Responsibility Accounting, Management Audit and Pert and CPM

Controlling is one of the major functions of management. And like all things it has evolved over time to keep up with new demands of the business world. Many new concepts have been introduced in the last few decades such as responsibility accounting, PERT and CPM. Let us take a look.

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Responsibility Accounting

Responsibility accounting is one of the modern techniques of controlling which is borrowed from Management Accounting. It is a system of controlling function, where the performance of managers is judged by assessing how far they have achieved the targets set for their departments or sections; or whose performance they are responsible.

(Source: mheducation)

Responsibility accounting defined as that method of management which consists of dividing a business organization into various sectors like responsibility centres, whereby, a distinct manager is assigned responsibility for achieving the predetermined target for his centre, and his success is judged by his ability in controlling the ‘controllable costs’ of his centre.

Management Audit

The management audit is also one of the modern techniques of controlling, which aims to examine the efficiency of the management’s philosophies, policies, techniques etc. in successfully running an enterprise.

Management audit can be defined as a well-known technique which includes various aspects which includes an independent, overall and scientifically critical examination of the entire management process, with a view to discovering a quality of management; and judging its success and failures in running and managing an enterprise. 

The scope of management audit is very wide. Areas which are covered under management audit are:

• economic functioning of the enterprise
• fulfilment of major social responsibilities
• functioning of the Board of Director
• Soundness of organizational structure
• The intensity of sales promotion efforts
• Emphasis on research and development etc. 

Evaluation of Management Audit

Management audit, by identifying, deficiencies in management’s principles and practices helps in effecting structural improvements in the entire managerial system. Therefore, it includes the fact of conducting management audit makes management more alert and progressive in its approach.

However, the scope of management audit is ill-defined. There is a lack of well-defined principles and procedures for conducting management audit.

Internal Audit (or Operational audit)

The Internal audit can be defined as an effective modern technique of controlling which is also now coming to be called operational audit.

Internal audit is vouching and verification of accounting information by a staff of internal auditors; and is also concerned with examining the overall operational efficiency of the enterprise. 

Scope of Internal Audit

Internal audit, besides, including financial audit as the core aspect of it; includes consideration of the following:

• appraisal of financial controls
• compliance with policies and procedures
• efficiency in utilizing resources
• Appraising quality of management performance etc. 

Social Audit

The social audit may be defined as that technique which is mainly concerned with the measurement of social performance of an organization in contrast to its economic performance.

PERT/CPM

(Source – keydifferences)

PERT (Programme Evaluation and Review Technique) was developed by the special project office of the U.S. Navy in 1958. Almost at the same time, engineers at the DuPont Company U.S.A. developed CPM (Critical Path Method). Though there are some differences between PERT and CPM; yet both these techniques utilize the same principles.

The application of PERT/CPM involves the following steps :

(i) Identification of Components

The first step towards the application of PERT/CPM is an identification of all key activities or events necessary for the completion of the project.

The term activity can be defined as an overall term which includes various techniques such as an operation or a job to be carried out; which consumes time and resources. It is denoted by an arrow, in the network diagram. The term event may be defined as the beginning or completion of an activity. It is denoted by a circle in the network diagram.

(ii) Sequencing of Activities and Events

A network diagram is prepared to show the sequence of activities and events. It has a beginning and a terminal point for the project. It also depicts a number of paths of activities from the beginning to the completion of the project. For sake of convenience, each event is given a serial number.

(iii) Determination of Estimated Time

For completion of the project during the contract period; it is -essential to determine the expected time required to complete each activity. Under PERT, three-time estimates for the completion of each activity are made –

• Optimistic or the shortest time
• Pessimistic or the longest time
• Normal or most likely time

(iv) Determination of the Critical Path

At this stage, it is required to identify the sequence of those activities whose completion is critical for the timely completion of the project. Once the critical path is known; the management will be in a position to deploy resources more fruitfully; to spot troubles early and apply controls where these are most essential.

(v) Modification of the Initial Plan

The initial plan may be modified by resequencing some activities that lie along the critical path. When this is possible, it will result in a shorter time for the completion of the project.

(or the most likely time) are given. CPM is used where cost is the main consideration; while PERT is used where time is the main consideration.

Solved Questions for You

Q1: Explain the process of determination of estimated time and determination of Path under PERT/CPM?

Ans: Determination of time -For completion of the project during the said contract period; it is required to know the expected time required to complete each activity.

Under PERT, three-time estimates for the completion of each activity are made –

• Optimistic or the shortest time
• Pessimistic or the longest time
• Normal or most likely time

Determination of the path- It is required to identify the sequence of those activities whose completion is critical for the timely completion of the project. As the critical path is known; the management will be in a position to deploy resources more efficiently; to avoid troubles early and apply controls wherever it is required.