CMA - Assignment - Cost and Management Accounting - Indian Context - Sec A - 001, 031, 033, 036, 041-1 - Final PDF

Cost &
Management
Accounting:
India Context
Aayush (001) | Mohit (031) | Nikhil (033) | Parthay (036) | Ridhima (041)
Contents
1. Executive Summary ..................................................................................................................... 4
1.1. Objective ...................................................................................................................................................... 4
1.2. Summary ...................................................................................................................................................... 4
2. Introduction ................................................................................................................................ 6
2.1. What is management accounting ....................................................................................................... 6
2.2. What is Cost accounting ......................................................................................................................... 6
3. Cost Accounting in Early Periods ................................................................................................ 7
3.1. Kautilya Accounting ................................................................................................................................ 7
3.2. Industrial Model of Accounting........................................................................................................... 8
4. Present Scenario of Cost & Management Accounting ............................................................... 9
4.1. Introduction ............................................................................................................................................... 9
4.2. Impact of 1991 liberalisation............................................................................................................. 10
4.3. Key Management Accounting Practices in India ........................................................................ 11
4.4. Rules & Regulations............................................................................................................................... 12
4.4.1. Companies Act – Section 148 ..................................................................................................... 12
4.5. Effect of Culture ...................................................................................................................................... 14
4.6. Recent Trends .......................................................................................................................................... 14
4.7. Way Forward ........................................................................................................................................... 16
5. Future of Cost and Management Accounting........................................................................... 17
5.1. Will present accounting system suffice Industry 4.0 ............................................................... 17
5.2. New Cost & Management Accounting models for the future ................................................ 17
5.2.1. Green Model of Costing ................................................................................................................ 18
5.2.2. Traditional ABC to Innovative Activity Based Standard Costing (ABSC) ................. 19
5.2.3. Capacity maximisation to capacity optimisation ............................................................... 20
Exhibit A. References ................................................................................................................... 21
2
The Cost & Management Accounting: Indian Context
Figures
Figure 1. Contingency theory framework, source: Shannon W. Anderson, William N. Lanen,

1999......................................................................................................................... ...................... 10
Figure 2. Comparison of adoption of management practices by Indian and Australian companies.
Source: P L Joshi, 2001. ............................................................................................................... 11
Figure 3 Companies Act – Maintenance of Cost Records ............................................................ 12
Figure 4. Companies Act – Applicability of Cost Audit .............................................................. 13
Figure 5. Usage of Performance management tools by Indian Companies .................................. 15
Figure 6. Usage of ABC by Industry ............................................................................................ 15
3
1. Executive Summary
1.1. Objective
The Objective of this report is to evaluate the changing landscape of cost and management
accounting in India, right from the 4th century of Kautilya to the impending industry 4.0. The
report recognises the early pioneers of the cost of management accounting and their
contributions to the cost accounting. Then, evaluate the recent trends and regulations by the
government on the practice of cost accounting in the industry. Thereafter, the report assesses the
change in the costing methods due to the change in technology and smart connectivity in the
industry 4.0.
1.2. Summary
Kautilya was the pioneer of cost and management accounting who wrote book on to how
economics and accounting should be recorded by the kingdoms to control cost, effective
decision making and prevent fraudulent activities. Thereafter, the post-industrial revolution
effectively incorporated cost accounting in its day to day operations so as to compute the cost of
production and to set the selling price for reasonable profits.
The present scenario of cost and management accounting in India is much more regulated ad
codified than before, wherein ICWAI is the pioneer for making rules and regulations for cost
accounting and its audit under Section 148 of the companies. Also, most of the companies in
India use ABC costing wherein appropriate cost drivers are used to allocate overheads to various
functions of the department. These selection of cost drivers is affected up to a certain level by
the culture of the organisation which is subjective to the priorities given by the top management
to various processes in production.
In industry 4.0, wherein there will be smart factories with interconnected machines using
technologies like AI, ML, NLP, IoT, 3D Printing, etc. For these complex environments, the present
method of costing wont suffice and new methods of cost & management accounting will evolve to
tackle the problems of the future. Most notable ones would be the green manufacturing
to reduce carbon footprints and new cost drivers wherein the usage of network bandwidth and
the allocation of robots will dictate the scope of cost of production.
<<This space is intentionally left blank.>>
5
2. Introduction
2.1. What is management accounting
Management accounting is the management-oriented accounting. It is the study of financial
accounting from the manager’s point of view. Hence, the main aim of management accounting
is to restructure or remodel the entire accounting system in order to achieve the management
objectives of the organization.
Management accounting has wide scope in the managerial aspect wherein the financial
information of the company is modified to planning, controlling and directing the various
functions of an enterprise. Management accounting enables management to manage better by
serving as a management information system. One of the major tools for the management
accounting is the ratio analysis to analyse various information in comparison to another
information to devise various management strategies.
2.2. What is Cost accounting

Cost accounting is the branch of accountancy which systematically studies and provides insights
about product costs or costs related to a unit of services. In order to make reasonable profit and
to determine the cost of production, cost accounting is a useful method to more controlling cost
and decision making.
6
3. Cost Accounting in Early Periods
3.1. Kautilya Accounting1
According to Kautilya, objective inquiry in accounting requires the fulfilment of two key goals:
explanation and prediction. He applied these objectives to inquires relating to accounting –
implicitly and explicitly. Kautilya used fractions, percentages and advanced operations,
including permutations and combinations to develop bookkeeping rules, conducting independent
audits and methods for making timely budgets and income statements. The Arthashastra, written
by Kautilya can be considered as a system study of wealth and welfare, classified into three
logically well-elaborated sections:
(i) Issues related to security/threats of the nations and includes topics like foreign policy,
(ii) Issues like crime and punishment covered under jurisprudence
(iii) Issues related to development of the economy, laws related to labour, taxation and
financial management
Broadly, the Arthashastra explain accounting standards and principles, auditing and fraud risk
management, responsibilities and duties of auditors and accountants, the methodology (rules
and procedures) of accounting and how ethics shape management of financial activities.
The receipts were classified into three: (i) current, (ii) last balance, and (iii) anyajátah (meaning
accidental or received from external source).
Expenditure was classified in a fashion similar to receipts and thus included the classification
into revenue expenses and capital expenditure. Kautilya illustrated it as two kinds of
expenditure - daily expenditure and profitable expenditure. “Net balance” was defined as the
difference between income and expenditure.
1 https://www.jstor.org/stable/pdf/40698303.pdf?refreqid=excelsior%3Aba04f380ef3a7226630b18e7d2558029
3.2. Industrial Model of Accounting
In 18th century, the rise of Industrial Revolution saw the development of large sized processing
industries including manufacturing, textiles and railways. Since there was no market for
intermediaries, cost information gained relevance so that efficiency of each stages could be
measured. Around 1875, the concept of prime cost was used. Following that till 1925 AD, major
changes in the accounting systems took place. Development in complexity of product designs and
emergence of corporations that had diversified into multi-activity processes led accountants to
convert physical standards into cost standard. Cost standard was useful for variance analysis and
control. Major global events altered the processes of cost and management accounting. World War
I and II saw the growth in social importance of cost accounting with the growth of each country's
defend expenditure. The lack of a competitive market scenario during the war times caused the
governments in several countries to place cost-plus contracts. Under them the price owed to a firm
was equal to cost of production in addition to an agreed upon rate of profit. Even after World War
II, the reliance on cost information to defence contracts continued and most of the government
contracts are decided on a cost-plus basis.
Contemporary accountants have redefined accounting as “the science that attempts to explain
and predict the economic performance of individuals or groups responsible for the utilization
of economic resources.”
8
4. Present Scenario of Cost &
Management Accounting
4.1. Introduction
There can be a unique role for management accountants in steering their organizations in this
changing business environment. Their role is no longer restricted to the accumulation and
reporting of financial data. Research by Institute of Management Accountants (IMA®) has
shown that around the world, management accounting professionals are partnering with other
personnel inside their organizations to help in various aspects of the organizational strategy
formulation, evaluation, and implementation.
In India, post-independence period saw the establishment of two bodies (statutory in nature) to
regulate and oversee the auditing professions of cost and financial accounting systems of
private as well as public sector companies, one was ICWAI or the Institute of Cost and Works
Accountants of India and the other one was the ICAI or Institute of Chartered Accountants of
India. The ICWAI was established in 1959 as to train cost and management accountants in
India.
However, in India, academia has overlooked the evolution of management accounting

intentionally or unintentionally.
The notable reasons for this are:
1. In India there has been a dearth of field studies that are systematic in which may be
partly due to academia’s and accounting bodies’ lack of interest and initiative and
partly due to the unwillingness of corporates and conglomerates to divulge
information in the form of case studies with researchers or consulting bodies.
2. Since management accounting is not exploited to its full potential by most companies
an average management accountant in these companies do not get the chance to
participate and provide insights into the accounting practices and activities which
otherwise, he could have.
4.2. Impact of 1991 liberalisation2
The effect of 1991 liberalisation on management accounting practices in India has been studied
using Contingency theory framework. Contingency theory states that structure of the
organisation is a function of background or the context, which is simultaneously controlled by
the history, environment (external) and other organizational features (internal).
Figure 1. Contingency theory framework, source: Shannon Anderson, W. N.

Lanen, 1999.
With respect to processes of control and planning, there is proof to show that decentralisation of
planning process has taken place, there has been a wider understanding of the strategic
objectives and the economic reforms of 1991 have changed the key information inputs necessary
for strategy formulation. Managers especially in planning and human resource management
functions are now more involved in developing corporate strategies. Increased budget accuracy
has been achieved by firms by greater use of standard budget developing procedures and larger
employee participation in every stage of setting and revision of budgets have also been achieved.
External perspectives such as customer satisfaction have been quantified and included in
organizational performance measures.
2
Shannon Anderson & W. N. Lanen, W. N. (1999). Economic-transition, strategy-and-the-evolution-of
management-accounting-practices: the-case-of-India. Accounting, Organizations and Society, 24(5-6), 379-412.
10
4.3. Key Management Accounting Practices in India
Although manufacturing companies in India took on most of the recently developed practices,
Indian companies mainly relied on management accounting methods that are traditional
and the rates of adoption have
been slow and low for new
practices. Though, greater
benefits were obtained from the
traditional methods compared to
the recently developed methods,
some of the new methods like
activity-based costing, product
profitability analysis, target
costing and customer
satisfaction surveys that had low
rates of adoption had greater
benefits. However, there is
surely an indication towards a
shift in their methods and
practices. Factors like size of the
company, long term orientation,
conservative attitude of Indian
management influenced the low
adoption rates.
Figure 2. Comparison of adoption rates of management

techniques and practices by Australian and Indian
companies. Source: P L Joshi, 2001.
11
4.4. Rules & Regulations3
The Institute of Cost and Works Accountants of India (ICWAI) acts as a custodian and
oversees the profession of management accounting in India. The organisation has the vital
responsibility of reducing the gap between the role of its members in the Indian economy
and the functions of management accounting defined by it.
4.4.1. Companies Act – Section 148

As per the companies Act, 2013, government has made it mandatory for some companies for the
maintenance of cost records and to get their cost accounting to be audited by an independent
auditor.
The applicability of maintenance of cost records is depicted below:
Figure 3 Companies Act – Maintenance of Cost Records
3 https://icmai.in/upload/Students/Circulars/Companies-Rules-2014.pdf
12
The applicability of cost audit by an independent auditor is depicted below:
Figure 4. Companies Act – Applicability of Cost Audit
Moreover. ICWAI has issued various Cost Accounting Standards (CAS) for the classification
of cost and also on how to account various costs for managerial and cost accounting purposes.
13
4.5. Effect of Culture
A very popular question is whether national culture (measured using Hofstede’s dimensions)
affect management accounting techniques and practices. Studies of firms across the four
countries (including India) shows that the firms even when their national cultural values differ
from the management accounting practice, they are consistent taking on board practices in
management accounting, traditional in nature. Thus, it seems that global influences at the
macro level are steering practices and techniques in management accounting, resulting in
similar techniques and practices in different countries. However national culture was found to
have an effect on the rate at which newly developed practices and techniques are adopted, with
India being slow and late adopters of such practices.
4.6. Recent Trends4

A study was carried out by MyCFO in collaboration with IMA to find out the present state of
management accounting in India. Some of the key findings were:
1. The traditional, limited role of the cost accountant is slowly being replaced by a more
expansive role that is strategic and value creation-oriented
2. In areas like statutory reporting practices, India is more similar to emerging economies
whereas in areas like strategy development, they are similar to that of developed
economies.
3. Though the important goals of finance are forecasting, planning and delivering business
insights, substantial resources and focus are allocated to India’s complex tax and
regulatory reducing the firm’s ability on generating business insight.
4. Traditional methods of performance management (operational budgeting, incentive

