In this article we will discuss about Reporting to Management:- 1. Forms of Reporting 2. Contents of Reporting 3. Frequency.
Forms of Reporting:
i. Descriptive Reports:
These types of reports are written out in a description style. These reports usually do not take the help of tables and graphs. They may include tables and graphs in order to lay emphasis on some of the points discussed. The language used is a very important factor in such reports.
ADVERTISEMENTS:
The language should be simple and correct and may convey the idea of the reporter to the management. The report should have the suitable heading and it should be suitably paragraphed. The main report should be summarised, so that the recipient of the report should be able to know the exceptional matters, and the recommendations of the reports without going into the details of the report.
Descriptive reports are considered to be less effective devices as compared to tabular and graphical devices of illustrating points involved in the reports. Such a report does not attract the eye more quickly and forcibly.
ii. Tabular Reports:
Such reports are presented in the form of comparative statements. This form of reporting is applied in case of periodical reports covering production, costs, sales and finance. These reports should use same standard form of statements or tables from period to period so that proper comparison may be made between the present and past performance.
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Examples of this type of reporting are statement of cost, statement of profit, statement of materials cost, labour efficiency report, idle time report etc. These reports are more effective as compared to descriptive reports because they create more impression on the mind of the recipients of such reports.
iii. Graphic Presentation:
It is very important method of presenting information to the management in a pictorial manner and attracts the eye of the recipient more quickly and forcibly. Recently graphs and diagrams are becoming very popular with the cost accountant because they are the most effective media for disclosing trends and making comparisons over fairly long periods within a short space.
Graphs and diagrams make otherwise dull and confusing figures interesting and attractive. This method of presenting information can effectively depict production costs, fluctuations in input and output, position and movement of stocks, variances, components of cost of production etc.
Contents of Reporting:
ADVERTISEMENTS:
On the basis of nature of information to be presented before the management, the report can be divided into four groups, i.e., production, sales, cost and finance. All the periodic or routine or regular reports and most of the special reports will fall under either one of these categories. Below are given some of the important periodical reports generally prepared in any organization:
i. Reports to Production Division:
a. Statement showing actual output achieved against the standard output.
b. Statement making a comparison of actual capacity worked against budgeted capacity.
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c. Report showing labour turnover and absenteeism.
d. Machine and labour utilisation report.
e. Analysis of idle man hours.
f. Analysis of lost machine hours.
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g. Effect on cost and productivity of overtime and shift working.
h. Analysis of cost variances.
i. Cost of each department or product duly analysed by components of cost.
j. Analysis of abnormal loss, spoilage, defective work and rejection.
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k. Analysis of stock of raw materials, work-in-progress and finished goods.
l. Analysis of maintenance cost.
m. Analysis of power consumption and cost.
n. Analysis of ratio of indirect labour cost to direct labour cost.
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ii. Reports to Sales Division:
a. Statement showing comparison of actual sales against budgeted sales.
b. Analysis of orders on hand, orders received and orders executed.
c. Product and area-wise analysis of sales.
d. Comparison of actual selling and distribution expenses with the budgeted expenses.
e. Market survey reports on sales trends and the expected demand for the company’s products in future.
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f. Analysis of gross profit earned in each area on each product.
g. Analysis of outstanding debtors.
h. Analysis of sales promotions campaigns.
i. Analysis of customers’ complaints.
j. Report on credit worthiness of customers.
k. Report on ratio of bad debts to total debtors or credit sales.
l. Report on ratio of selling and distribution overhead to cost of sales or sales.
m. Report on effectiveness of various sales campaigns.
iii. Reports to Finance Division:
a. Summary of cash receipts and payments compared with the cash budget.
b. Analysis of capital expenditure.
c. Analysis of working capital.
d. Analysis of outstanding debtors and creditors.
e. Statement showing actual profit against the standard profit.
f. Cash flow statement and funds flow statement.
g. Report on cost of operating and maintaining assets.
h. Report on funds required for expanding business.
i. Report on funds employed in the business.
iv. Reports on Cost:
a. Inventory Reports.
b. Scrap and spoilage of materials.
c. Materials quality report.
d. Report on product cost estimate for price fixation and sending quotation.
e. Comparison of actual cost of materials with the budgeted cost of materials.
f. Report on carrying and ordering costs of materials.
g. Comparison of actual cost of labour with the budgeted cost of labour.
h. Report on idle time costs under various causes.
i. Labour turnover statistics and costs.
j. Report on labour efficiency and productivity.
k. Report on idle capacity.
l. Report on steps taken to reduce the number of accidents.
m. Comparison of actual overheads with the budgeted overheads.
n. Report on overheads recovered and under-or over-absorption of overheads.
o. Comparative income statement product-wise.
p. Report on research and development costs.
q. Comparison of actual costs and standard costs and analysis of reasons for the difference in two costs.
