable of changing the profit figure to the desired number by changing the value of finished goods and work in progress. Over the years they have lost their enviable position.
 
Information technology has taken over much of their tasks. The approach towards price fixation has changed. Market environment does not allow cost plus pricing. Companies do not maintain inventories at the level they used to maintain earlier. As a result, the scope for managing earnings by manipulating inventory valuation has been reduced significantly. There is no role for cost accountants in successful organisations.
 
No company needs a costing system that supports the operating management. Today, companies are looking for a management accounting system that provides adequate support to strategy formulation. Now cost (and revenue) management has become an interdisciplinary function. The cost accountant has lost his identity. Now, any one who is intelligent and smart, and understands business irrespective of her specialisation, can play the role of management accountant.
 
Companies work backward from customers need and willingness to pay. Managers recognise that there is a trade off between price, cost, functionality and quality. Managers examine this trade off at the development stage of the product, and optimise on the product functionality and quality within the parameters of estimated selling price, target cost, target volume and target launch date.
 
Take the example of Tatas Rs 1 lakh car, which Business Week has named as one of the trendsetters of 2007, while listing Ratan Tata among the world's "Most Important People" of the year.
 
In March 2003, Tata announced launching of this product. He conceived the idea several years ago to create a basic four-seater, four-door car to which the regions millions of scooter and motorcycle riders, plus 3-wheeler users could aspire. Tata Motors is still maintaining that price point. Ratan Tata, by announcing the launch of the car, had thrown a challenge to the product development team to produce the car at a cost that will enable the company to earn a decent margin at the selling price of Rs 1 lakh.
 
The challenge before the managers was to produce an affordable car that meets safety standards, but also looks stylishly adorable, because, despite its low cost, a completely no-frills and staid car is unlikely to appeal to the status-sensitive Indian consumer.
 
The demand was innovation. Innovation in product design was not enough. Innovation was required in manufacturing process, location of plants, procurement of component and parts and relationship with suppliers and distributors, and finally relationship with ultimate users for after sales service.
 
The car will be unveiled on January 10, 2008 and we shall come to know exactly how stylish is the car and about its functionality and quality. Think about what was the role of a traditional cost accountant in the whole process. My guess is nothing. But a manager with accounting perspective must have played an important role in the whole process. We may call him the management accountant. Companies need management accountants and not cost accountants.
 
Companies talk about cost management and not about cost reduction or cost control. Cost reduction is inward looking and has a narrow perspective. Cost management looks for cost and revenue management opportunities both in the external environment and the internal environment.
 
Cost and revenue analysis in the context of value chain is an important tool in the kit of an management accountant.The value chain for any industry refers to the chain of interlinked value-creating activities beginning with the production of the basic raw material and ending with delivery of the products or services to the final customer. Frequently these activities span multiple organisations.
 
Management accountant provides an insight into the profit pool at each linkage by mapping cost drivers. Each activity has a unique set of cost drivers. The revenue at each activity depends on the competitive environment and the market strength of other players in the value chain.
 
A companys strategic decisions as to whether it will engage in one of the activities or it will vertically integrate all or some of the activities in order to maximise the value of the company. The decisions are based on the analysis provided by the management accountant and an analysis of its core competencies.
 
We may take the example of Apple iPod. Three economists, Linden, Greg, Kremer, Kenneth L and Dedrick, Jason at the Personal Computing Industry Centre in California mapped the profit pools in the value chain of the Apple iPod. Apple has outsourced the entire manufacturing of the device.
 
The total cost of the device comes to around $ 143.12.
 
The retail price of the device is US $ 299. The wholesale discount is 25 per cent; the distributor retains 10 per cent and 15 per cent goes to retailers. The wholesale price, which goes to Apple, is $ 224. Thus, Apple captures an value of $ 80.
 
Among the major suppliers, Toshiba, which supplies the hard disc at $ 73 captures value of $ 19.45; Toshiba Mitsushita, which supplies display module at $ 20.39, captures value of US $ 5.85; Broadcom, which supplies video/multimedia processor at $ 8.36, captures value of $ 4.39 and Portal player, which supplies Portal Player CPU at $ 4.94 captures value of $ 2.31.
 
These four firms together supply components which constitute almost 75 per cent of the total cost and they together capture value of $32 approximately. The calculations clearly bring out the logic as to why Apple outsources the entire manufacturing of the device.
 
The share of value in innovation and brand management activities is significantly higher than the value captured by any individual activity. Apple has conceived the product and protects it from competition through innovation and customer service, and therefore, gets more than 50 per cent of the total value created in the value chain, which is $156.
 
Analysis that the economists provided was made by managers with support from the management accountant before the formulation of the strategy. Again, the traditional cost accountant has no role to play in this analysis.
 
Unfortunately, the Institute of the Cost and Works Accountants of India has failed to lead this transformation of cost accounting in India. It is not that it has not made efforts. It has revised the syllabus. However, it has failed to attract talent.
 
Although, the chief reason is lack of enthusiasm on the part of the Institute, but the government is also responsible. It is taking too much of time to approve a proposal to change the name of the Institute to reflect the new role of the members of the Institute. Let us hope that 2008 will bring cheers to the cost accounting profession.
 
 
Home | About Us | Terms and Conditions | Contact Us
Copyright 2016 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - Our Vision

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions