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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 (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. (11)
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 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 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 (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. 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.
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