Frequency of Reporting:
Routine reports are rendered at periodic intervals. The intervals at which routine reports are to be presented should be fixed for each report. Production reports should be rendered at shorter intervals because delayed reporting on production may lead to a continuing loss for a longer period.
Thus, an effort should be made to take note of production losses as earlier as possible so that earlier corrective action may be taken to eliminate the losses. Special reports are to be presented after making an investigation of the problem which requires to be investigated. Following matters may be covered by special reports.
i. Special Reports:
a. Effect of idle capacity on cost of production of different products.
b. Make or buy decisions.
c. Whether to replace labour by machinery or not.
d. Whether to explore the new market at a selling price which is below cost of production.
e. Whether to continue the selling of a product at a very low rate during depression.
f. Cost reduction schemes.
g. The most suitable method of raising funds.
h. The most suitable method of investing surplus cash.
i. Whether to purchase or hire fixed assets.
j. A report on the capital expenditure to be incurred.
k. A report on working capital management.
l. Research and development expenditure problems.
m. The effect of labour disputes on production and cost of production.
n. The effect of a high rate of labour turnover.
o. Price fixation problems.
p. The effect of providing a particular facility to workers.
q. Feasibility study for a project.
r. Report on new taxation policy and its effect on company’s profits.
s. Report on important developments in the industry.
t. Report on general economic forecasts.
u. Report on whether to operate a costing system or not.
v. Report on company’s financial position and profitability.
w. Report on effect of change in Government Policy.
Reports provided by Cost Accounting Department:
Following are the various reports provided by Cost Accounting Department:
(i) Cost sheet setting out the total cost, analysed into various elements, giving comparative figure of previous period and other plants under the same management,
(ii) Consumption of material statements.
(iii) Labour utilization statements, details about total number of hours paid for, standard hours for output, idle time and causes thereof.
(iv) Overheads incurred compared with budgets.
(v) Reconciliation of actual profit earned with estimated or budgeted profit.
(vi) Total cost of abnormally spoiled work in the factory and abnormal loss and store.
(vii) Total cost of inventory carried, number of monthly stocks would be sufficient.
(viii) Labour turnover and cost of recruitment and training of new employee.
(ix) Expenses incurred on R & D as compared to budgeted amount.
Illustration 1:
In a brass foundry where standard costing is in operation, the standard mixture consists of 70 per cent copper and 30 per cent zinc. Standard loss in casting is 2% of input. Material usage for a certain period is:
Actual production is 82,500 lbs.
Submit a report on these facts to your management.
Solution:
Foundry Manager,
Your attention is invited to the increase in casting loss which it about 1%. Wrong proportions of copper and zinc are seemed to be the reasons of increase in loss. Precautionary measures may kindly be taken to ensure that there is no increase in loss in future.
Cost Accountant
Illustration 2:
The Easy Way Co., has been often encountering difficulties in its ways and means position and normally delays its payments to suppliers of raw materials and components.
Prepare a report to the Managing Director indicating the possible reasons for its situation and the effects on the cost of production.
Solution:
August 10, 2010
The Managing Director
Dear Sir,
In pursuance to your instructions, I investigated into the reasons for the financial difficulties and ascertained the effect of delays in payment to suppliers on the cost of production which are summarised as follows:
Reasons for Financial Hardship:
The main reason for financial hardship of the company is overstocking in every component of inventory i.e., the company has large accumulated stocks of materials, work-in-progress, stores and spares and finished goods.
It has resulted in too much requirement of working capital and shortage of liquid funds. The investigation has also revealed that credit policy of the concern is liberal which has resulted into a considerable amount of receivables.
