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GUIDANCE NOTE ON PERFORMANCE APPRAISAL REPORT (Form-III ) - November 2012

G Note - Companies Law - G Note - 1. PREFACE 1.1 The Ministry of Corporate Affairs vide Companies (Cost Audit Report) Rules, 2011 notified by GSR 430(E) dated 3rd June 2011 introduced "Performance Appraisal Report". The Government has prescribed that Cost Auditors are required to prepare and submit a Performance Appraisal Report in Form III of the said notification, to the company. This is a landmark in the history of companies in India, as this is the first time that a regulatory mech .....

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organization as a whole. Effective performance measures can let us: ♦ Monitor performance to judge how well the company is fairing, ♦ Know if company management is meeting its goals. ♦ If appropriate actions have been taken to affect performance or improve efficiency if improvements are necessary. There is no set number or formula to determine how many performance measures an organization should have. Tracking too many performance measures at once may cause managers to lose si .....

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the context of performance analysis of companies under Cost Audit provisions of the Companies Act, 1956. The guidance note is also not a prescriptive but a suggestive mode for performance analysis. This guidance is about some of the theoretical perceptions on Strategies formulation and implementation, centering on cost implications. Understanding the theory without understanding the ground reality is dangerous. 1.3 The users of this guidance note may come across three types of companies. In the .....

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tor may additionally provide an effective assurance service on selected performance indicators as desired by the management. The Second category of companies is the group consisting of leading domestic companies with a sight on the global market. Such companies would be receptive to any positive and meaningful recommendations from the Cost Auditor in the Performance Analysis Report. This guidance note would supplement the efforts of the Auditor in such situations, notwithstanding the fact that i .....

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value addition provided by the profession in such a situation would strengthen the statutory role which it normally plays under the legal framework by the government. 1.4 This guidance note would supplement the efforts of the Cost Auditor in all the three situations categorized above, and is the first version of guidance note on this subject. It is proposed to constantly update the guidance note on the basis of responses from the users of this guidance notes and further exposures in this area. .....

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nisations: ♦ to improve profits and profitability ♦ to optimize resource allocation ♦ to optimize the product and services portfolio 2.2 The Performance Appraisal Report is to be provided only to the company under cost audit. The form III is NOT to be submitted to anyone else. In that sense, this report is a confidential and not public document. According to the rule 4 (5) of the Companies (Cost Audit Report) Rules 2011, the Performance Appraisal Report should be submitted to t .....

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at the contents of the report are to be mutually agreed between the company management and the cost auditor. Although some indicative areas have been specified in Form III to the Companies (Cost Audit Report) Rules 2011, the cost auditor is expected to verify the suitability for the company and then add other relevant areas or delete those not relevant to the Company. 2.5 It is also clarified that the frequency of the Performance Appraisal Report is to be mutually agreed between the company mana .....

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ntification of business risks faced by the company in the immediate past and evaluate the risk mitigation measures that are planned by the Company in the subsequent period. 2.6 It has been clarified that there cannot be a "nil" performance appraisal report. This means that if the report is not issued or if the report is issued as "nil", the cost audit report will be incomplete. The cost auditor must certify in the main body of Certificate to the cost audit report (form II) th .....

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a good Performance Appraisal Report 4.1 It should be remembered that the Performance Appraisal Report is meant to be used by the company and this report is confidential. 4.2 The report, being an annexure to the cost audit report, should basically lay more thrust on the cost management aspect of the business and should effectively bring out comments on how the business performance could be improved by elevating the cost performance. 4.3 When commenting on or analyzing the cost performance, the c .....

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operational executives to relate what is being done at the shop floor to the cost statements that are the end product of the cost accounting system. 4.5 It would be necessary to analyze the use of various resources to boost economy, efficiency and effectiveness of the operations. Economy indicates incurring of the least possible cost for acquiring and/or utilizing the resources, without compromising the quality. Efficiency denotes maximization of the output-input ratio. Effectiveness means achie .....

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or exclusion from the Performance Appraisal Report. 4.7 The following criteria may help the cost auditor to select and include the various performance measurement criteria in the Performance Appraisal Report: ♦ Effect on profitability ♦ Effect on resource utilisation ♦ Effect on liquidity ♦ Effect on risks ♦ Effect on quality ♦ Effect on competitiveness ♦ Effect on responsiveness to the market etc. 4.8 The Performance Appraisal Report should include non- .....

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ormation overload ♦ Coverage of strategic thrust ♦ Trend measures and current status ♦ Timeliness ♦ Segmented and enterprise-wide coverage 5. Suggested Mechanism for Performance Analysis 5.1 After analyzing the activities within each process, we come to the operational part of Form III of the Companies (Cost Audit Report) Rules 2011. We give below the suggested mechanism for performance analysis as follows: 5.2 In the above paragraphs, we discussed how the strategies are .....

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ements are necessary. So we need to identify appropriate Performance measures so that the analyst is provided data and information necessary to make informed decisions. Performance measures provide a snapshot of current performance capabilities and track whether actual performance is getting better, staying the same, or getting worse over time. Machine hour rate is a performance measure which provides us inputs for various decisions. Capital expenditures tell about the investment of funds; we co .....

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dustry leader? Narrowing the list of measures requires judgment and knowledge about the organization's systems and customers. Keep in mind that the audience who receives the information set the standard for what is relevant and important. Typically, internal audiences are interested in process-level measures and production outputs. Surveys may be measurement tools of last resort for qualitative subjects that defy attempts to measure them quantitatively, such as customer satisfaction. Survey .....

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explanations of why the measure is important or how the data is collected. Those comments belong to in operational details, footnotes, or unpublished notes. ♦ Avoid jargon and acronyms in performance measure titles, so readers who are not subject matter experts can understand what is being measured. Don't word performance measures as objectives. Objective statements include words such as "increase" or "decrease," which imply change. Objective statements are not per .....

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ith specific reference to the company. 6.1 Identify and understand the key strategies of the company, both prescriptive and emergent strategies included. 6.2 Choose strategies that have more visible expressions in costs data maintained by the company. 6.3 Identify the activities that were impacted by the strategies selected and also implemented during the year of cost audit. 6.4 Analyze the cost implications of those activities and link it with the expected results of the strategies. 6.5 Present .....

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report, it would apply in all the cases where Companies (Cost Audit Report) Rules, 2011 apply with effect from 1st April 2011. 7.2 Before preparing the Performance Appraisal Report for the first relevant year, the following approach is recommended to be adopted by the cost auditor: ♦ The cost auditor first must clearly understand the nature of business operations of the company, its segmentation, the environment within which the company operates. It is essential to list the various busine .....

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Performance Appraisal Report around it. ♦ The organization's reporting structure is a crucial consideration. The responsibility centers recognised as investment centers, profit centers or cost centers should be correctly understood as the performance metrics for each of them would be different. ♦ The business drivers could, inter alia, include product life cycle stage, technology, customer preferences, market developments etc. This will enable the cost auditor to understand the .....

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hese reports help the management to make decisions for short term and long term. ♦ It is necessary to get agreed between the cost auditor and the company management the contents of the Performance Appraisal Report and the frequency of the issue which could be half-yearly or yearly depending upon the need. More frequent reporting may not be feasible. The cost auditor should concentrate on financial as well as non-financial performance indicators. The selection of Key performance indicators .....

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ize the plan in order to have clarity. A suggestive format of the plan is given in the Appendix- A 7.3 Once the terms of Performance Appraisal Report are agreed upon as above, the cost auditor should ensure that the company has the underlying information system which could throw up the data required for the preparation of Performance Appraisal Report. In case, the existing system is insufficient, the cost auditor could hold discussions with the IT head of the company. 7.4 The cost auditor is rec .....

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company to review its performance. The cost auditor should then present his independent evaluation of performance of the company. It should not only be diagnostic assessment, but should also include suggestions for improvements. 7.6 The suggestions for improvement could stem from comparing the performance vis-à-vis competition or any other benchmark selected (whether internal or external). 7.7 The Performance Appraisal Report should not contain only number crunching, but have meaningful c .....

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collected ♦ Source of the information - whether from the IT system or internal documents, board minutes, any other internal correspondence ♦ Basic assumptions like risk perception of the management, discount rates used in various calculations, the methods of inventory valuation, overheads allocation, absorption rate calculations etc. 8. General guidance on Performance Appraisal Report for subsequent years 8.1 Handling of the Performance Appraisal Report for subsequent years may seem .....

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in consultation with the management. 8.3 For every subsequent year, it is necessary to question the basis of preparing and submitting the Performance Appraisal Report. If substantial changes have occurred in the business during the year (like merger or demerger, introduction of a new products, new markets, discontinuation of a product line, new technological development, or such other material changes), the cost auditor should make suitable changes in the contents and format of the Performance A .....

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the management and the outcome thereof. This is essential to ensure no issue remains open. 8.6 The Performance Appraisal Report would also highlight the success achieved as a result of suggestions made in the Performance Appraisal Report of the previous year/s. It is required to officially document the usefulness of the Performance Appraisal Report for the organisation. 9. Guidance on indicative contents of the Performance Appraisal Report 9.1 The form III of the Companies (Cost Audit Report) Ru .....

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those areas. 9.2 This approach would enable the cost auditor to include in the report ♦ The opinions and observations and ♦ Suggestions for improvement 9.3 The word "opinion" denotes "a view point". The cost auditor is expected give his/her viewpoint about "how something or someone has performed" during the reporting period. In addition, the cost auditor is expected to put a remark as an observation. This needs to be based on a critical assessment of the .....

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the chosen metrics and then elucidate the analysis by comparing these ratios with the set benchmarks. 9.5 For each of the indicative area given in the form III, the guidance aims at providing the following: ♦ Meaning and Coverage of the area ♦ Performance measures related to the area ♦ Cost auditor's checklist 9.6 The guidance note covers the following indicative areas: (i) Capacity Utilization Analysis (ii) Productivity/Efficiency Analysis (iii) Utilities/Energy Efficienc .....

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ropriate the following: ♦ Horizontal and vertical analysis of quantitative figures ♦ Trend analysis of performance parameters reflecting 3-10 years' figures ♦ Qualitative comments with interpretations of the cost auditor ♦ Comparison with external benchmarks such as industry average 10. Capacity Utilisation Analysis 10.1 The basic quantitative information on capacity is covered in the Para 4 - Quantitative Information to the annexure to the cost audit report. However, .....

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this impact by analyzing and relating the impact of capacity costs on profitability. 10.3 The cost auditor should collect information of theoretical capacity, practical capacity, normal capacity and budgeted capacity for the period under review. Although the information may be available for all machinery & equipment, the cost auditor should identify the "constraint" that would limit the capacity of the entire organisation or product or a certain geographical area. 10.4 The cost au .....

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trollable and uncontrollable causes. It would help to concentrate on material impact caused due to idle time, break-downs, lack of power, lack of material, lack of demand. It would be advisable to compute the cost impact of these. 10.6 Most of the capacity related information is available with the production and industrial engineering departments. The cost auditor should also refer to the CENVAT records for actual production data. 10.7 The cost auditor should comment on how the company responds .....

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♦ Committed capacity costs by process and managed capacity costs by process ♦ Impact of wastages on capacity utilisation 10.9 The cost auditor's checklist would include processing of information gathered from sources like: ♦ Technical documents pertaining to the equipment ♦ Production planning reports ♦ Interviews with managers responsible ♦ Wastage and down-time reports ♦ Benchmarking exercises done, if any ♦ External sources providing sugges .....

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fectiveness (OEE) ♦ Theory of constraints model (TOC) ♦ Balanced Score Card - by Robert Kaplan ♦ AA1000APS (Principles) ♦ AA1000AS (Assurance) ♦ AA1000SES (Stakeholder Engagement) 11. Productivity and Efficiency Analysis 11.1 Productivity involves variables of input resources and the output. Measuring, identifying and isolating the different input resources and analyzing their contribution to produce goods and services and their effect on costs and profitability is .....

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the input ingredients for each product, product group, customer etc. 11.3 Para 6 and Para 8 to the cost audit report provide some basic information about the input costs and their relation with the output. The cost auditor should further analyse these areas to identify causes of good performance and areas that need improvements. 11.4 The considerations in measuring productivity and efficiency performance could be: ♦ Performance of input factors such as material, people, tools, equipment, .....

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put • Achieve slightly less output with much less input ♦ For each selected area, the cost auditor should identify whether the improvement is permanent or temporary and report on the same. The recommended approach for the organisation should be focusing on the sustainable improvements. Care should be taken to identify and report potential manipulations. ♦ Alongside the productivity or efficiency ratios, the cost auditor should also analyse and report on the effect of the same on .....

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in various productivity measures e.g. output per man-hour may have increase, but if it is accompanied by higher wastage per man hour, then there is no real benefit 11.5 The cost auditors checklist would include, inter alia, the following: ♦ The Bill of Material (BOM) for each product ♦ The standard cost card, if any ♦ Internal reports on consumption, wastages per unit of input to capture actual data ♦ Production scheduling and plans to measure labour & machine time pr .....

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lysis of single factor productivity in respect of the utilities and energy inputs acquired and consumed by the company. The importance of conservation of nonrenewable energy needs no emphasis. 12.2 The utilities are resources that are used in the process of conversion of material and other components into a finished product, but these resources do not form part of the physical unit of the product. In manufacturing industries, utilities and energy form a substantial part of the conversion cost. 1 .....

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It is essential to check if there are any statutory norms prescribed for the company. 12.4 The cost auditor should gather information on whether the company falls under the energy intensive industries as per the schedule attached to the Energy Conservation Act 2001. These industries include Aluminum, fertilizers, steel, cement, paper and pulp, sugar, textile, chemicals, petrochemicals, gas crackers, etc. 12.5 For external benchmarking, it may be useful to refer to the practices followed by compa .....

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electricity, water etc. ♦ Measurement of improvement in power factor (denoting reduction in the KVA demand charges) ♦ The cost of generating energy per unit and the cost of consuming the energy per unit of the finished product would be the critical part of the analysis. ♦ Trend analysis of energy costs as percentage of total production costs is a good indicator of performance 13. Key Costs And Contribution Analysis 13.1 The thrust here should not be only on computation of numb .....

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roup) on operating ratios for the current and previous years. These ratios are computed as proportion of individual cost elements to the cost of sales. 13.3 The cost auditor could provide analysis of the cost information by highlighting any significant variation therein during the reporting period. These variations are caused by non-recurring, onetime costs that may vitiate the ratios. Suggestions to avoid such variations may be provided in the report. This could be having long term rate contrac .....

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these, it would be necessary to enlighten the company management with an in depth analysis of contribution earned by each product group. The contribution analysis may be given an absolute amount per unit of the finished product or in terms of percentage of sales i.e. the PV ratio. The cost auditor can add value by pointing out contribution earned per unit of the key constraint resource. 13.6 The contribution analysis should also be extended to include the break-even analysis and the margin of sa .....

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ditor could include reference to ♦ Sales and production records ♦ Reconciliation with CENVAT records ♦ Price lists and discount structure policy ♦ Product cost statements ♦ Operational budgets 14. Product/Service Profitability Analysis 14.1 The unit product or service profits are driven by two major components viz. cost per unit and selling price per unit. The cost auditor should analyse if the business belongs to the sellers' market or buyers' market. This .....

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ervices, it is essential to exercise care in analyzing the profitability thereof especially when the services provided are not standard. Many times, there is a combined contract for sale of product along with the service & maintenance contract. In such cases, the cost auditor should bifurcate the sales and costs for each portion and then compute and comment on their respective profitability. 14.3 Care should be taken in splitting the joint costs in case of joint products and by products. The .....

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k-return profiles. This classification may be different from the 'product groups' in the cost audit report annexures. 14.6 The analysis should separately appraise profitability of newly introduced products or services and also their proportion to the total profits of the organisation. The cost auditor should incorporate the profitability analysis of products discontinued during the period. 14.7 The term "profitability" should be taken with an extended meaning to include, apart .....

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or services are contributing to the performance and which are ones that are non-performing. Based on this the suitable corrective actions may be suggested. 14.9 The checklist for the cost auditor could include reference to ♦ Sales and production records ♦ Reconciliation with CENVAT records ♦ Price lists and discount structure policy ♦ Product cost statements ♦ Operational budgets 15. Market/Customer Profitability 15.1 Certain industries focus on limited markets and .....

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segmented on the basis of geographical locations such as domestic & international, zones or regions. They can also be segmented based on customers, e.g. OEMs, institutional, dealers, aftermarket, retail etc. These are normally termed as channels of distribution. Sales and supplies to Government, related parties could also be used for analysis. 15.4 The challenge in all the above named method of segmentation lies in the computation of costs for each of them. The cost auditor should carefully .....

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itability analysis. Hence, the cost auditor could analyse the costs of acquiring the market or customer, costs involved in servicing and maintaining them and also costs involved in evaluating the potential thereof through market research. Example of how to look at "Cost per unit" when there are multiple customers and orders vary from quantities to deliveries. A Customer places the PO for X quantity to be delivered in four batches. Another customer places PO for Y quantity which is high .....

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ustomer categories and also the ones that are consuming resources but not yielding profits. 15.8 In addition to the study of profitability, the cost auditor could comment on the risks associated with the markets and customers. This risk could be "concentration risk", e.g. overdependence on a few customers or selling in one market only. The other risk may be related to defaults by customers. The analysis of bad debt history would help the analysis. 15.9 The checklist for evaluation of p .....

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or each product group and evaluate the adequacy or otherwise thereof. 16.2 In case of multi-unit operations, the working capital and inventory management is centralized, with sub limits fixed for each manufacturing locations. While the working capital assessment is done for the Company as a whole, the key factor which influences the working capital requirement of each unit have to be kept in mind and evaluated. 16.3 On the whole, the cost auditor should critically examine the working capital pol .....

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ional measures of ratios like current ratio, quick ratio, turnover ratios, number of days in operating cycle etc. These ratios could be computed for each product group separately. Analysis of the operating cycle of the company would be immensely useful. 16.6 For manufacturing industries, inventory is the major portion of the current assets. The cost auditor should evaluate the inventory management policy which would include, inter alia, procurement policy, stocking policy, inventory valuation me .....

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should comment upon the quality of inventory asset using the inventory aging reports. 16.8 Another important component of working capital is receivables. Analysis of receivables is important for internal perspective (working capital management) and external perspective (customer management) as well. The cost auditor should peruse through the policy of the company regarding credit evaluation of customers, setting up of credit terms and credit limits, discount policy, collection & delinquency .....

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receivables and payables etc. the criteria for analysis here should be to find whether excessive amount is blocked in these areas. Cash management can be included in the analysis. 16.11 It will be helpful to include the observations on cost of working capital funding. These costs may include the interest paid on cash credit and loans, cost of using factoring services, cost of collection efforts, costs involved in cash management, cost of inventory carrying etc. These costs may be explicit or imp .....

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ly collection, bad debt etc. ♦ Terms and conditions of working capital funds such as bank credit, loans etc. 17. Manpower Analysis 17.1 The depth of analysis of manpower could depend upon the proportion of manpower cost to the total cost of product or service. The performance criteria for this area will mainly be related to the costs and efficiency or productivity. Again, benchmarking with the similar organisations would be helpful. 17.2 The costs may be categorized into the cost of recrui .....

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ality of manpower management. These costs could be further broken up as per the hierarchies of people. The time taken to recruit important positions may affect the performance adversely. 17.3 The factor returns from the manpower is in terms of growth in production and productivity, enhancement of skills and knowledge of the organisation. The cost auditor should analyse the figures of manpower productivity, idle time, overtime worked, absenteeism etc. These factors could be compared with the resp .....

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of recruitments done, number of people left, the labour turnover ratios ♦ The data on idle time, absenteeism ♦ Manpower productivity reports ♦ Use of temporary or casual labour ♦ Turnover at the higher level of management ♦ Training and developmental programmes and the feedback thereon 18. Impact of IFRS on the Cost Structure, Cash Flows and Profitability 18.1 The new era of accounting standards has started in India after India committed to converge to the IFRS. Th .....

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ences as compared to the existing standards. 18.3 In the Performance Appraisal Report, the cost auditor may point out the impact of IFRS on the existing cost structure, cash flows, and profitability. It may be noted that the new standards provide a principle based framework in place of rule based standards, and as such the companies may need to assess the effect of their actions and choices made for accounting. 18.4 The five main elements of financial statements are assets, liabilities, equity, .....

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f fair value is mandatory or permitted as management's choice. It should be noted that any change in the fair value as on the reporting date has to be taken to the profit and loss a/c. 18.6 It may not be possible to split the effect of new standards on individual product or product group costs and profitability. It could be assessed for the organisation as a whole. 18.7 These effects arise due to the balance sheet orientation of IFRS rather than the P & L smoothing practices followed by .....

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instruments - accounting for hedges and FOREX may result in profits or losses to be recognised or derecognized ♦ Construction contracts - there could be changes in contract revenues and profit measurement thereon ♦ Impairment of assets - recognition of provisions may impact profitability ♦ Intangible assets - certain existing assets may have to be derecognized ♦ Business combinations - some costs of M & A cannot be capitalized 18.8 The impact of changeover has been e .....

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t permit such recognition; (c) Reclassify items that it recognised under previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity under Ind AS and (d) Apply Ind ASs in measuring all recognised assets and liabilities 18.9 The Performance Appraisal Report should include comments of the potential changes for the understanding of the Board and Audit Committee members. The cost auditor could provide them an insight to th .....

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ecific characteristics of the industry within which a company operates, the performance criteria should be chosen and included in the Performance Appraisal Report. It may be necessary to drop one or more of the above on the basis of their relative importance (or the lack of it) for the organisation. 19.2 Some additional areas of performance assessment actually may not directly comment upon the current or past performance but the likely future performance. The cost auditor should make use of the .....

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This is usually given in the "management discussion and analysis" in the annual reports. The cost auditor should benchmark these with companies in the same industry and provide observation thereon. 19.5 Risk Management: The Performance Appraisal Report should include the risk analysis that may affect the future performance. These could be macro variables causing variations like the economic indicators of India such as industrial growth trends, Government policy on commerce and trade, .....

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echniques to be used ♦ Evaluate the effect of the existing risk mitigation tools used by the company 19.6 Environment and Sustainability: The Performance Appraisal Report could provide insight into how effectively the company is following policies on CSR, environment and sustainability. The importance of economic, social and environmental performance hardly needs any justification. The CSR index could be formulated to reflect performance in respect of socially responsible products, sociall .....

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assessed by relating the quality costs incurred versus the benefits achieved by reduction in customer complaints or increase in customer satisfaction index. The quality costs should be reported as prevention costs, appraisal costs, internal failure costs and external failure costs. It will be useful to analyse the changes in the composition of total quality costs and their impact on the sales and profits, e.g. higher spending on prevention would mean less costs on external failures, which in tu .....

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taken for development, the response time taken for changes in designs due to customer requirement etc. Total expenditure on R & D initiatives as a percentage of sales turnover may be a good indicator of the technology leadership status of the company. 19.9 Business Process Performance: The cost auditor could evaluate various processes followed by the company and incorporate valuable assessment in the Performance Appraisal Report. The processes could be evaluated on the criteria like speed, a .....

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studies. It would be appropriate to highlight the processes that should be re-engineered. 19.10 Human Resource Accounting: This is an extended analysis of total human resource costs, both explicit and implicit, which are capitalised at an appropriate discount rate. This value of human capital is reflection of the enhanced value that an organisation could create by owning the human asset. The cost auditor could observe the value of human asset and link it to the returns. This is an upcoming perfo .....

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ccounting these are generally not capitalised. It is possible to use value based approach. The value created by the intangibles could be computed as excess returns earned by the company over the industry average. This excess is supposed to be earned due to the presence of intangible assets like brand. 19.13 Stakeholder Performance Analysis: This would mean analysing various performance parameters for the different stakeholders. The performance for shareholders could be denoted by EPS growth, the .....

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mation, analysing the same by establishing the inter-relations between them, interpreting the results and then arriving at meaningful conclusion. The collection of information depends upon various sources of data and other reports for various systems used by the organisation. 20.2 The data input is generally made in the accounting system used by the company e.g. the ERP systems. Most of the ERP systems facilitate input and capturing of even the non-financial data which can be then processed to p .....

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ropriate management accounting tool. 20.4 The following table shows various management accounting tools that are used to serve different objectives: Purpose Management Accounting tool Control Budgetary control, standard costing, variance analysis Cost computation Full(absorption) Costing, Job, batch, process or contract costing Activity based costing, Time Driven ABC Cost reduction Total Quality management, Quality costing, Kaizen costing, Lean manufacturing, Value Analysis and Value Engineering .....