compensation, benchmarking and fixed-variable cost analysis) are still more frequently used
as compared to recently developed tools like target costing, balanced scorecard, value chain
4 https://www.imanet.org/-/media/45ce9a46a03b4c84a5afcb062d83132f.ashx
14
analysis etc (figure 5). The satisfaction levels associated with organisations’
performance management systems (PMSs) is low, consistent with results from the
rest the world.
5. Activity-based costing (ABC) system usage was high (59% of companies). Service
industries had a higher usage of ABC compared to manufacturing industries (figure 6)
Figure 5. Usage of Performance management tools by Indian Companies
Figure 6. Usage of ABC by Industry
15
4.7. Way Forward
Management accounting isn't in trend among the Indian corporates as well as the
professionals. So, it is imperative that the users of management accounting be made aware of
its true potential. One of the important steps could be taken by the government in promoting
transparent information on reformation of cost auditing and its direct impact on
competitiveness and productivity of the industry. Such kind of methods could help the
government shape and control its finances in an efficient manner. This would lead to the social
sector restructuring its welfare schemes and civil projects via management accountants. Small
and medium scale industries stand to gain the most out of the use of such practices and can
achieve their truest potential using such accounting methods.
16
5. Future of Cost and
Management Accounting
History lessons tell us about how the steam power revolutionized factories, creating the
Industrial Revolution that happened in the late 18th century. A series of other revolution soon
followed, a second happened in the 19th century, when mass production was made possible
with electricity and assembly lines, the third in the 1960s, when programming machines and
networks was made possible due to advances in computing. Today, we are fast approaching
the Industry 4.0 or the 4th industrial revolution.
According to Brian Heckler, CPA, U.S. leader of KPMG's Industrial Manufacturing Sector,
"Industry 4.0 or the fourth industrial revolution is the next stage in the evolution of
automation of processes, rendering them better and smarter"
5.1. Will present accounting system suffice Industry 4.0

If we take the example of a connected factory, in a day it is expected to generate 1 petabyte of
data, which is comparable to 60 million books or one billion minutes of MP3 music. Even
though it is remarkable to note that manufacturing-operations management (MOM) systems and
manufacturing-execution systems (MESs) are currently capable to handle this large quantity of
data to create valuable insights and information, there is still a long way to go before finance
and accounting systems can efficiently connect and create decision-supporting insights and
information used for digital manufacturing. Most of the costing systems currently used are
limited in the sense that they deliver only minimal financial reporting requirements such as
direct material, direct labour and overhead.
Hence it is the need of the hour that a new approach to financial decision support modelling is
created.
5.2. New Cost & Management Accounting models for the future
In an environment where data-rich digital manufacturing is becoming popular, cost information has
an enormous potential to improve decision support. Such an environment requires greater
connectivity to consumer needs, increased role of IT and support, flexibility of modern production
resources and integrating design flexibility into the production process. This increases the
complexity of modelling to manage costs and determine profitability. Operational systems are
adapting to this new environment, and would hugely benefit if they have a timely and clear
picture of the created costs and value that can be made possible by integration of new
monetary models. Hence the need for the accounting profession to go far beyond financial
statements and create new models has never been greater.
The evolved models of costing and management accounting for future are:
5.2.1. Green Model of Costing5

The model for ascertaining costs of green manufacturing uses concept of industrial dynamics,
and product lifecycle. It consists of a dimension of process-based cost and SD (system
dynamics) dimension. Costs related to carbon emission and energy-saving activities are mainly
incorporated by the process-based cost dimension. Key quantitative measures usually
overlooked in static modelling were included in the system dynamics dimension.
Green manufacturing model makes it possible to decrease the costs of manufacturing by

including “green issues or concerns” at the unit level as well as the batch level. Activities related
to maintenance and production are done at the unit level. Here the reduction in costs can be
accomplished by employing electric power and through minimizing wastes during production.
During production, waste minimization can be accomplished by refraining from using cutting
fluids and promoting usage of recycled material. Reduction in emission levels of carbon
achieved in the course of production will help in saving payment of carbon emission tax. The
batch level activities consist of transportation of input supplies and finished as well as used and
damaged goods to facilities like manufacturing factory, recycling locations and customer homes.
Here costs may be reduced by usage of electric power and energy efficient fuel like motor gasoline.
At the process level, reduced number of designs and drawings by engineering managers will
result in cost reduction.
5
https://www.mdpi.com/2071-1050/10/8/2932/pdf
18
5.2.2. Traditional ABC to Innovative Activity Based Standard Costing
(ABSC)6
Development of smart products, smart factories and smart services in the Internet of Things
(IoT) environment will happen during industry 4.0. The future industry 4.0 will be based on an
innovative ABSC (activity based standard costing) model, modified from the traditional ABC
theory. ABSC will address the following technological gaps compared to ABC in the future
Industry 4.0 environment.
• CPS: Cyber Physical Systems which enables an intelligent connection of all smart
objects capable of continuously interchanging data in a timely fashion.
• IoT: Internet-of-Things (IOT) is a ubiquitous virtual infrastructure
• Sensor technology: A system where a variety of sensors are embedded into Smart
objects enabling them to be observed, understood and perceived through
computers without the requirement to input data.
In the future Industry 4.0, real-time decisions can be made using cloud computing and big data.
Hence in the industry 4.0 era, a decision support system using product-mix ABSC model can
give optimal solutions linked to the business strategy and planning and organization’s budget.
The model can be solved using a LINGO software system and hence it should be included in
the requirements for Big Data systems.
5.2.2.1. New Overheads to be allocated in Industry 4.0

