Many professionals we come across get confused between two different fundas. In the process they are unable to present to the Management, a businessman’s angle. This ends up in suggesting in the process, the legally compliant record keeping.
The concept happens to be pretty simple but not available in any book in Structured fashion to my knowledge.
Here is an attempt to provide Structured Format for conversion of Financial Accounts to Management Accounts.
Produced below is illustrative table in respect of query raised by Managing Director with respect to query increase in insurance cost for 3rd quarter of 14-15.
Insurance Cost
Period October – December 14-15 Vs 13-14
Analysis of Variation
| No. | Particulars | Amount Rs. In Millions |
Amount Rs. In Millions |
| 1 | Expenses as per Financial Accounts Q3 14-15 | 1,000 | |
| 2 | Period Mismatch | (50) | |
| a | Not booked in Q1 and Q2 | (200) | |
| b | Provision for fire insurance at northeast sector for Q3 missed out. | 150 | |
| 3 |
Errors |
(70) | |
| a | Traveling cost wrongly debited | (70) | |
| 4 | Expenses as per Management Accounts Q3 14-15 (based on above adjustments) | 880 | |
| 5 | Cost Drivers | (29) | |
| a | Additions to assets | (25) | |
| Addition to fixed assets Rs.20, 000m @ 0.5% P.A.for the quarter. | |||
| b | Risk Coverage | (3) | |
| Increase in coverage for additional risk on vehicles Rs.6000m @ 0.2 % P.A. for the quarter |
|||
| c | Reduction in Asset | 1 | |
| Sale of Building Rs.2000m @ 0.2% P.A. for a quarter | |||
| d | Rate Increase | (2) | |
| Increase in rate of premium from 0.7% to 0.9% Rs. 4000m for a quarter | |||
| 6 | Net cost after removal of impact of cost drivers | 851 | |
| 7 | Expenses as per Management Accounts Q3 13-14 | 851 |
The above analysis will show that the cost increase is only 29 millions whereas on the plain reading of financial accounts it appears to have increased from 851 million to 1000 million i.e. increase of Rs. 149 million.
Conclusion: Financial accounts figures should always be adjusted for period mismatch and errors, in order to arrive the expenses as per Management accounts.
After that the comparison with prior periods figures, be analyzed by considering various cost drivers.
As a further refined version a table of cost drivers kept handy, will help to structure further. e.g. In this case of insurance cost addition to assets, risk coverage and premium rate happened to be cost drivers of insurance cost.
Remember finally
Financial accounts conversion to Management accounts means:
1) Period Mismatch
2) Errors
3) Cost drivers