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ure are considered, but upon how they are evaluated and assessed with the help of various management accounting tools. APPENDIX A Planning for the Performance Appraisal Report Key Performance Indicators (KPIs) are simply the variables, independent or interdependent, in respect of which the goals can be set and performance measured to assess whether it is in furtherance of the enterprise objectives. Hence, for evaluation of performance the selection of KPIs must be chosen correctly in tune with t .....

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tset, based on the initial discussion with the management, a proper checklist may be drawn in the following format for planning the Performance Appraisal Report: KPI (performance measure) Also indicate if strategic or operational Type of KPI (whether quantitative or qualitative) Functional areas affected by KPI Persons/ departments responsible Measurement criteria Comparison with (budget, standard, external benchmark etc) Depending upon merit of each case, the cost auditor could factor in other .....

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owth % Growth % in new product sales New product sales as % of total sales Customer-wise sales Top 5 customers, bottom 5 customers' sales Margins Gross margin % on total sales Gross margin % on segmental sales Gross margin % on new products Customer-wise Gross margin % Costs Element-wise cost % to total turnover and segmental turnover Cost composition - nature-wise, variability structure, functional split Returns ROI on product groups ROI on geographical segments ROI on new products ROI on n .....

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oduction per man hour Production per employee Employee cost % to sales Idle hours % to total available hours Machine Production per machine hour Growth in machine capacity utilisation Machine downtime ratio Break-down hours Manufacturing performance Operating cycles Material turnover WIP turnover Finished goods turnover Customer performance Complaints % of customer complaints to total orders Response time to resolve a complaint Customer-wise number of complaints Number of complaints repeated Dev .....

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cost effect Overall Supplier satisfaction index Accuracy of forecasts shared APPENDIX C Additional references for cost auditor 1. Annual reports of the companies for current year and past years 2. Guidance given by companies to stock markets 3. Written Policy documents of the company 4. Company web-sites 5. Web-sites of industry associations 6. Macro-economic data from RBI, Ministry of finance and commerce & industry etc. 7. Management accounting tools and techniques - reference books and h .....

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e company 15. The cost accounting system of the company - costing methods 16. The CENVAT and VAT records maintained by the company 17. The monthly MIS reports - concentrate only on exceptional reports White Paper on MANAGEMENT CONCEPTS IMPACTING CURRENT PERFORMANCE FRAMEWORK: 1.1 Strategies can be seen as the process of building on or stretching a company's resources and competencies to create opportunities for the company to benefit from them. It means identifying existing resources and com .....

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Performance Analysis report as discussed in this Guidance note, takes this view of linkage between strategy formulations and operational dimensions. Strategy will be affected by the values and perceptions of people around the company who have power in and around the company, like investors, shareholders, consumers, suppliers and the regulatory authorities. Strategies formulated in a company can be grouped into three levels: The Corporate Level, The Product Group Level and the operational level. .....

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ations including cost implications. A Cost Auditor should focus on the cost implications of strategic decisions and their implementation, not losing the sight of other implications. Familiarity with the strategic management process will be an essential requisite for this focus. 1.2 Strategic Management Process: Strategy and strategic management are significant aspects of company's decision making process in a specific political and cultural context and the performance analysis would include .....

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aisal report can be extended to strategic areas expressible in terms of cost impacts. There is a sufficient scope for reporting on overall performance, because of the recent thrusts in companies on resource-led strategies which tend to have significant cost implications. 1.3 Strategic Management is concerned with: Strategic Analysis>Strategic choices>Strategic Implementation All the above three segments are inter-related. Performance Analysis is evaluation of the results of the implemented .....

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any in the context of its environment, competitive and others. For example, a small company may be engaged in finding a niche' in the emerging competitive market. The Strategic management process is also involved in finding ways to extend the company to a perceived future position with higher levels of competitive advantage. One of the important factors on which success of company is dependent, is the strategic capability of the company which is based on judicious use of resources to build c .....

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Hence, the Performance Appraisal, primarily, should focus on the resources of the company both in terms of usage in strategies' implementation as well as in terms of the outcomes of its usage. It would also include an appraisal as to the uniqueness of the resources of the company that adds to its competitive advantage. 1.5 Resources Resources of any company may be grouped: (a) Physical resources: Queries should be raised as to the nature of these resources, such as age/condition/capabilitie .....