The fourth industrial revolution will result in factories that are smart, robots and
interconnected devices. Hence, the traditional costing of raw material, labour cost will be
replaced with costs of network usage by various systems / departments in the organisation and
the robots being deployed for the productions of goods and services.
6
https://-www.mdpi.com/-2071-1050/-11/-3/899/pdf
19
Also, there will be accounting for the cost of CO2 emissions and the green house gases generated
by various cloud computing servers.
The newer ABC system will have new cost drivers which will be linked to the network usage,
infrastructure deployed, cost of accounting, database cost, robotics, etc.
5.2.3. Capacity maximisation to capacity optimisation7

In the "Industry 4.0", production processes will be largely interconnected driven by information
collected in a real time manner and hence increasing efficiency of processes. In this scenario,
capacity optimization should not only target the traditional aim of capacity maximization, but also
should take into consideration the economic dimensions of organization’s profitability and value.
Capacity optimization in place of maximization is also supported by continuous improvement and
lean management approaches. Hence going forward new costing models will be developed and
deployed to analyse idle capacity costs and to design strategies towards the maximization of
organization’s value.
7
https://-www.sciencedirect.com/-science/-article/-pii/S2351978917308326
20
Exhibit A. References
1. Kallapur, Sanjay, and Ranjani Krishnan. "Management Accounting in India."
Handbooks for Management-Accounting-Research (2009): 1399-1410.
2. S. W. Anderson and Lanen, W. N. (1999). Economic-transition, strategy &
evolution of management accounting practices. Accounting, Organization and
Society, 24-(5-6), 379-412.
3. Joshi, Prem Lal. "The international diffusion of new management accounting
practices: the case of India." Journal of International-Accounting, Auditing &
Taxation 10.1 (2001): 85-109.
4. M.bt. Nazli Ahmad Sulaiman Alwi, (2004),"Management-accounting-practices in
Asian countries", Managerial-Auditing-Journal, Vol. 19 Iss 4 pp. 493 – 508
5. Raef Lawson. Enterprise Performance management the role of management
accountants in India. MyCFO. 2017
6. https://www.jstor.org/stable/pdf/40698303.pdf?refreqid=excelsior%3Aba04f380ef3a7
226630b18e7d2558029d
7. https://icmai.in/upload/Students/Circulars/Companies-Rules-2014.pdf
8. W.-H. Tsai; S.-H. Lan; C.-T. Huang, Activity Based-Standard Costing-Product-Mix
Decision in the Digital future Era: Green-Recycling Steel-Scrap Material for Steel-
Industry. Published in Sustainability 2019, 11, 899.
9. https://www.mdpi.com/2071-1050/10/8/2932/pdf
10. https://www.sciencedirect.com/science/article/pii/S2351978917308326

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Cost &

Figure 1. Contingency theory framework, source: Shannon W. Anderson, William N. Lanen,

<<This space is intentionally left blank.>>

2.2. What is Cost accounting

<<This space is intentionally left blank.>>

(ii) Issues like crime and punishment covered under jurisprudence

<<This space is intentionally left blank.>>

However, in India, academia has overlooked the evolution of management accounting

Figure 1. Contingency theory framework, source: Shannon Anderson, W. N.

Figure 2. Comparison of adoption rates of management

4.4.1. Companies Act – Section 148

The applicability of maintenance of cost records is depicted below:

Figure 3 Companies Act – Maintenance of Cost Records

Figure 4. Companies Act – Applicability of Cost Audit

4.6. Recent Trends4

4. Traditional methods of performance management (operational budgeting, incentive

Figure 5. Usage of Performance management tools by Indian Companies

Figure 6. Usage of ABC by Industry

<<This space is intentionally left blank.>>

5.1. Will present accounting system suffice Industry 4.0

5.2.1. Green Model of Costing5

Green manufacturing model makes it possible to decrease the costs of manufacturing by

• IoT: Internet-of-Things (IOT) is a ubiquitous virtual infrastructure

5.2.2.1. New Overheads to be allocated in Industry 4.0

5.2.3. Capacity maximisation to capacity optimisation7

<<This space is intentionally left blank.>>

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