Friday, September 18, 2009

ROLE OF FINANCE MEMBER IN TENDER COMMITTEE

ROLE OF ACCOUNTS MEMBER IN TENDER COMMITTEE

1. Competency - level of tender – basic rate is the criteria
2. indent / estimate duly vetted by associate/accounts
3. brief note and tabulation is available and vetted by accounts
4. availability of sanctioned estimate
5. funds availability
6. tender cost within estimated cost
7. special conditions if any detrimental to railway
8. in case of unusual conditions, legal opinion is obtained
9. rate inclusive of ED, ST, CD Etc
10. for huge projects plants, drawings, design, land availability
11. rate analysis – market rate – not merely previous purchase rates
12. credentials in case of new contractor
13. in case of LT from approved list A B C D as the case may be
14. advance to contractors in case of projects costing more than Rs 1 Crore
15. in case of RP tender, the same conditions as the original – if defaulter is L 1 sufficient SD to be collected to avoid second default
16. when L 1 is passed over, the reasons to be in written form
17. in case of single tender, prior concurrence of finance is obtained and reasons for ST are recorded
18. splitting is allowed in stores tenders contracts to develop alternative sources – but in works prohibited unless emergent situation to safeguard life and property
19. choose to visit the work spot if need be
21. no undue preference to contractors over past credentials
22 validity of offers exist
23. finance interest of railways is not lost sight off

Wednesday, September 16, 2009

PERFORMANCE BUDGET






PERFORMANCE BUDGETTING
1 The performance budgeting came into effect in Railways in 1979-80 and has been gradually stabilizing for purposes of management control over the costs in relation to the physical activity. Before discussing the merits and advantages of P.B, it is nccessary to have an understanding the form of budget which was in existance prior to the introduction of Performance Budgetting.
in one of the reports the World Bank Study team has described Budget as prepared in the Past as a "routine and dogged exercise, undertaken and produced by the bureaucratic elite" The form in which the Railway Budget was presented to Parliament till 1979-80 provided for appropriaition of funds for certain items of expenditure falling under each demand without correlating expenditure to the quantum of service to be rendered with the aid of the funds sanctioned. For all practical purposes the Budget was a potrayal or record of cash transactions and their anticipations; it did not at all serve as a tool for management or as a device for evaluation performance-
The Conventional Budget was more ‘appropriation oriented’ than 'performance oriented’. There were in all 22 demands for grants not strictly representing homnogenous functional groups or activities though the demands for grants’ are supposed to basicaly represent the estimated expenditure in a 'Single' or ‘homogenus’ group of functions. The other defects in the old system of budgetting were;-
i) The Accounts heads under the detailed heads of accounts did not correlate with the Budget heads. The expenditure under demands had to be eolleccted from different revenue abstracts.
ii) Budget had liltle relevance to performance.
iii) When Parliament sanctioned the budget, it was not aware of the quantum of services that would be rendered in Ihe various aspects of Railway activities,
i5.2 Based on the recommendations of a Task Force appointed for the purpose the demands for grants have been restructured with the approval of the Estimates Committee. It was therefore considered necessary that the budget as a document must be capable of fulfilling the following objectives:-
i) to present more clearly the purpose and objectives for which funds are sought and to bring out the programmes and accomplishments in financial and physical terms.
ii) to help in the better understaniding and review of the budget
iii) to improve the formulation of the budget and to aid the process of decision making at all levels of Govt., and
iv) to incorporate an element of accountability,
3 Performance budgetting therefore, implies fixing in advance performance, targets, under each activity, in acceptable and feasible measures of output, fixing corresponding finance outlay for achieving these physical outputs and monitoring and comparing the actual performance both in physical and financial terms.
The steps involved in Performance Budgetting, are identification of functions, programmes and activities. In order to achieve the objectives of P.B, the demands for grants have been restructured to spell out the functions, activities and objects. Each demand has 3 sub­divisions -
i) Sub Heads of Demands representing major functions,
ii) Detailed Heads representing further break-up of the activity classification i.e. identifying 'Why' the expenditure is incurred,
iii) Primary Units identityfying 'what' the expenditure denotes (objects of expenditure, i.e salary, allowances, material etc)
An example of concordance between the Sub-Heads of Demands for Grants and Main Heads of Accounting Classification is given below :-



EARNINGS BUDGET


EARNING BUDGET
The Budget Estimation of Traffic earnings is framed under Four distinct categories viz. (i) Passenger (ii) Other Coaching (iii) goods and (iv)sundries. The cumulative total of the above categories form the gross earnings. The commercial branch initially compiles the estimate of earnings in the proforma prescribed by the Board. This is based on the physical performance of previous year and the and the actual earnings and other available statistical data for the current year. Following are the methodology adopted for estimates of figures under each category.
1 PASSENGERS :
The originating No. of passengers separately for suburban and non-suburban should be first assessed in the basis of the trend during the first four months. the current year and the actual of last year. This information is available in the 6 A statement. While assessing the above, commitments of growth in passengers as in the Budget papers as well as Railway's own growth and pattern of traffic should also be taken into consideration. These originating No of passengers, thus estimated should then be converted into carried passengers. This is done by applying the ratio of originating to carried No of passengers as per the trend of current year and last year. The average lead i.e., the average distance carried over the Railway shall then be fixed based on the trend of previous year. Change in the lead depends on the Railways jurisdiction or change in the pattern of traffic. Normally the lead of' passenger traffic is constant. The average fare per passenger per km is used at the fare of previous year's actual. In the event of any revision in fare, the average fare is suitably modified with reference to the trend of current year. By multiplying the rate to the passenger KMs, passenger earnings are assessed (carried No of passengers x lead x rate = passenger earnings)
2 OTHER COACHING;
This head consists of earnings of parcels, luggage and other traffic. The traffic prospects, in this category are assessed by the Commercial Department considering the trend of movement of fruits (like plantain and oranges) based on the reports given by DRMs. Here again the factors like postal haulage charges billed against P&T Department and their acceptance are also taken into consideration.
3 GOODS
The originating tonnage are fixed by thc Board after discussion with the COPS in a meeting in the Board's oflice. The originating tonnes thus fixed will form thc basis for thc preparation of the Goods earning projection. Based on the originating tonnes as fixcd and approved hy GM. the carried tonnes arrived at range-wise by applying the ratio of originating to carried tonncs as is available in the 7-C statistical statement for the last year and current year. The average falr per tonne per kilo meter is arrived after taking into account the rate prevalent in the 7-C statement after suitably modifying the same with the current ttend and revision in freight rate etc. On the basis of the above statistical data the freight earnings are estimated as under :-
Carried tonnes x lead = NTKM
NTKM x rate = earnings (by multiplying the lead and rate to carried tonnes, goods earnings projections are fixed)
In addition to the freight earnings as estimated above, certain Misc, earnings such as wharfage, demurrage, siding charges, etc- are added by estimating the same based on the previous years actuals and the trends noticed during the year.
The freight earnings together with the Misc. earnings will form the total goods earnings of the Railways, commoditiy wise steel( manufactures, pig iron, alloy steel), coal for steel plants, washeries railway and other users, cement, ore for exports, food grains, fertilizers, general goods, but railway material separately.
4 SUNDRIES
an
The sundry earnings consists of rents recovered, advertisement thargc, catering earnings, profit for work done for outsiders in workshop, dividend accrued from State Road Transport Corporations and interest and maintenance charges of siding etc. The estimates under this category are done in relation to the current year's trend as well as earnings potential.