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important areas of analysis and evaluation. Similarly, the adaptability of the human resources to the strategies formulated, needs to be examined while evaluating the operational processes as well as their outcomes. (c) Financial Resources: Financial Resources are the money available to a business for spending in the form of cash, liquid securities and credit lines. Simply put Financial Resources represent the money that is available for a person or organization to spend. Before going into busi .....

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tional funding sources such as banks and equity investors or apply for government grants or venture capital funds. Each funding type offers different advantages to companies with different costs associated with them. Corporate financial management plays a cardinal role in organizational decision-making processes, enabling companies to manage risks adeptly, administer liquidity ratios and increase profit indicators. Central to corporate strategies are management accounting procedures that organiz .....

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h. The performance analysis should include audit of all the resources of the company that support its strategies, including resources like network of contacts or customers. The cost auditor will do well to identify resources that are critical in underpinning the company's strategies. That is, which are the resources on which the successful performance of the strategies, implemented, depends? 1.6 Competencies Difference in performance over time in the same company or differences in performanc .....

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its resources. They are difficult to be imitated by competitors. The bases of competencies of company could be any or all of the following: (a) Cost efficiency; (b)Value addition: The Performance Analysis process should examine the above factors in identifying the core competencies (those that are unique to the company) of the company and their comparisons through appropriate benchmarks. This is an area of professional expertise of the cost auditor. Core competencies (cost efficiency being an im .....

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eeds to be appreciated that many company attempts to gain competitive advantage by appropriately linking its own activities with those of the suppliers, channels or customers. Vertical-integration, quality controls on inputs from suppliers, total quality management strategies, controlling distributors' performance through training/financing etc., collaborative arrangements etc. are some of the ways in which company's own activities are beneficially linked to other organizations. This pro .....

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rom core competencies) are to be assessed, ultimately, in relative terms. Items like capacity utilization at a given level Sales value, contribution ratio, investments in green initiatives, contributions to social responsibilities, are of no use unless just apositioning them with other companies' similar data. Such an attempt is usually known as Benchmarking. It is important to note that benchmarking technique, both internal and external to the company, would be an important tool for reporti .....

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ustry. Having mentioned the relevance of Benchmarking under Performance Appraisal Report, it must be stated in clear terms that it is a challenging task for the Cost Auditor and it would require good amount of hard work to get appropriate benchmarks and use them effectively. In the initial years, historical data comparisons, input-output data available in public domain may be used and slowly graduate to higher levels of benchmarks acquired through specific in-depth studies undertaken by the cost .....

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.1 Definition of "process": "A collection of interrelated work tasks, Initiated in response to an event." The objective of a process is to achieve the specific result as expected by its customer. A process can be made up of processes, often called sub-processes. Process mapping is to understand the activities of the company, in the background of strategies formulated and implemented by the company at all levels. To evaluate performance it is necessary to understand the proces .....

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increased visibility into the process (Those who assume they know the process, without having mapped it, will probably find surprises when they map the process). 2.3 Steps-wise approach for Process Mapping: 1. Observe process 2. Document your observations 3. Identify all process steps & Align all the steps horizontally 4. List the parameters that can change a product characteristic at each step (machine settings, supplies) 5. Identify VA and NVA steps: 5.1 Value Adding (VA) steps have the fo .....

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ng, storage. ♦ Is task required by law or regulation? ♦ Does task reduce financial/liability risk? ♦ Does task support financial requirements? ♦ Does process break down if task is removed? b. NVA Unnecessary (waste): (rework, delays, idle) 6. List Process Inputs and Outputs: Each step in a process may be understood in terms of a common logic: INPUTS >>>>TASK >>>>>>OUTPUTS. Inputs: all necessary parameters to complete a step in a Process (Huma .....

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actors that can be changed to see the effect on product characteristics. ♦ Standard Operating Procedures - A procedure is used to define and run those factors. ♦ Critical Factors - Important factors that determines the outcome. (Availability of specific input, at times, become so critical that even product mix is determined by computing contributing per such input) 9. Link desired customer value to process: Time; Cost; Quality; Flexibility; Sustainability; 10. Measure The Process &di .....

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