Indian Railway Codes and Manuals-Administration and Finance Code-Chapter- 5 (V)

 



CHAPTER V

MANAGEMENT ACCOUNTABILITY

 

501. Management has been defined as involving responsibility for judgment and decision in effectively planning and controlling operations towards known objectives attained through efficient co-operation of the personnel concerned. Arising out of this definition, management may be said to have the following characteristic features :—

(i) Management is a ' Process ', in the sense of a combined pattern of mental action and human behavior;

(ii) ' Decision ' is of its essence, and this presupposes consideration and judgment, as well as assembling facts and  data from which to judge ;

(iii) The Manager has to obtain effective co-operation of other people, and this implies a need for ability to guide, motivate and get on with people in the organization ;

(iv) The ' objectives ' at any given time are determined by the corporate policy of the undertaking ;

(v) The management process has an essential economic character in its primary concern for effective attainment of selected objectives with optimum use of resources ;

(vi) The achievement of objectives can be ensured only by continuous review of the actions ensuring from the decision and this means that the judgment-cum-decision process is in the nature of a feedback circuit, and finally,                                

(vii) The management process is basically future-oriented, since it is concerned with planning the course of action for attainment of objectives in future.

The above characteristic features of management require of the managers unceasing responsibility for (a) high performance and its betterment, (b) cost control and cost reduction to optimum level, (c) good profitability and its improvement, and (d) attainment of all these objectives through the co operation of many functionaries of diverse disciplines whose own interests and objectives may not synchronise or may even be quite different.

 

502.  The Railways are owned and managed by Government of India.    The Railway Management is, therefore, accountable to the Parliament for the efficient operation of this vital transport system   in   the   country The annual revenue budget of the Railways is based on specific performance targets for  movement of freight and passenger traffic, and comprises the estimated amount of money required to be spent to achieve the specified targets.   The annual works budget provides for additions, restorations and replacement of assetst to enable the railways to progressively  increase their capacity to meet the transport  needs.    Parliamentary  financial control is designed to keep a watch over the performance of Managers  entrusted with handling and disposal of public funds.   The budget grants voted by Parliament and the appropriations sanctioned by the President are thus the limits upto which expenditure can be incurred by the Central Government during a financial year on the specific purposes for which the grants and appropriations have been  obtained.   While   it  is the duty of the Railway Board as the controlling authority in respect of  the  total   amount  of each   Grant voted   by Parliament and appropriations sanctioned by the President, to watch the progress of expenditure and  to restrict the aggregate expenditure within the amount of grant or  appropriation  placed  at their disposal,   it  is the    responsibility   of the   individual   Railway   Administrations   to   exercise   a  similar    control    over   the allotments made to them.

503.  Accountability to Parliament.—The accountability to Parliament   is   satisfied through  the  submission of the annual Appropriation Accounts, that is to say records suitably devised for the scrutiny,  by Public Accounts Committee and the Comptroller and Auditor General, of incurred and  adjusted expenditure in   relation to the grants and appropriations so as to ensure authenticity of each item in relation to the budget grants and appropriations.   The constitutional principle underlying these Accounts  is that the   Parliament approves every year the provision of certain sums of money which are distributed to the Railway Managers for spending on approved objects.    Parliament  has therefore, to be satisfied when the year has ended, that the   moneys have, in fact, been spent as authorized.   The certified Appropriation  Accounts show  how the   revised/final allotments/appropriations  vary   from  the  original  one and the actual expenditure from the final allotment/ appropriation.   The Railway Management is thus accountable to Parliament for  achieving the  financial  targets envisaged in the Budget for realisation of revenues and restricting the disbursement of moneys and adjustment of expenditure within the authorized limits.

 

504.  Accountability for Performance—Performance Budgeting.—Underlying the   annual   budgets are certain assumptions in. respect of physical outputs such as movement of a specific quantum  of traffic,  consequential workload on maintenance of track, rolling stock and other assets, fuel consumption,  optimum  utilization of assets and generally operating the system efficiently, etc.   The extent to which these assumptions are actually realized is judged through a number of performance indices which are worked  out   periodically and annually.   The more important and commonly used operating efficiency indices are—

(a)  Freight traffic—

(1)  Originating tonnage of revenue-earning freight traffic by broad commodity groups.

