“Accounting is closely connected with control”. Elaborate the statement and discuss the role of accounting feedback in the process of control.
Sol One of the major tasks of the management is to control the operations of an
organisation. Control can be easily understood as meaning the process of keeping the organisation on its planned course. This process of ensuring that the organisation is on course, involves measurement. Accounting is closely connected with the control system in an organisation in that it provides the measurement system and the required information to the controller for ensuring that the organisation is on its course and making corrections whenever required.
This process can be easily visualised by having a look at the structure of a control system in an organisation. Look at the control system given in Fig. 1.7. You know that an organisation is made up of interrelated parts and is linked to the environment. The organisation depends on the environment for its inputs and for disposing off its output. The process of control implies that we have to measure the inputs, processes and the output. Environment, which provides the input, would impose output standards, such as will he acceptable in exchange for providing the inputs. The control. therefore, would imply measurement comparisons and feedback. The process of evaluation brings out the deviations, which provide the basis for the feedback.From the figure above, it is obvious that the controller (accountant) and managers obtain such information, which enables them to diagnose the situation. They are in a position to identify and define the problem.
Let us try to identify and define a problem in a hypothetical setting. Suppose you are managing a firm that sells three products. PI, P, and Pia You are now confronted with the problem that the profit of your firm is declining. The falling profit may be due to many reasons. The first thing you would like to do is to identify the problem more clearly before you set about solving it.
Some of the possible hypotheses you would like to examine are:
• All the three products are earning less money.
• Two of the products are losing money.
• Only one of the products is losing money.
• Some products are earning more money. but others are losing more than that.
You can go on and on when you really attempt a blind search. But in practice, it can't be that bad. You will he able to zero in on a more focused questioning. The summarised accounting information triggering these questions is provided in Table 1.3.
Table 1 Summarised income Statement
| | Year 1 | Year 2 | ||||
| Sales Less: cost of goods sold | | Rs. 1000 400 | ||||
| Gross margin | 600 | 500 | ||||
| Less: Depreciation | 200 | 200 | ||||
| Other operating expenses | 100 | 100 | ||||
| | Rs. 300 | Rs. 200 | ||||
From the above data, we see that the decrease in the profits during the period happened as a result of an overall increase in the cost of goods sold. This identification naturally triggers the next logical question:
Which product is losing money?
Year 1 Year 2| | P1 | P2 | P3 | P1 | P2 | P3 |
| Sales | 300 | 300 | 400 | 400 | 400 | 200 |
| Less: cost of goods sold | 150 | 150 | 100 | 200 | 200 | 100 |
| Gross margin | 150 | 150 | 300 | 200 | 200 | 100 |
Sales of P, and F, have increased. The costs of sales of these products have retained the same relationship with the sales. Sales of PI have decreased. The ratio of cost of sales to sales of P3 has doubled. We now have a clearly identified problem. At this stage, managers step in. Thus, the function of accounting as an information processing system, is to provide information to decision makers.
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