EARNINGS BUDGET (SPECIMEN)
Sl no PASSENGERS ANTICIPATED FOR THE YEAR
1 No. of originating passengers 200 MILLION
2 Carried No, of passengers 220 MILLION(100:110)
3 Average lead (in km) 230
4 Passenger km (2 x 3) 220x230)=50600 MILLION
5 Average fare in paise 12 paise
6 Earnings (4 X 5) (Rs in Crores) 607 Crores

GOODS:
Originaring tonnage 34.5 million tonnes
Tonne carried (100:260) 89.7 million tonnes
Average lead in km 435
Net tonne km (2 x 3) (435x89.7) =39019.5 million
Average rate per km 35 paise
Goods Earnings (4x5) 1365.68 Crores
Other earnings (siding,wharfage, Demurrage etc) 14.32 Crores
Total Goods Earnings 1380.00 Crores
Traffic suspense: station outstanding, outstanding in the accounts office balance sheet, admitted debits, objected debits, wharfage, demurrage, frieght on hand, frieght not on hand, current freight special advices

ANALYSIS OF IR PERFORMANCE

ANALYSIS OF 3 YEARS OF PERFORMANCE OF INDIAN RAILWAYS
ANALYSIS OF THREE YEARS PERFORMANCE OF INDIAN RAILWAYS

COURTESY: A Venkateshwar, IRAS, Director/C-TARA/SCR

Indian Railways have exhibited signs of a turnaround in the last three years and the improvement in the performance has been significant , especially in FY05-06. An attempt has therefore been made to analyze
(a) the improvement in FY05-06 over FY04-05 and
(b) the projections made for FY06-07 over FY05-06.

The analysis is based on :
a) 04-05 - actual performance as per accounts.
b) 05-06 - likely performance as per revised estimates .
c) 06-07 - projected performance as per budget estimates .

The analysis is contained in the three annexures enclosed.
Annexure – A : Financials of revenue operations and capital investments.
Annexure - B : Pattern of Goods traffic.
Annexure - C : Pattern of Passenger traffic.

( Source : Railway Budget 2006-07 Documents – Explanatory Memorandum)


ANALYSIS OF Financials Annexure a
I REVENUE OPERATIONS
Total receipts
In 05-06, share of passenger earnings to total receipts dropped from 29% to 27%, while share of freight earnings went up by 2% to 65%.
Recorded a growth of 15% ( 7375 Crs.) in 05-06 over 04-05 , due to a 7% increase in passenger earnings and 11% increase in freight earnings.
Are expected to increase by 10% (5412 crs.) in 06-07., due to a 11 % increase in passenger earnings and 10% increase in freight earnings.

In 06-07, it is expected that ,
Ø Misc. receipts will grow by 8% against 3% in 05-06, due to increase in subsidy.
Ø Passenger earnings will grow by 11% against 7% in 05-06.
Ø Goods earnings will grow only by 10% against 19% in 05-06 during which period there was approximately an 8% increase in the permissible loading per wagon. .
Ø Sundry earnings will fall by 27% against a growth of 56% in 05-06, due to the continued transfer of catering activities to IRCTC..
Ø Traffic Suspense will increase by 50%, against a drop of 70% in 05-06.
Ø Goods earnings will continue to constitute 65% of total receipts.

Total expenditure
v Recorded an increase of 11% ( 5069 Crs) in 05-06 over 04-05.
v Is expected to increase by 10% ( 5120 Crs) in 06-07.
v Ord. Wrkg. Exp. are expected to increase by 9% ( 3116 Crs) in 06-07 (against 5% - 1795 Crs in 05-06) due to a 18% increase in fuel expenditure and 12% increase in repairs & maintenance.
v Increase in Appr. to Pension fund by 12% ( 850 Crs) over 05-06 against a 4% ( 270 Crs) increase in 05-06 over 04-05
v Increase in Appr. to DRF by 20% ( 703 Crs) over 05-06 against a 33% (904 Crs) increase in 05-06 over 04-05. Surplus/Excess
v Likely to increase by 111% in 05-06 over 04-05, due to increase in total receipts.
v Expected to increase by 7% in 06-07
v Reduction in Appr. to Development Fund by 48% ( 893 Crs) in 06-07.
v Capital Fund renewed after 8 years
v Increase in Appr.to Capital Fund by 47%( 1185 Crs) in 06-07

II. Capital Investments

o Reduction in Govt. support by 15% in 05-06 and by 5% in 06-07.
o Government support dropped from 55% (8468 Crs) of total Capex (Capital expenditure ) in 04-05 to 38 % (7185 Crs) in 05-06 and is placed at 29% ( 6800 Crores) of Capex in 06-07.
o Railways’ own funding has increased from 25% of Capex in 04-05 (6888 Crs) to 42% ( 10447 Crs) & 49% ( 12870 Crs) , largely due to increased appr to DRF and Capital fund.
o In both 05-06 & 06-07, borrowings from IRFC funded 18% of the total capital investments.
o Appr to Capital fund increased by 65% ( 1575 Crs) in 06-07.
o Appr to Development Fund drops by 33% ( 397 Crs) in 06-07.
o DRF gets increased appropriation by 40% ( 1221 Crs) in 06-07.
o RVNL funding increased by 13% (57 Crs) in 06-07.
o Capital investments maintain steady growth of 23% - 24% in 05-06 & 06-07.
o Steady increase in share of revenue receipts ploughed back into capital investment – from 31% in 04-05 to 38% in 06-07.
o Capex as a % of revenue expenditure shows a steady increase - 26% from 04-05 to 32% in 06-07.

ANALYSIS OF goods traffic
Annexure b

Performance in 05-06 over 04-05

Ø A 11% ( 66 MT) increase in loading (effect – 3578 Cr.) coupled with a 10% increase in rate/NTKm ( effect- 3287 cr) – due to rationalization of commodity classification (4000 classes reduced to 80 ) helped earnings increase by 19%.(5793 cr.)
Ø However, average lead dropped by 17 kms. (2%) (effect of 913 crs).
Ø Increase in loading was significant in iron ore for exports (10 MT, 26%). , Others (18 MT, 23%) and raw material for steel plants ( RM for SP) ( 9 MT 21%).
Ø Earnings increased significantly in iron ore (1000 Cr.65%), fertilizers ( 540 Cr. 46%) and RM for SP ( 540 Cr. 41%).
Ø The rate/NTKm increased significantly in iron ore (32%) , RM for SP (21%) and foodgrains (20%) which added 616 Cr. 324 cr. & 579 Cr. respectively
Ø A dip in average lead by 2% (17 kms.) lead to a loss of 913 crs. - significant commodities were coal ( 3%, 526 crs.) others ( 5%, 246 crs.).
Ø Cement & fertilizers movements were healthy - increases in loading ( 9%, 18%) and longer leads ( 7%, 11%) helped increase of 21% ( 500 Crs.) & 46% (543 Crs.) in earnings.
Ø A 14% drop in food grain movement ( 12% in loading & 2% in lead) offset by a 20% increase in rate/NTKm. resulted in earnings registering only a 4% in increase),

Performance in 06-07 over 05-06

increase in loading by 9% ( 58 MT - effect - 3204 Cr) with an over all 2% increase in rate /NTKm (effect - 653 Cr.) due to further rationalization of commodity classification (80 classes reduced to 20 ) will together result in a likely increase in earnings by 11% ( 3827 cr)
Since actual movements have not yet taken place average lead has been
assumed to be same ( effect of lead indicated as 24 Crs. in the statement is due to rounding off of derived figures in the analysis and may be ignored.).

ANALYSIS OF passenger traffic Annexure c

Performance in 05-06 over 04-05

A 6% ( 643 million ) increase in number of passengers coupled with a 0.4% increase in average rate per PKm ( due to increase of the average lead in AC I class and AC III tier travel) helped passenger earnings increase by 7% ( 72 Crs).

There was a significant increase in number of passengers traveling by AC 3 Tier (24% , 4 million) and Others (21% , 3 million). AC II tier travel also registered an increase of 18% ( 2 million). The additional revenue on account of the above were Rs.228 Crs. (AC 3Tier) , 76 Crs.(Others) and 178 Crs. (AC 2Tier).

Ordinary II Class/Sleeper travel registered an increase of 9% ( 138 million), which contributed 255 Crs.

Even though, there was no increase in passenger fares, there was a slight increase in the average earnings per PKm from . 24.52 ps. to 24.62 ps.,due to increase in no. of passengers and average lead in AC I Class and AC 3 Tier.

Performance in 06-07 over 05-06.

An increase of 10% (582 million) in no. of passengers and 1% increase in average lead is likely to fetch an additional revenue of 1670 Crs. (11%).

Average leads are expected to increase in AC I Class and Others by 11% & 18% respectively.

A reduction in AC I and AC 2Tier fares will be offset by an increase in avg.lead and no. of passengers as result of which, the earnings in both these classes are expected to register an increase of 11% .

An over all increase of 10% (63 million) in no. of passengers traveling by both Mail Express II and Sleeper Classes, is likely to fetch an additional revenue of 765 Crs. (11%). Similarly, a 10% increase in Ordinary II Class / Sleeper (170 million passengers) will fetch an additional 362 Crs.).

Suburban traffic is also expected to increase by 10% resulting in additional earnings of 158 Crs.

TOWARDS BETTER PRESENTATION OF RAILWAY ACCOUNTS TOWARDS BETTER PRESENTATION OF RAILWAY ACCOUNTS
COURTESY: V.A.PADMANABHAM, IRAS, Sr.AFA/GENERAL/SCR THROUGH www.irastime.org
In the present day context of need to introduce accounting reforms on Indian Railways, it is elevant to introspect as an organisation whether the present set of Final Accounts adopted over a long time are conveying to the Government and the public, a true and clear financial position on Railway Finances as a true Public Administration includes a transparent, understandable, meaningful presentation of Accounts for the information of all concerned. Drawing inspiration from the Budget speech of Hon’ble Minister of Railways for the year 2005-06, wherein it was emphasised to bring in greater transparency in the financial reporting of the organisation and the need to stress on uniform accounting standards. The Railways are poised to set in motion an Accounting Reforms process to meet the emerging business needs.
The present article is aimed to highlight the impending need to redefine, re-orient and refine accounting concepts of Indian Railways to reflect true and fair view of state of the affairs of Indian Railways in its Final Accounts.
Broadly speaking, Indian Railway Accounts are so designed to conform to principles of both Government Accounting and Commercial Accounting in as much as Indian Railways represent both as a Department of Government of India and as a Commercial Undertaking. The dual functioning and dual responsibility of Indian Railway in a way compels the organisation to embrace, adopt and also live with dual system of Accounts viz., Government Accounts and Commercial Accounts, very often not presenting a clear vision of this biggest organisation to a common man. Even to a fully conversant and well informed personality, the accounting concepts adopted by Indian Railways are not easily understood leave aside appreciating the intricacies involved.
Over the last two decades nothing much seems to have been attempted by the practitioners of Indian Railways Finance and Accounts, except adding a few Plan Heads in Capital classification and a few primary units in both Revenue and Capital classification of Accounts to cater to new requirements of the organisation. In the light of widely accepted economic reforms that took roots in Indian economy in which Indian Railways play key role in shaping the economic well being of this vast nation, the Accounting concepts of Indian Railways also cannot escape attention of General public, Economists, Professional Accountants and Financial Analysts/ Critics.
Significant differences exist in the presentation of the items in the Balance Sheet of Indian Railways vis-à-vis the Balance Sheet of a corporate enterprise. Several experts who have gone into this subject have suggested that the presentation of Final Accounts of Indian Railways should reflect the information directly understandable to general public, as is the case with reference to other corporate enterprises. Some points worth considering are explained as under:
LIABILITIES SIDE
While the corporate enterprises have share capital represented by Equity shares, Preference Shares, etc., the term used for Capital in Railways is loan capital. There is a need to change this term either as Capital-at-Charge or Investments by Government of India.
In respect of Public Limited Companies, the closing balance of P&L Appropriation Account is carried forward and reflected under the heading ‘Reserves and Surplus’. In the Balance Sheet of Indian Railways, no such reflection is made even though Professional Accounts personnel from Indian Railways may know that the surplus under P&L Account is appropriated towards Development Fund (footnotes in Annexure-II, Para 431 of Indian Railways Financial Code, and Vol. I). Indian Railways do not prepare a P&L Appropriation Account. Dividend payable to General Revenues is also reflected in P&L Account, as the same is very much in the nature of interest on borrowed capital, which is naturally a part of revenue expenses of the organisation.
ASSETS SIDE
The block of assets reflected in the Balance Sheet of Indian Railways indicate only the book value of assets; whereas, in terms of commercial principles of accounting the assets are required to be reflected either at book value or at market value, whichever is less. This aspect needs to be addressed in detail by the practitioners of Indian Railways Accounts and Finance as the value of assets seem to be grossly understated in the Balance Sheet particularly in the light of there being no mechanism evolved so far to periodically re-value the assets in the light of market trends. The additional values so generated can as well be applied to write-off the book value of capital perennially reflected in the books even though the assets were either replaced with the funds of DRF or the assets are no longer in existence. After all, every physical asset has a fixed life in terms of provisions envisaged in Indian Railways Financial Code. Of course, this thinking is to be crystallised by detailed discussion at appropriate level and in consultation with the Finance Ministry and C&AG before approaching Railway Convention Committee.
It is evident from Balance Sheet of Indian Railways that cash-in-hand is reflected which represent the closing balance of cash at the end of financial year available with Chief Cashiers and also with the Departmental officers in the form of imprest. While, the balance sheet in respect of companies indicate both cash-in-hand and cash-at-bank, which provide the organisation with necessary levels of liquidity to enable them to discharge the current liabilities, the Balance Sheet of Indian Railways does not seem to reflect cash-at-bank on the face of the document. At this juncture, it is necessary to bear in mind that the moneys deposited with RBI should also be exhibited in one of the block of the assets as the same represents cash-at-bank as far as Indian Railways are concerned. The block of assets represent only the assets created as per contra on liabilities side under various Plan Heads like New Lines, Gauge Conversion etc.
Under the heading Sundry Debtors Railways reflect Loans and Advances also whereas in Commercial book keeping, same is not permitted as loans and advances to staff in Railways are from Civil Grants which does not represent actually the disbursement from Railways earnings even though Railways are duty bound to ensure the amount sanctioned under Civil Grants as Loans and Advances to staff and officers are regularly recovered and remitted along with interest, wherever applicable. In fact, this item can be shown under a separate heading in the Balance Sheet of Indian Railways with provision for contra entry on the liability side.
As can be seen from the items on the assets side, there is no provision envisaged for bad debts as done in commercial book keeping. This is considered essential, as there are huge amounts of money due from Power Houses and other parties, which become sometimes old and irrecoverable. In the absence of this provision, the accounts of Indian Railways do not seem reflect the true and fair view of the state of the affairs. This issue also needs to be looked into carefully.
CONCLUSION:
A time has come for Indian Railways to formulate Indian Railway Accounting Standards on the lines of Accounting Standards adopted by Professional Accounting Bodies like Institute of Chartered Accountants of India with definitions and interpretation of various terms used in Profit and Loss Account and Balance Sheet so that a true and fair view of the state of the affairs of the business is reflected in these documents. It is needless to reiterate that these documents are of interest not only to IR but also to General Public, Economists, and Financial Analysts/critics of Indian Railways Finances. The formulation and circulation of the meaning, content and significance of different terms used in the Accounts of Indian Railways to all concerned would not only dispel the wrong notions if any, in the minds of personnel who intend to use the same, but also helps in better understanding of the state of the affairs of Indian Railways finances.

OVER CAPITALISATION - AMORTISATION

OVER CAPITALISATION AND AMORTIZATION
The term "Overcaptialisation" refers to fictitous capital representing intangible assets. "Amortization" means setting apart amount from revenue surplus to write-off/write down the fictitious capital.
The question of assessing the element of overcapitalization and its amortization has been discussed by various Railway Convention Committees and it is more than twenty years since the Capital structure of the Indian Railways was subjected to a scrutiny by an Expert Group. Since then various changes have taken place in the functioning of the Railways and in the financial relationship between Railways and General finances. Indian Railway's survival is being threatened by the mounting 'dividend' liabilities exceeding the budgetary support causing a reverse Flow of funds to the general revenues
To avoid falling with a 'debt trap’ and for improving the financial health of Indian Railways it is imperative on the part of Railways to institute an amortization fund.
To assess the element of over capitalization, the entire capital structure of Indian Railways is to be examined and analyzed and should not be confined to 'Capital-at-Charge' alone. The Capital-at-charge represents loan capital whereas capital structure covers the entire range of capital investment, irrespective of the fact whether financed from loan from General Revenues, Railways revenues or from Railway's own funds.
In the initial stages, the intangible assets covered the following;
(i) Premium paid on purchase of old guaranteed Railways.
(ii) Difference in exchange between the rates at which the sterling payments were converted into Rupees
(iii) Interest paid by the Companies during construction
(iv) Loss in working during construction.
The historical evolution of the capital-at-charge of the Indian Railways point to the conclusion that over-capitalization, at least in the initial stages, was inherent in the scheme of things. Overcapitalization to the tune of Rs 122.54 Crores was written off without financial adjustment as recommended by RCC 1971. The then expert group was also convinced that amortization by setting apart from Revenue surplus would
remain a laudable but an unattainable proposition.
Waiting until eternity for the financial position to become comfortable to take steps to gradually amortize is not a wise policy especially when interest payments continue in perpetuity. Indian Railways cannot go on indefinitely borrowing from general exchequer Capital-at-charge with perpetual interest liability and at the same time maintain financial viability. A start has to be made along with pressing for other methods of restructuring of capital for writing off some portions of Capital-at-charge.
The problem has therefore, to be faced squarely before it is too late. The following points need consideration for reducing the over-capitalization of both past and future.
Dividend liability:
Railways are in a serious situation as the net inflow under budgetary support has become negative. The dividend payable in Genera] avenue for l995-96 is Rs 1370 Crores whereas the budgetary support for 1995-96 is Rs 1150 Crores.
It is necessary to write off some portion of capital-at-charge on which, dividend has been paid for more than 30 years. The scope of exemption from Dividend payments should be increased taking into account the huge amount booked to Development Fund over 40 years.
Lease charges to IRFC:
Lease charges to IRFC is paid 14.5 % on the assets (Rolling Stock) leased to Railways. The Railways have retained option to buyback the assets at the end of the lease period at a nominal price or continue the lease arrangement by reducing the leasing charges. The lease charges inflate expenses under Demand No-9 unduly. The issue regarding buy back at otherwise of the assets at the end of the Primary lease period of 10 years should be solved immediately.
Lease charges include 5 percent as contribution towards amortization. This is over a very short period of ten years whereas based on the life of the asset it should have been spread over a longer period so that the Revenue Demand No. 9 need not be overburdened.

SOCIAL COSTS IN RAILWAYS

SOCIAL COSTS
1.1 Indian Railways have all along accepted certain social obligations not usually associated with a purely commercial undertaking. The railways operate not only on commercial consideration but also in terms of wider economic and social interests. The Railways, therefore, simultaneously perform the dual role of commercial undertaking and a public utility service. Being a public utility undertaking, Indian Railways do not have the freedom to strike a balance between the two conflicting objetives of earning substantial revenues and meeting social obligations.
The expense incurred in a public service obligations may be aptly termed as social costs. The social costs borne by the Railways, may be briefly classified as under:
i) Carriage of essential commodities at below cost.
ii) Passenger and other coaching service at below cost and loss in suburban services,
iii) Uneconomic Branch Lines.
iv) Freight concession on relief materials,
v) Other obligations such as education, security etc

1.2 Essential Commodities: A number of commodities which are required for essential consumption and have direct bearing on the cost of living of the weaker sections of the society have been traditionally carried at concessional rates. The commodities include foodgrains,salts, fresh vegetables and fruits, edible oil, sugar etc. The Railway incurrs losses every year on this account
1.3 Passenger and Other Coaching Services:
The overall loss in the passenger and coaching service is more than Rs.100 Crores every year. The suburban passenger services in and around Bombay, Calcutta and Chennai alone account for Rs.25 Crores. (Thls claim is questioned by many forums and debate is going on).
The concession in fares are extended to students, sportsman, artists, scouts, trained nurses, teachers and educational tours, blind persons, TB/cancer patients etc. Military traffic is also carried below cost.

1.4 Uneconomic Branch Line:
A number of branch lines are utilised below their capacity and the services on these lines are therefore, not commercially viable. However, there is a strong public resistance to any proposal forr slosure of these lines.
1..5 Fodder despatched to scanty area is charged at concessional rates at the request of State Governments. Again relief supplies such us medicines, clothing, blankets etc., are carried free of charge.

1..6 Other Social Costs:
The Railways provide a large number of non-wage benefits such as health and medical services, subsidised housing and educational assistance to the employees’ children. The Railways share a part of expendilurc incurred by the State Governments on deployed Police Force in the Railway premises.
1.7 As a result of constant and continuous review ofl these aspects by various committess, certain exemptions have been provided from the payment of dividend (e.g, .strategic lines, unremuerative branch lines etc.,). However, the losses incurred in running suburban services and other obligations are continued to be brone by Railways.
1.8 all these losses must be quantified for subsidy and debt burden to the General Revenues attributable to these identifiable factors should be wrilten of. As is the practice on the Railways of other parts of the world, the entire loss being incurred by Indian Railways on account of social burdens should be borne by General Revenues.

MANAGEMENT OF VARIOUS FUNDS IN RAILWAYS

MANAGING OF VARIOUS RAILWAY FUNDS
1.1 The Railways maintain the following funds for different purposes viz
a) Depreciaion Reserve Fund (DRF)
b) Pension Fund
c) Development Fund
d) Capital Fund
e) Railway Safety Fund
f) Special Railway Safety Fund
The Development Fund maintained by the Zonal Railways record expenditure only and the overall balance/overdraft position is maintained by Railway Board. Balances in the funds remain with the Ministry of Finance and interest is credited to the funds on the balances. Plan outlay of Indian Railways comprises of budgetary support i,e capital from thc Ministrv of Finance and expenditure to be met by Indian Railways from their own internal resources i,e. DRF,DF. OLWR and Capital Fund.
The first two funds viz.. Depreciation Reserve Fund and Pension Fund are in the nature of 'Provision^' earmarked for a very specific purpose. They are 'charge’ funds and represent amounts set aside for "providing coins and currency' for the specific purpose for which they are created. On the other hand, the last two viz Development Fund and Capital Fund can be said to be General purpose funds. DF and Capital Fund are maintained only out of 'profits' or 'surplus', but the charge' funds have to be maintained out of the revenue 'before true profits’ can be ascertained.
Let us discuss each of these funds to ascertain how far do the railways finance them properly and to what extent is the.expenditure properly debited to them.
1.2 DEVELOPMENT FUND
This fund was created in 1950 replacing the "Betterment Fund". Presently, the following items are chargeable to DF.
i) Works of Railway Users' Amennies.
ii) Labour Welfare works above Rs 1 lakh
iii) Unremunerative works costing over Rs10 lakhs.
iv) Safety Works
v) Passenger Amenities Works.
This fund started borrowing from GeneraI Revenues since 1960’s. interest has to be paid on money borrowed from General Revenues. The loan otistanding to General Revenue as on 31-3-1990 was Rs.34 Crores and the entire liability was discharged by the Railways during 1992-93 and the balance under this fund as on 31-3-94 is a meagre amount of Rs 32 lakhs,
1.3 DEPRECIATION RESERVE FUND
This fund was created from 01-04-1924. This Fund, being a charge fund this has to be financed not from the surplus but from revenues. Uplo 1935 the amount tobe credited to the fund was determined on Straight line Method i.e. by dividing the cost of each class of assets by their normal life. From 1935-36 to 1949-50, one-sixteenth of the capital at charge was credite to the fund every year. The 1950 Convention Committee however, started fixing a lumpsum amount to be credited to the fund due to Railway’s inability to appropriate adeqyuate money to this fund for several years. Raiwlays faced a heavy backlog in replacements and renewals. As a result the contribution was increased from rs 200 Crores in 1980-81 to Rs 2000 Crores during 1995-96. this amount to be credited to this fund for each quinquenium is decided by the Railway ConventionCommittee.
1.4 PENSION FUND
this fund was created in 1964-65 when the system of Contributory Provident fund was discontinued for the new entrants in Railway service and Pension Scheme was made compulsory for them and optron for the old employees.
The Pension Fund is financed:
i) by transfer of money CSRPF of the employees
jj) from Revenue also,
iii) from Capital (Production Units)
The number of pensioners and quantum of pension are taken into account while deciding the amount to be credited to the fund. After implementation the recommendations of the 4th Pay Commission, the expenditure charged to this fund has increased tremendously and so also the appropriation to the Fund. The amount of Appropriation to Pension fund for 1995-96 is Rs.1971 Crores. Appropriation to DRF and Pension Funds is made having regard to the recomincndations of thc R.C.C.
1.5 CAPITAL FUND
In pursuance of the rccommmendations of the Railway Convention Committee a new fund "capital fund" has been constituted from the surplus left after payment of dividend and appropriation to DF for 1992-93.
The plan expenditure initially used tio be met from out f the budgetary support received by the Railways from the central Govt. and their own internal resources generation. ini view of the acute resource crunch, the budgetary support provided by the Central Govt to the railways started dwindling. The Budgetary support which was 58 % in the VI Five Year Plan came down to 41 % in the VII Five Year Plan and then to 32 % in 1991-92. it was 16 % in 1995-96.
Resources are going to become more and more scarce and the time is not far when the budgetary support may cease to exist. Raising of resources from the market has been an expensive proposition. The Railways annual Iease charges of 16 % to IRFC is almost double the rate of dividend of 7.5%. Moreover, the 9 % tax free bonds floated by the IRFC are noo longer popular. In a situation like this when the Budgetary support is declining and market borrowing expensive and uncertain, the Railways have no option but to function on a self-sustaining commercial basis.
The size of the VIII Five Year Plan Rs 27202 Crores, not sufficient to meet the transport demands. if the Railways are able to generate additional resources by themselves, the plan size£ may be adequately increased to meet in full the transport demands.
The Capital Fund should be used to Finance Capital works on the Railways and is not intended to improve the general ways and means of the Government.
1.6 DISPENSATION OF RRF AND ACSPAF
RRF was created in 1924 and started sustaining year after year in 'Loans from General Revenues'. With the introduction of Deferred Dividend Liability Account the utility of this fund ceased to exist. Hence this fund was dispensed with from 01-04-1993.
ACSPAF came into existance from 01-04-1974. This fund was to meet the liability arising of Accident Compensation and also to meet the cost of certain Safety and Passenger Amenity works. As similar expenditure is already booked to DF there is overlap of expenditure. It has therefore been deicided to abolish ACSPAF with effect from 01-04-1993 and the expenditure presently charged to this fund is re-allocated as under-
Accident compensation Demand No. 12 Abstract K-250
Safety Works DF IV
Passenger Amenities DF I
1.7 The appropriation to DRF, DF, Capital Fund, Pension Fund is budgetled under Demand No, 14 and appropriation from the fund (expenditure from the fund) is budgeted under Demand No. 16 for. DRF, DF and Capital Fund and Demand No 13 for Pension Fund. The Interest on the Fund balances is credited to these funds.
1.8 Capital -at-Charge and Capital Fund :
The rules of allocation are same for booking the expenditure to Capital at-charge and Capital Fund.Capital-at-Cbarge is a loan Capital borrowed from General finance for creating assets. The Capital-at-Charge is non-refundable and interest bearing loan. The Interest is paid in the form of dividend to General Revenues. The payment of dividend is perpetual. The rate of diividend is as per the recommendations of R.R.C.
Capital-at-Charge is also termed as budgetory support for Railway's Plan investment. The Plan investment is financed through generation of internal resources, budgetary support and also market borrowings through IRFC. The Capital-at-Charge is the book value of assets created from the loan Capital from General Revenues.
Capital Fund is created out of Railway's surplus to meet the needs of Railway's Plan investment. The plan size of Railways cannot be reduced since capacity constraints would endanger economic progress of the Country. The gap between the requirements of resources and the availability is to be bridged. The growing self-reliance on the part of Indian Railways is to be continued. The only way is to increase the internal resources. The creation of Capital Fund is to reduce the borrowing from General Revenues.
No dividend will be paid on the expenditure met from Capital Fund. On the other hand, interest is credited to the fund on the balance of the Fund at the end of each financial year. Though there are no seperate rules of allocation for booking the Capital expenditure to Capital-at-Charge and Capital Fund, it is seen from the Budget Papers that the Capital-at-Charge is operated to book the expenditure under Plan Heads 1100- 'Construction of New Lines' and Plan Head 5100 - 'Staff Quarters' and Capital Fund is operated for other Plan Heads. At present the capital fund is not operated.
1.9 Railway Safety Fund:
the fudn was effective from 01.04.2001. The fund was created fro a specific purpose of manning of unmanned level crossings and construction of Road Under Bridge (RUB)/ Road Over Bridge (ROB) . the source of the fund is Central Road Fund, through a levy of 1 % cess on petrol and diesel. The Indian railways received 12 ½ paise on every litre of petrol sold ( 1 % cess) and receives 6 ¼ paise on every litre of diesel sold ( 1 % cess).

1.10 Special Railway Safety Fund:
The fund was effective from 01.10.2001. The fund was created for the following purposes: renewal and replacement of overaged assets renewal of track, bridges, signal equipments, rolling stock and other safety enhancement works. The source of the fund is the levy of safety surcharge on passenger traffic (Rs 5000 croers) and the additional financial assistance by the ministry of fiancé (Union Ministry). This is a non-lapsable fund.

ZERO BASED BUDGETING

ZERO BASED BUDGETING
Zero Base Budgeting has been defined as "a Planning and Budgeting process which requires each Manager to justify his entire budget request in detail from scratch (hence zero base) and shifts the burden of proof to each manager to justify why he should spend any money at all. This approach requires all activities be identified in 'decision packages' which will be evaluated by systematic analysis and ranked in order of importance
The traditional budgetary system relies on the present accounting data base. Thus, if salaries and wages of the employees have increased by five per cent every year on an average, the salaries and wages budget for the coming year is fixed by increasing previous years expense figures by five per cent. This system of budgeting has served well to exercise a measure of financial control and discipline in an organisation. However such a measure is not enough.

1.2 ZBB is a technique which complements and links the existing planning, budgeting and review processes. It is a management tool which provides a systematic method for evaluating all operations and programmes current or new, allows for budget reductions and expansions in a rational manner and allows the re-allocation of resources from low to high priority programmes. It is also a tool for the decision makers enabling them to frame range of options and choose priorities among alternative programmes in relation tor resource availability.
In ZBB. a unit is required lo justify not only the new activities and the funds therefor but also the ongoing activities. The ZBB requires identification and sharpening of objectives, examination of various alternatives ways of achieving through cost-benefit and cost-effecetiveness analysis, prioritisation of objectives and programmes which have outlived their Utility.
1.3, Suppose in an administrative set up, six clerks are employed as comptists for doing the work of addition and substractions. Recently the administration provided the staff with electronic calculating machines and also installed personal computer, with the result, the comptomer clerks have either no work or very little work. The Administration would fail to see that the clerks could be effectively redeployed or dispensed with. The traditional budgetary system would ensure that their salaries were paid till retirement for very little or no work.
The above example, although exaggerated can correspond to many situations in our exiting organisation where ‘dead wood’ abound in many areas. The ZBB helps to identify such areas of wasteful extpenditure and if desired can also suggest alternative uses of items of expenditure that are presently wasteful in nature.
The ZBB is an extension of Performance Budgeting as The ZBB technique links the budget with corporate objective.
1.4 In the Railway system/preparation of works programme well in advance partly suits the req uirements of ZBB. The same cannot be said so in respect of Revenue Budget. The technique of ZBB will help certain specialised areas especially whenever there is switch over from one system to another (e.g. Steam traction to Diesel. Diesel to electric and from manual to Computerisation etc.) indentify the 'Dead Woods',
1.5 HOW ZBB DIFFERS FROM TRADITIONAL BUDGETING
o A traditional budget is function-oriented, a ZBB is programme or project oriented
o in traditional budgeting, Justification is required only for new programmes, existing programmes are sell perpetutating whereas ZBB requires all programmes and projects are to be justified.
o traditional budgeting views critically only cost increases; ZBB critically examines existing levels of expenditure.
o traditional budgeting is input oriented; ZBB is output oriented
1.6 STEPS INVOLVED IN ZBB
1. Define the objectives of the budgeting exercises to achieve cost reduction in areas such as staff overheads, or to analyse and drop projects that are unlikely to achieve corporate objectives or to restructure the organisation itself.
2. Decide on the strategy for implementation, here the object is to decide whether to implement the ZBB technique in one particular area.
3. Develop decision Units: This is the key to effective ZBB, Each decision unit must be independent of all other units so that if the cost benefit analysis proves unfavourable the unit can be dropped.
4. Completion of decision package : After the decision units are identified a decision package for each such unit is made up.
5. Rank all packages : Once the decision packages are completed, all the packages are ranked according to the cost-benefit analysis,
6. Implement : Implementation process consists of simply acccpting those projects that have a positive cost benefit analysis.
1.7 CONCLUSION : To some, ZBB , is simply an old idea dressed up in a new name, To others, ZBB symbolises a new approach to management. But nobody would question its real value.

INTEGRATED BUDGET


INTEGRATED BUDGET
The budgeting work on Railways is connected with assessing or the annual requirements under Revenue Budget, the Works Programme and the Rolling Stock Programme. The Railways also submit the forecasts of earnings. These documents form the part of the Railway Budget presented to Parliament. However, hitherto, these programmes were considered separately at Railways and Board level and no connection was attempted with each other .The Capital and Revenue budgeting were slightly disjointed. It has since been realised that an integrated approach is necessary to evaluate performance of Railways,
Capital Budgeting aims at creating of infra-structure for economic development and the primary aim of investment is to generate income. Revenue Budgeting is nothing but translation of physical objectives into financial terms.
Some times Railways are in no position to generate sufficient income to pay dividend due to various social obligations investment of which have not generated sufficient income or sluggishness on the economy.
Aim of the capital inputs are primarily to generate income so that integrated approach to budget requires that each zonal railway should spell out in one place the capital and revenue inputs needed to achieve a certain level of earnings. With this aim in view, the Railway Bloard have directed all the Railway Administrations to submit a consolidated budget (ie., integrated budget) which should give the essential features of the proposed performances of each zonal railway and balance sheet reflecting the capilal-at--charge, the budgeting earnings ,an the working expenses, the net revenue and the return on capital.

The parameters to judge the performance of Railways are operating ratio, engine utilisation, passenger vehicle utilisation, wagon turn around, fuel consumption, turn over ratio etc, and the integrated budget therefore includes brief comments on the following important aspects :-
1.2
1. FINANCIAL RESULTS indicating the gross traffic receipts, working expenses, the operating ratio and the ratio of net revenue to the capita!-at-charge.
2. Proposed Plan outlays, capital investment, the dividend liability to General Revenue, the anticipated earnings for the year vis-a-vis the working expenses-
3. MATERIAL MANAGEMENT showing the position of inventories, .stores balances, manufacturing suspense and how efficient the systems are working. The "turn over ratio" is also furnished to work out the efficiency of inventory control.
4. Progress of computerization of accounts work relating to stores, traffic accounts etc.

5. Commitments about the overall operating performances with references to
a) Wagon turn round ( gap between two subsequent loading)
b) Engine turn round ( gap between two subsequent haulage)
c) Fuel consumption ( Specific Fuel Consumption - 1000 GTKMs
6. For earnings, the average lead and average rates both for goods and passenger traffic should be given
7 Projection of traffic earnings
8.Rolling Stock Programme both on additional and replacement account
9.Work, Machinery and Plant Programme
The integrated budget brings to limelight the efficiency, of working of financial viabiliity of the Railway system.
The Integrated Budget also highlights the following activities ;-
i) Requirements of Rolling Stock (Both on additional account and replacement account).
il) Incremental cost of additional traffic
iii) New trains introduced during the year.
iv) Other activities such as energisation, improvement in loco utilisation, All India whole sale price index and any other achievements worth mentioning,

1.3 The Integrated Budget is submitted along with the Preliminary work Programme in the first week of September. After discussion of the PWP, a revised Integrated Budget should be submitted along with Final Works Programme duly taking into account the changes thati might have taken place in the meantime (Para 622 of Engineering Code)
1.4 Utility
After the introduction of Performance Budget, the Significance of Integrated Budget is lost, Various statistical information that are already available can be made use of.
CHAPTER XVIII
WORKS BUDGET
1.1 The requirements of funds of Zonal Railways to progress their ongoing and new schemes proposed are to be grouped under the prescribed Plan Heads. Investment decisions relating to the creation, acquisition and replacement of assets on the Railways are processed through the Annual Works Machinery and Rolling Stock Programmes. These programmes are examined by the Board and discussed with the General Managers and the works to be undertaken and outlays during the budget year decided upon.
The works budget process stats almost a year in advance of the financial year to which it relates. Tentative requirements of funds are required to be projected at the beginning of say May '06 for the year 2007-08. This information is required to be presented in two parts.
(A) Throw forward amounts for the year 2006-07 from
i) Works in progress included in the budget of 2005-06
ii) Anticipated cost of new works included in the budget for 2006-07 workwise and classified under Cap, DRF, DFand Capital Fund.
(B) Tentative requirements for 2007-08 for:
i) Works in progress
ii) For new works proposed in 2006-07 classified workwise and under Cap, DRF, DF and Capital Fund.
In addition, Fhe plan oullay during the subsequent years of fhe plan is also required to be furnished under each plan head workwise. Simultaneously all schemes costing over Rs 3 Crores are required to be got cleared by the Board after a broad serutiny of the financial implications as presented by the Railways. Track renewal proposals are furiher examined with reference to overall priorities having regard to the availability of Permanent Way materials.
1.2 i) In about June/July '2006 the Railway Board will convey to each railway in respect of each plan head the total outlay within which the works programme should be framed by the Railways. The railway taking note of the ceilings is required to submit the Preliminary Works Proramme some time in Aug/Sep 2006. In this outlay proposal for each work indicating the actual expenditure upto March 2006, outlay proposed for 2006-07, outlay proposed for 2006--08 together with balance to complete the works have to be shown. In addition two more annexures regarding (i) the position of actual expenditure on staff quarters and outlays proposed in the current and next year as also balance to complete the work and (ii) employment likely to be generated in the current year and next year under unskilled, educated, technical and non-technical are required to be given.
n) Project costs have to be based on firm dala and once the same is approved the changes in scope of the project should be allowed without prior reasons being adduced for accpctance by the Railway Board. As far as possible only the last sanctioned costs should be exhibited. Works sanctioned and taken up should continue to be included every year till they are finally completed.
iii) Works approved in earlier years and but commenced as well as works approved in earlier years but for which estimates have not been sanctioned by 30th June are required to be indicated in the programme.
iv) Certain far-reaching decisions have been taken in the recent years in regard to regard excess over estimates, material modification etc. It has been decided tlhat no outlay would be made available if there is no corresponding estimate provision left for utilization. This would mean that wherever there has been excess over estimates, these would have got to be covered by a proper sanction for the revised estimated cost by August itself. Only then it will be possible to reflect the revised cost in the statements and ask for the required budget provision in the succeeding year. In respect of material modifications also, Board have decided that a serious view would be taken if material modification not within the GM powers are not covered by a proper sanction. While approaching the Board with material modifications, the revised financal iimplications have to be brought out. These measures have cast a great responisibility on the project organisations to see that they confine themselves to the works provided for in the original estimate and if material modifications within their own powers are involved find out savings elsewhere to absorb them and where they are not within their own powers approach the Baard in time before the works are executed. In practice, however there are considerable problems in getting the revised estimates sanctioned mainly due to the time laken for secretarial scrutiny.
v) After having examined the individual railways progrommes the Board decide which works should be included in the next year's budgel and direct the railways to modifiy the programmes and submit the works programmes on ihe stipulated dates. The budget estimates therefore reflect the final investment decisions. The estimated amount is advised to the Planning Commission/Ministry of Finance for necessary provision being made in the ways and means budget of the Govt. of India and after it has been ascertained that funds will be available, the programmes are submitted to the Ministry for approval.
vl) Thereafter the demands for grants and other papers are presented to Parliament. With the recommendations of the President Appropration bill is also introduced for drawal of funds from consolidated fund of India. This bill passed in the Parliament and asssented to by the President forms the budgetary allocation to the railways, Thereafter, allotments are made to the railways through budget orders. Allotments fixed by the President are shown as 'charged'.
I.3 No reappropriation is permissible between 'voted' and 'charged' allotments as also between capi al, railway funds and revenue. The provision under ihe plan heads (i) electrification projects (ii) new lines, (iii) gauge conversions, (iv) track renewal cannot be reappropriated without the approval of the Board. This equally applies in (i) staff quarters and (ii) amenities for staff under staff welfare works as well as passenger amenities and other railway users' amenities. Other re-appropriations are, permissible before the close of the financial year.
*
The stages for review and asking for additional provision/surrendering provision not required are at the August review, revised estimate, first modification and final modification stages. Supplementary grants should be sought in the same financial year in which it is required. In case expenditure has already been incurred, these should be covered by seeking excess grants based on the recommendations of the Public Accounts Cummittee as a result of the scrutiny of the Appropriation Accounts by the C&AG of India.
1.4 The expenditure to be forecast is also to be comipiled and reflected under diffarent primary units,
The main points to be taken care of in framing these estimates are :
a) Wherever payments are made by other railways on Railway Board contracts a forecast of the likely payments is to be obtained from them.
h) Similarly in respect of services rendered or work done also either by home railway or others the adjustments are to be estimated properly and incorporated.
c) budget section should identify the spending units and ensure That the projections arec received in time and taken note of
d) In the above cases the process involves advance action. in other respects it is just the process of review of likely payment;it has to be carefully noted in this connection that if the reviews are to be purposeful the current state of expenditure should be readily available under various primary units and further split up into the components thereof in the same manner in which the budget has been built up. This would only be possible if a computerised system of compiling the transactions under these components on a monthly basis is evolved. With the advent of personal computer this is an elementary exercise and from February onwards even a day to day watch can be attempted to produce worthwhile results. Large scale adjustiments vitiate the budgetary process and it is here that a close interaction between the executive and Accounting Wings is called for.

SENSITIVITY ANALYSIS


SENSITIVITY ANALYSIS

1. simplest of handling risks
2. magnitude in the ROR by small change in the components of which are uncertain
3. selct variable –whose estimated values may contain significant errors or elements of uncertainty
4. key variables are – cost, price, project life, market share etc
5. Graph

Advantage:
1. identify crucial variables that makes greatest impact in the NPV of the project
2. graphical presentation – better visual appeal
3. by confining SA to adverse changes in the variable that can be reasonably expected to occur one can obtain range of NPV that can be reasonably anticipated
4. knowledge is helpful for making decisions

Railways Risk Factors:
1. land - delay in acquisition – litigation
2. earth work availability of sand
3. soil condition – geographical factors –weak/loose Eg TEN-NGC line due to weak soil
4. alignment due to local or popular demand Eg KRCL in Madgaon line in Goa State
5. availability of sleepers – wooden/ Pre Stressed Concrete Sleepers – snags in production- ban on wooden sleepers as environmental policy of the Govt
6. availability of rails – change in the production pattern of the steel mills – delay in production- change in the Govt policy
7. estimated earnings – net production of commodities short fall in projected and traffic due to climatic and natural causes – import and export potential
8. delay in rolling stock in ordered quantity Eg Hassan – Mangalore line for transport of ore to Port of Mangalore diverted to road
9. cost and time over runs – likely delay due to paucity of funds/allotment

RISK ANALYSIS


RISK ANALYSIS
- Study of risk/uncertainty factor of any investment proposal
Factors of uncertainty
1. process or product becoming obsolete
2. decline in demand
3. change in Govt policy in business
4. price fluctuation
5. foreign exchange restriction
6. inflationary tendencies

Techniques
I. Conservative: 1. Short Pay Back Period
2. Risk Adjusted Discount Rate
3. Conservative Forecasts of Certainty
Equivalent
Ii. Modern Methods:1. Sensitivity Analysis
2. Probability Analysis
3. Decision Tree Analysis

I. 1. Short Pay Back Period: Projects with short pay back period are normally preferred to those with longer pay back period. It would be effective when it combined with a cut off period. The cut off period denotes the risk tolerance level of the firm.