(2)  Earning per million stones of originating traffic by selected commodities.

 

(b)  Wagons—

 

(3)  Wagon kilometers per wagon day.

(4)  Net tonne kilometers per wagon day.

(5) Wagon turn-round (time elapsed between successive loadings of a single wagon).

(6) Detentions to wagons in important marshalling yards.

(7)  Percentage of loaded to total wagon kilometrage.

(8)  Net tonne kilometres moved per annum per tonne of wagon capacity.

 

(c)  Engines—

(9)  Hours worked per day per engine available for use, service wise and traction wise.

(10)  Engine kilometers per day per engine day on line/in use on goods services traction wise.

(I I) Net tonne kilometers per goods engine hour on line/in use.

(12)  Engine kilometers per engine failure, traction .vise.

(13)  Fuel consumption under the various services, traction wise.

 

(d) Train operation—

(14)  Average speed of goods trains, traction wise.

(15)  Average load of goods trains, gross and net in terms of wagons, traction wise. 

(16) Punctuality of Mail and Express and other passenger trains.

 

(e) Rolling Stock repairs.— 

(17) Percentage of under and awaiting repairs-locomotives, coaches and wagons.

 

505.  Ideally, Railway Managers should set themselves performance targets/norms under each of the above and other important indices taking into account the additional investment   on   modernisation.     Failure   to realise the norms should require a detailed examination of reasons and adequacy of remedial action.   A direct correlation between the norms as may be laid down in these efficiency indices  and  the    budgetted financial targets is, however,   extremely difficult.    In financial terms, the final test of the working of a Zonal   Railway is its operating ratio, profit/loss and the return on capital which enable the   Railway  Board  to   monitor the overall efficiency of each Zonal Railway management.

 

506.  The concept of Management Accountability applies all along the line from the top Manager   down to the Divisional/Workshop Officer.   Or viewed upwards from   below,  the   performance/financial   targets  set for a Division/Workshop are the responsibility of the concerned officers.    The Divisional   Superintendent is accountable for the operating/financial targets fixed for the Division.   As accounts of earnings are maintained for the Zonal Railway as a whole without any break-up by divisions or sections, the accounting records of the Railways do not   indicate the complete financial results of working of a Division.    Expenditure   accounts are, however, maintained for the different spending units like Division, Workshop,    Headquarters,   etc.    At the Divisional level, the financial targets, therefore, do not relate to earnings but only to expenditure  within the budget allocation.   There is thus no separate profit and loss  accounts for   each   Division,   nor  is   it feasible under the present   accounting  arrangements to   prepare such accounts.   The accountability of the Divisional Superintendent is, therefore, restricted to the financial limits of expenditure laid known in the sanctioned budget and the physical (operating and commercial, etc.) target set for his Division.    He is  duly  authorized,  under a system of delegation of financial powers, to incur expenditure for the specified purposes up to the limits  laid down in the sanctioned budget.   The monthly financial review prepared at the Divisional level compares the actual expenditure with the proportionate budget under the sub-heads of grants.    At the level of the   Headquarters of the Zonal Railway, however, the accountability of the General Manager and his Heads of Departments extends fully to the total financial performance—profit/loss—of the   Railway Administration in relation to the budgeted target.   The monthly financial review prepared by the Financial Adviser and Chief Accounts Officer for the Zonal Railway Administration as a Whole compares the actual earnings and expenditure with the budget anticipations, with brief explanations for variances, from the budgetary proportions.