The company has also not made an intensive use of its available capacity because of poor sales activity. Idle capacity and inefficient management of inventory and receivables have contributed insufficient profits which are also responsible for the financial hardship of the company.
Effect of Delay in Payment to Suppliers:
The facility of cash discount from suppliers is not available if payments are not made within the stipulated period. Further, if the payments to suppliers are regularly delayed beyond the allowed credit period, the company’s reputation suffers.
In case of delayed payments, suppliers will become reluctant to supply materials on credit or they may charge higher prices to cover up the loss which may arise due to the possibility of bad debts. All these give rise to increased cost of production and cause further financial hardship.
Recommendations:
(1) Stock of inventory should be reduced by means of suitable inventory control techniques. Stock of finished goods should be reduced by means of production planning and sales promotion planning and sales promotion programme.
(2) Strict credit policy should be followed to realise the amount from debtors in time.
(3) Intensive utilisation of capacity be made to reduce the cost of idle capacity.
(4) Purchases should be made in a planned way according to the budget so that maturing obligations may be met in time.
Yours faithfully,
Management Accountant
Illustration 3:
Batliboi Ltd. manufactures and sells one product only. The budgeted volume of production and sales is 80,000 units per month. The standard selling price is Rs.100 per unit.
The breakup of the standard cost per unit is given below:
The company carries substantial stock of finished items at all times.
The company prepares the following statement indicating the result of the first three months of trading:
The Sales Manager reports that sales for the rest of the year may continue at an average rate of 60,000 units per month. The General Manager though worried over the fall in sales contends that a monthly profit of Rs.6.00 lakhs can be retained.
You are required to write a brief report pointing out the fallacy, if any, in the General Manager’s view and giving an estimate of profit for the year assuming that the Sales manager’s estimate of future sales is correct. You may also make such suggestions, as you consider, may improve the situation.
Dear Sir,
As desired by you, we have gone through the statement and particulars concerning trading during the first three months of your company and the Sales Manager’s revised estimates regarding sales during the rest of the year.
You contend that despite the sales remaining at 60,000 units per month, the profit will continue at Rs.6,00,000 per month. We are of the view that profit of Rs.6, 00,000 will not be possible as the figures given below show:
It may be seen from the above that a fall in sales of 20,000 units from the budgeted figure of 80,000 units will reduce the monthly profit by Rs.12 lakhs because the profit of Rs.8, 00,000 at the sales of 80,000 units is converted to a loss of Rs.4, 00,000 at the sale of 60,000 units.
A contribution of Rs.36, 00,000 at the monthly sale of 60,000 units is not able to meet the monthly fixed expenses of Rs.40, 00,000 so there is a loss off 4, 00,000.
The mistake in your working is that you consider the fixed expenses as being connected with output and your expectation is that these expenses will fall proportionately when output comes down whereas the fixed expenses are related to time and not to output.
Fixed expenses will remain constant (Rs.40, 00,000) even though the quantity of units sold may be reduced by 20,000 units. Fixed expenses of Rs 40, 00,000 are not fully recovered at the monthly sales of 60,000 units because contribution at this quantity of sales is Rs.36,00,000 consequently there being a loss of Rs.4,00,000.
The company should explore possibilities for making sales at a concessional price below Rs.100 but above the marginal cost of Rs.40 to special customers like the Government or in the foreign markets.
The price is to be reduced below Rs.100 keeping in view that the selling price of Rs.100 for the existing market is not affected. There is a surplus capacity of 20,000 units and fixed expenses will not increase if the output is 80,000 units.
Any price above Rs.40 will give an additional profit but the concessional price of less than Rs.100 should be limited to sale of 20,000 units (surplus capacity) only otherwise the fixed expenses may increase disproportionately.
For example, 20,000 units are sold to special customers at the concessional price of Rs.75 per unit, the additional contribution will be Rs.7,00.000 [(20,000 (Rs.75 – Rs.40)]. Hence, loss of Rs 4,00,000 at 60,000 units of sales will be converted into a profit of Rs.3,00,000 (Rs.7,00,000 – Rs.4,00,000).
Yours faithfully,
Cost Accountant
Illustration 4:
A manufacturing company maintains its own fleet for various reasons favourable to it. Design a form, through which, it could know, expenses vehicle-wise to take remedial measures, as and when necessary to control costs.
Solution:
