The Management Accountant is a King-pin
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Passenger Transport Policy Relies on Accurate Financial Forecasting
HAT the management accountant is concerned with the financial effect of events as they take place or are envisaged and thus assists in the immediate control of a business, was the theme of a paper read before the Scottish Road Passenger Transport Association at Turnberry, on Wednesday, by Mr. John Cooper, M.Inst.T.-, F.C.1.S., F.C.W.A., general manager, Leicester City Transport.
Although clear dividing lines between specialized branches of accountancy were not easy to define, because each was designed to arrive at a profit and loss account and a balance sheet, Mr. Cooper made a distinction between " historical " accounting and that which was concerned with current events. The cost accountant looks to the future rather than to the past, and is thus of immediate assistance to management in deciding policy.
In British practice, considerable difference existed between financial and cost accounts, often leading to duplication of effort in the larger business. In the United States, the two accounting bases were more closely knit. The standard form of municipal transport accounts, for example, allowed for two separate sets, financial and costing. Mr. Cooper feared that the new form of accounts sponsored by the Institute of Municipal Treasurers pandered still further to the needs of the financial officer rather than the manager. He hoped that the point of view of the tatter might in the future be granted greater weight.
Planning for the Future The purpose of management accounting lay in a forecast of events, perhaps three years ahead, for which a financial programme INAS prepared and broken down into annual and four-weekly periods. During the period planned, results were measured against forecast, due allowance being made for known or suspected eventualities.
It was the function of the cost accountant to forecast the financial implications of alternative suggestions and to ensure that programmed targets were not set above fulfilment capacity. Mr. Cooper emphasized the value of keeping all concerned "in the picture --too much information throughout an enterprise was preferable to too little-and restated the dictum that the aim should be centralization of control rather than decentralization, of responsibility.
It was the task of the management accountant to seek out the information likely to be required by management at different levels, well ahead for the senior executive, and :immediately for day-today action at lower levels. In this connection, it was the duty of the nI2 accountant to consider what statistical information was useful and what was redundant.
As profit margins narrowed, cost consciousness became more important in transport operations. If some municipalities were prepared to subsidize their transport departments, the management accountant must see that some other standard than the profit margin took its place. A profit in a controlled monopoly undertaking could usually be obtained if charges were set high enough and if a shrinking of business were acceptable. Of itself, a surplus was not an automatic measure of efficient management. The " featherbed " of controlled monopoly conditions must not be allowed to dull the sense of urgency in the need for better methods.
Statistical Comparisons
Comparison of the figures of one operator with another was a valuable aid to management, but the basis of calculation should be studied and understood. Percentage rise and fall of annual costs was an important guide but dissimilar circumstances must always be considered. Mr. Cooper welcomed the suggestion of the Municipal Transport Accounthig Officers' Committee that a summation of key figures in the annual reports of undertakings should be collated by a central authority for distribution throughout the industry.
Whilst the preparation of a 'monthly profit and loss account might, in some cases be useful, in others the labour cost in its preparation might make anything but a "flash" account unreasonable. It might well be desirable to sacrifice bookkeeping accuracy in the hastening of a close enough figure to allow for a decision. Trends indicated by moving totals could be helpful.
The problem of the capital locked up in spare parts, fuel, tyres and so on, was one which the accountant would watch. Whilst it was desirable that vehicles should not be immobilized by the lack of components, maximum stock figures must be kept as low as possible; good service was generally available for most types of vehicle outside the workshop of the undertaking. Similarly, expenditure on machine-tool equipment could be expensive, as were the allied charges for insurance, housing and so on. In a nonproducing industry, it was essential to ensure that parts were not scrapped prematurely and, wherever possible, reclaiming and . repairing techniques should be employed to the full.
The speaker made the point that, in theory, the administrator could control everything, but if this control were carried to extremes, administration could be choked to death, and more would be spent in obtaining statistics than, they could possibly be worth. Trial and error would show what figures were worth keeping, but the statements of figures should be capable of being understood without lengthy written explanations.
The cost centres set out in the municipal standard form of accounts were of great value in particular cases. The charges relating to traffic officers and staff, for example, could usefully be compared with the wages of drivers and conductors, and the numbers of vehicles and mileages involved. The wages account, of course, was always to be closely scrutinized, particularly as to payments for overtime, meal breaks and terminal standing times. The reasons for labour turnover should be analysed and the preventive and replacement costs sub-divided.
So far as the repairs and maintenance account was concerned, labour control through standard times should be exercised wherever possible. The system permitted the comparison of actual output with the standard, so that the relative efficiency of individual craftsmen doing the same task could be assessed, at least where the results were measurable by inspection.
Mr. Cooper emphasized the need for effective material control as to quantity and quality, and for a careful watch on purchase price variations.
Third party insurance cover was another matter that called for periodic review. The accountant had to consider the advisability of increasing or .decreasing the extent of the risk covered, the workings of "knock-for-knock" insurance agreements, and the occasional problem of fighting a case or settling out of court.
Expenditure and Tax The task of the accountant in assessing the impact of proposed capital expenditure on income tax payrneng was perhaps an obvious one, but an important part of it lay in deciding on a replacement programme flexible enough to take full advantage of tax concessions. The full significance of the figure for vehicle hours worked must also be fully understood in its relation to utilization of capital assets: the cost of peak hour services, for example, was apt to be disproportionate. The minimum figure for vehicle use at the three peaks was the base from which followed the required total fleet.
Operating ratio could be expressed equally accurately as target gross profit. Every undertaking had a desired surplus after working expenses had been rnet: this could be absorbed in loan charges or transferred to reserve but if the proportionate sum to replace the capital utilized in any one year were .not put back in some way into the business, then the undertaking was not paying its way.
Mr. Cooper devoted a considerable part of his paper to a consideration of mechanical aids to accounting. That their use facilitated office efficiency was undoubted, but it was possible that the revision of procedures necessary before machines could be introduced was as valuable as the machines themselves.