 

507.  Management   Controls.—Management   controls   have   been    defined   as   a   combination   of the objectives of plans, policies, procedures,   techniques,   and   standards   in addition to  measurement, appraisal or   evaluation   of results.    Business   controls   represent the  patter   of activity followed  by the   manager; and should not be isolated from performance, standards or plans of action.   The controls may be  categorised in the following manner:—

(i) the controls provided to standaridise levels of performance ;

(ii) controls used in safeguarding corporate assets ;

(iii) controls which set the limits of the delegation of authority ;

(iv) the rule used to plan and programme operations ;

(v) the regulations employed to standardise quality levels and to measure job performance ; and ; (vi) the rules for motivating employees within the organisation.

The operational control of the business of an organisation may be further classified as cither policy control or systems control. In the case of Railways the policy objectives are clearly defined in their Corporate Plan. The. systems control comprises the plan of orgainisation and of co-ordinated methods and measures adopted to promote the policy objectives of the organisation. Management is a difficult art ; wise men use all available aids to help them deal with their many problems. In recent years a number of management aids or control techniques have increasingly come into operation and Railway Managers should strive to make themselves familiar with some of these techniques and make use of them for problem solving under given situations. An illustrative list of the control techniques is given in Annexure together with brief explanations. Some of the management aids progressively being used on the Railways are given in the subsequent paragraphs.

 

508.  Investment decisions.—During the successive 5-year plan periods, the Railways  have made massive investments for increasing capacity and modernization and these investments have been financed from borrowings from the General Revenues and  internally generated resources.   The value of total investment in the Railways went up from Rs. 855 crores as on 1st April, 1951 to nearly Rs. 16,851  crores on  31st March   1989,    Railways are a Capital-intensive industry, and their economic viability depends to a large extent on the  productivity of the Capital inputs.    Each major investment proposal   has, therefore,  to be subjected to a techno-economic feasibility study before it is accepted for inclusion in the Railway's Plan/annual programme.   At the same time due regard must be had to the role of the Railway in the larger context of planned development of the country. Further, after a project is executed and is in operation for some time, the   Railway  Management must carry out post-project appraisal to ascertain how far the benefits expected to be  available from the investment have been actually realised.    Investment decision-making thus  calls for    use of refined and effective   methods of investment planning such as project preparation, evaluation and grading together with a sound system of financial control and post-project appraisal.   These   are described in   detail in Chapter II of the  Indian   Railway Financial Code.

 

509.  Inventory Management—Inventories of raw materials, stores and spare parts,   and the   value  of unfinished jobs (known as work-process) in Railway Workshops represent essential,   but unproductive, Capital investment.    Efficient inventory management requires lowest stock   levels with the highest  service levels. This objective is secured through budgeting for  inventories  after  careful  scheduling  of deliveries  against purchases and regular monitoring of the changing needs of the indentors. In view of high inventory carrying costs the importance of inventory managements as a part of the overall accountability of Railway Management cannot be overemphasized.

 

510.  Financial Ratios.—The financial efficiency of operating an enterprise  can best be  seen  from the ' financial ratios ' which are worked out from the Statement of Profit and Loss for the year and the  Balance Sheet (of Assets and Liabilities) as at the end of the year.   The glossary of terms which should be used in Railway Estimates and Financial statements is given in Para 308-F.

 

511.  The important financial ratios, applicable to Indian Railways, may now be described as shown below:—

(a)  Operating Ratio,  i.e.,  percentage of gross working expenses (item (xiii) of Para 308-F.) to gross earnings (item (v) of Para 308-F).

(b)  Return on Capital—

(i) percentage of (revenue) surplus (item xxi of para 308-F) to  Capital-at-charge (item xxii  of para 308-F).

(ii) percentage of net receipts (item xix of para 308-F) to Capital-at-charge. 

(c) Current Assets /Liabilities—                                                                                          '

(j) Stores in stock in terms of month's consumption, (ii) work-in-process (workshops) as a percentage of the value of workshop outturn.

(iii) stores inventory (stores, ' purchases', 'sales', and miscellaneous advance-   capital, etc.,) as percentage of the total issue of stores.

(iv) Unrealised earnings at the year-end in terms of number of days, earnings.

The above ratios, compared from year to year, provide useful information for judging the financial performance of the Railways.

 

5I2. Statistical and other techniques.—The phenomenal growth in business activity in the second half of the 20th century has given tremendous impetus to the development of management techniques, such as work study and related quantitative disciplines at the same time making use of the specialized knowledge of physical and behavioral sciences in the problems of productivity and measurement of inputs. Work study is a generic term applied to techniques used in the examination of human activity and the investigation of all factors which affect efficiency and economy. While, the conventional type of work study was adequate in the past for improving the systems, it has been found that complexities of the interaction of various sub-divisions within the same system and those of the system with related external systems, can be determined with the required degree of clarity and precision only by the simulation of problems through mathematical models quantifying different alternatives to arrive at the optimum solution. This, has borough about the quantitative discipline called Operation Research (O. R.) which is defined as the science of decision making by simulating physical situations through mathematical models. O. R. Techniques include linear programming, queuing, simulation etc. An important technique used for project scheduling is network analysis and the determination of the critical path.

ANNEXURE—I

ILLUSTRATIVE LIST OF MANAGEMENT CONTROL TECHNIQUES

(Refer Para 507)

1.  Financial  and cost ratios.—These got   their start as a device and convention   in  the inspection of balance sheets for credit purposes.   They have been of some use to managements internally, especially when extended to percentage-to-sales data on income statements.    Still in  use, such ratios do not have the highest regard, at least not for reliability, but one ratio, return on capital, has achieved extreme and diversified recent application (commented upon separately below).

2  Unit-costs.—-First  needed for building inventory values for balance sheets, the periodic derivation of costs incurred per product unit manufactured grew to serve in assisting cost estimating for pricing purposes and to facilitate control of costs.

3.  Standard   costs.—An engineering device in origin, unit costs determined by time study, or otherwise reliably, have corns into wide use as means of operating inventory in process accounts and valuing period-end inventories.    Even more, and partly because detailed to material, labour, and overhead unit costs, standard s have   been   used  to   measure   the  operating  performance   of  manufacturing  cost entres.    Analyses   of differences between actual and standard  costs, called   variances, have become a common and highly regarded cost appraisal tool.

4.  Direct costing.— Dependent   upon the pioneering analysis  done for flexible   budgeting and cost-volume-profit relationship, direct costing is a system of accounting and/or reporting which, as a primary feature excludes fixed costs from cost of sales, all such costs being grouped as period costs with fixed costs of administration and sales.    This has the effect of providing a balance called gross margin, after deducting variable costs from sales.   This margin is unaffected by production rate,   which influences gross profit under conventional (absorption) costing.    Direct costing theory extends to the balance sheet, on which inventories are stated at variable costs only, not carrying forward period costs, as these must be re-incurred at any event.

5.  Budgeting-fixed.—This is normally a control plan   applicable   to operations geared to a particular volume and detailed as to allowable outlays for later comparison with actual outlays.    It is logical extension of fore-casting and standardizing costs to the control field and has been responsible for the establishment of bud-getting as a conventional internal activity.    Ordinarily, budgeting is the only tool that   introduces into statements, a set of figures as numerous as the account balances to which they relate.

6.  Budgeting-flexible.—This is a control   plan devised to be useful,   as fixed  budgeting is not, when volume of production/activity changes.    The key here has been the recognition of cost behavior and the alignment of budget figures to the fact that fixed, semi-variable, and variable costs will respond to volume changes in the manner suggested by these terms.    Considerable analytical  work  precedes use of a  flexible  budget, which  usually proves superior for    performance  measurements.

7.  Integrated   data processing.—The computing machines now available , with   capacities   and 'skills of sorting, analyzing, and communicating   well beyond tabulating equipment, are moderately in  use in larger companies and pose wide challenges and opportunities in management accounting generally.

8.  Statistical   techniques including operations research.—A somewhat new set of accounting tools seems to be shaping up from the discipline of statistics.   Sampling is being used in auditing.    Control charts, constructed on the concept of standard deviation and control limits, are sometimes used to isolate exceptional cost behavior.    More intricate techniques grouped as operations research-are  occasionally introduced by problem-solving in accounting tasks by qualified personnel.    Use of linear programming for inventory control is an example of this.    Regression analysis may be used for assessing degree of correlation of expenditure to performance.

9.  Project  evaluation.—'Evaluation of proposed capital expenditure has been a popular topic for over 3 decades because of the marked business expansion during this period.    Refinements in the methods of project measurement have been made in theory and practice, but rough and ready methods have also been retained, the main consideration being the estimated outlay involved and the relative   simplicity or complexity of the situation.    Whatever the methods used, the basic concepts are based on segretion of cost and revenue, calculation of risk involved, determination of prospective return to the company with or without consideration of the timing of income.    In recent years how ever, time value of money has been brought  into operation for evaluation of projects by discounted cash flows over the entire period of the anticipated project life.

10. Program Evaluation and Review Technique (PERT).— The basic concept of PERT requires concise visualization of all the individual tasks (operations) to completes a given project. These are classified as "events", stages of completion, and "activities", placed in sequential order, and various time estimates are prepared for each activity. The sequence in which the activities are scheduled to be performed creates " paths ", from the beginning to the end of the project network. The time required by the paths is determined by totaling the time for each activity along the path. The most significant results of the calculation involved with PERT are the determination of a " critical path " and " slack time " for the network. Since the longest time path through the network will control the schedule for the entire project, it is the ' critical path '. Delays -in completing the activities on this path will create a potential schedule slippage (time variance) for the project as a whole-. The other paths through the network are referred to as slack paths. The critical path and slack time calculations result in a slack order report furnished to management periodically during the course of the course of the project's operation. !n determining a schedule for a project, if the target time required to complete the project is less than the time available on the critical path (total of timed activities), then these activities must be re-analyzed to determine whether their time requirements can be reduced, it may be possible for some of the activities to be performed concurrently. When the time required by the critical path is less than the time required to meet the original target date for the completion of the project, then either the target date can be moved forward or costly methods of operation can be employed. In any case, management has information available upon which it can base a course of action. The system also provides a timely index on the percentage of funds expended against the capita! budget for the project.

11. Management/Operational Audit.—Management/Operational Audit (OA) is a comparatively new control technique for evaluating the effectiveness of operating procedures and internal controls. OA is a constructive method of assisting management to improve business operations in various ways, viz., by alerting management to the breakdown of operational controls, by pin-pointing areas for cost reduction, by suggesting potential operating improvements, and by pointing out failure of functional, responsibilities in various areas.

 

Management in Indian Railways is defined as involving responsibility for which of the following?

a) Judgment and decision-making in effectively planning and controlling operations
b) Coordination without decision-making
c) Only financial control
d) Primarily focusing on customer satisfaction

Answer: a) Judgment and decision-making in effectively planning and controlling operations

2. Which of the following is NOT a characteristic feature of management according to the provided text?

a) Management is a process of combined mental action and human behavior
b) The essence of management is decision-making
c) The objectives of management are always fixed and unchanging
d) Management has an essential economic character concerned with effective use of resources

Answer: c) The objectives of management are always fixed and unchanging

3. The Railways in India are accountable to which body for their operations?

a) The President of India
b) The Supreme Court
c) The Parliament of India
d) The Ministry of Transport

Answer: c) The Parliament of India

4. What does the annual revenue budget of Indian Railways comprise?

a) The estimated amount of money required for corporate events
b) The estimated amount of money required for new railway projects
c) The estimated amount of money required to achieve specific performance targets for freight and passenger traffic
d) None of the above

Answer: c) The estimated amount of money required to achieve specific performance targets for freight and passenger traffic

5. What does the term 'Appropriation Accounts' refer to in the context of Indian Railways?

a) Accounts used to track the personal expenses of railway employees
b) Records devised for the scrutiny of incurred and adjusted expenditure
c) A detailed list of assets owned by the Railways
d) An account of revenues generated from passenger services

Answer: b) Records devised for the scrutiny of incurred and adjusted expenditure

6. The performance budgeting in Indian Railways includes assumptions about which of the following?

a) Movement of a specific quantum of traffic
b) Maintenance of track and rolling stock
c) Optimum utilization of assets
d) All of the above

Answer: d) All of the above

7. What are the important financial ratios used to judge the financial performance of Indian Railways?

a) Operating Ratio and Return on Capital
b) Revenue per employee and Net Profit Margin
c) Current Assets/Liabilities ratio and Debt-to-Equity ratio
d) None of the above

Answer: a) Operating Ratio and Return on Capital

8. Which of the following is NOT a financial ratio applicable to Indian Railways mentioned in the text?

a) Operating Ratio
b) Return on Capital
c) Profit Margin per employee
d) Current Assets/Liabilities

Answer: c) Profit Margin per employee

9. The accountability of Divisional Superintendents in Indian Railways is primarily related to which of the following?

a) Earnings from freight and passenger services
b) Expenditure within the budget allocation
c) Setting and achieving profit targets
d) All of the above

Answer: b) Expenditure within the budget allocation

10. Which technique is described as the science of decision-making by simulating physical situations through mathematical models?

a) Network Analysis
b) Work Study
c) Operation Research (O.R.)
d) Financial Accounting

Answer: c) Operation Research (O.R.)

11.Financial and cost ratios were originally used for what purpose?

a) To assist in setting sales prices
b) As a convention in the inspection of balance sheets for credit purposes
c) To evaluate employee performance
d) For determining the cost of raw materials

Answer: b) As a convention in the inspection of balance sheets for credit purposes


12. What is the primary use of unit costs in management?

a) To evaluate the company's stock performance
b) To set pricing for products and control costs
c) To assess employee productivity
d) To determine the total sales revenue

Answer: b) To set pricing for products and control costs


13. Standard costs are commonly used for what purpose in manufacturing?

a) Calculating income tax
b) Operating inventory in process accounts and valuing period-end inventories
c) Managing customer relationships
d) Setting sales targets

Answer: b) Operating inventory in process accounts and valuing period-end inventories


14. What does direct costing exclude from the cost of sales?

a) Variable costs
b) Fixed costs
c) Direct labor costs
d) Material costs

Answer: b) Fixed costs


15. What is the main feature of flexible budgeting?

a) It is only applicable to fixed costs
b) It does not account for volume changes
c) It aligns budget figures with cost behavior, accommodating volume changes
d) It is a tool for forecasting only

Answer: c) It aligns budget figures with cost behavior, accommodating volume changes


16. Integrated data processing in management accounting involves which of the following?

a) Manual calculation of data
b) Simple tabulating equipment
c) Advanced computing machines capable of sorting, analyzing, and communicating data
d) Basic spreadsheet software

Answer: c) Advanced computing machines capable of sorting, analyzing, and communicating data


17. Statistical techniques in accounting include which of the following methods?

a) Estimating future sales revenue
b) Using control charts to isolate exceptional cost behavior
c) Direct negotiation with suppliers
d) Manual inventory counting

Answer: b) Using control charts to isolate exceptional cost behavior


18. What is the main consideration in project evaluation?

a) The project's impact on employee morale
b) The estimated outlay involved and the simplicity or complexity of the situation
c) The company's market share
d) The current economic climate

Answer: b) The estimated outlay involved and the simplicity or complexity of the situation


19. In Program Evaluation and Review Technique (PERT), what does the term 'critical path' refer to?

a) The path with the shortest duration
b) The longest time path through the network that controls the project schedule
c) The path with the least number of tasks
d) The path with the most slack time

Answer: b) The longest time path through the network that controls the project schedule


20. What is the purpose of a Management/Operational Audit?

a) To assess the aesthetic appeal of the company's branding
b) To evaluate the effectiveness of operating procedures and internal controls
c) To conduct market research
d) To create new marketing strategies

Answer: b) To evaluate the effectiveness of operating procedures and internal controls

 

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