I. 2. Risk adjusted discount rate: Under this method, the cut off rate or minimum required rate of return is raised by adding what is greater.

I. 3. Conservative forecasts of certainty equivalent: It deals with the uncertainty in cash flow. Under this method, the estimated risks from cash flows are reduced by employing initiative corrective factors or certainty equivalent coefficient, which is calculated by the decision maker subjectively or objectively. Normally, this coefficient reflects the decision maker’s confidence in obtaining a particular cash flow in a particular period.

II.1. Sensitivity analysis:SENANA.DOC

II.2. probability analysis: The measure of some one’s opinion about the likelihood that an event (cash flow) will occur. The range of probability is 1 to 0. That is 100 % certain to 100% uncertain. The measure can be classified into 1. Optimistic 2. Pessimistic 3. Most likely based objective or subjective factors.
II. 3. Decision tree: In this analysis alternative course of action are charted into a form of branches left to right. The nodes represents either the chance event (denoted by a circle) and a decision point (denoted by a square). The process starts from the extreme right hand decisions and travel stage by stage along the branches that maximize interest. This process is known as Roll Back Method.

MARGINAL COSTING

M A R G I N A L C O S T I N G


1. Other names:
Direct costing, Variable costing, Differential costing, Incremental costing, Out of pocket costing
2. Marginal cost means -
v The amount by which the total cost varies as a direct result of the change in the volume of production by one unit.
v When used in the plural as ‘marginal costs’ – it means the total of all variable costs.
v Marginal Cost is the amount at any given volume of output by which aggregate costs are changed of the volume of output is increased or decreased by one unit. In practice this is measured by the total variable cost attributable to one unit.( By the Institute of Costs and Works Accountants, London)

v Marginal costing is defined as “the ascertainment of marginal costs and of the effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs”.
v Thus, all the costs attributable to a product are broadly classified into two viz. fixed costs and variable costs.
v Fixed costs are those elements of the cost of production which are not affected by variation in the volume of output – i.e. under normal conditions; fixed costs remain constant irrespective of the volume of output.
v On the other hand variable costs are those elements of cost which tend to vary directly with the volume of output. The total of all such variable elements of the cost of a product is called the marginal cost of that product.
v The difference between the selling price and the marginal cost of a product is called “contribution” which is the most significant aspect of marginal costing. All the decisions made with the help of marginal costing are based on this concept. It is also called “gross margin”. All the products are expected to “contribute” towards a fund from which the total of all fixed costs is deducted, the surplus being the profit.
v Thus, the contributions of all products (or all units of the product) represent (a) Sales less variable cost or (b) fixed costs plus profit (or fixed cost less)
v Since much emphasis is placed on this concept of contribution, we can frame an equation as follows:

Marginal Cost Equation:
Sales – Variable Costs = Fixed Costs + Profit = S-V = F+P
v The following specimen of cost statement will show the components of marginal cost and total cost (i.e. the different types of variable costs and the fixed costs)
Cost Statement Rs.
Direct Materials XXX
Direct Labour (Wages) XXX
Direct Expenses XXX
-----
Prime Cost XXX
Variable overheads XXX
Marginal cost of Production XXX
Fixed Overhead XXX

3. Special features of marginal costing method:
v Separation of fixed costs and variable costs. Marginal costs (variable) above are considered to be the cost of the product in marginal costing unlike in the orthodox system – vi. Absorption or total costs costing.
v Valuation of stock-in-trade
v Like the cost determination, calculation of the profit, also done in a special manner in marginal costing method. First the marginal cost of production will be deducted from the sales; the remaining proceeds are known as “contribution”. The Contributions of all the products are brought into a pool from which the total of fixed costs will be deducted. If there is any surplus after meeting the fixed costs, it forms the profit.
v Fixed costs are not apportioned to the individual products under marginal costing. This is the basic and salient principle of marginal costing.
v The profitability of each department or product will be determined by its contribution. From the sum total of these contributions, total fixed costs will be deducted to arrive at the profit.
v The significance of the concept of contribution is well explained in this method (marginal costing method). When fixed costs are apportioned to the cost centres individually certain products may show a loss.
4. Illustration of cost statements:
1. ABSORPTION COSTING 2. MARGINAL COSTING

ParticularsCost per 100 unitsCost per 120 unitsParticularsCost per 100 unitsCost per 120 units

Variable Expenses :1500 1800 1500 1800
Direct Materials
Direct Labour 1,000 1,200 1,000 1200
Variable overheads 600 720 600 720
Fixed Expenses 1,500 1,500 Marginal costs 3,100 3,720

Total Cost 4,600 5220 Marginal cost per unit 31 31
Cost per Unit 46 4,350


5. Uses of Marginal Costing Method:
v Fixing the price of the product :
Pricing under Trade depressions
(operate or shut down decisions)
Pricing in a special market
- Pricing in a special job (accepting a special order)
v Effect of changing the prices on profits
With the help of marginal costing technique, the following questions can be answered:
1. What is the effect of a change in price on the present profits?
2. What should be the volume of sales in order to earn a given profit?
3. What will be the profit for a given volume of sales?
4. Which is the most profitable product?
When management plans to expand output, normally the cost per unit will be reduced, enabling a price reduction. Again to attract a wider market, the selling price may be reduced. Therefore, the management is willing to know the effect of such a price change on the profits.
v Make or Buy decision
v Product Mix or Sales Mix
v Planning the volume of production (or level of activity)
6. Advantages:
v Marginal costing method clearly explains the nature and behaviour of the various costs incurred in the production of a particular product.
v Marginal cost statements provide for the data regarding the cost-volume profit factors that are required by the management for profit – planning.
v Marginal cost statements and reports give a more clear picture regarding cost of production and they are easier for the management to understand. For example, the impact of fixed costs on the volume of profit is well depicted by summarizing the fixed costs in the profit statements.
v The concept of contribution facilitates the relative appraisal of the profitability of the various products, product mixes sales territories etc. This is feasible because under the marginal costing technique, costs are classified as variable and fixed and the incidence of fixed costs is considered separately.
v Marginal costing is contributing to cost control plans such as standard costing and flexible budgeting.
v As illustrated earlier, marginal costing method is of immense use to the management in its area of decision making as in fixing the prices, determining the sales mix, closing down a business venture, planning the level of activities buying a component from outside etc.
7. Limitations of Marginal Costing:
v It is always difficult to bifurcate all the elements of costs rigidly into fixed and variable ones. Very often, arbitrary classifications are made to segregate the fixed and variable costs.
v In the long run, all the costs are variable i.e. even the fixed costs will vary at different stages in the long term. Therefore long range pricing and other policy decisions cannot rely much on the marginal cost analysis.
v Valuation of inventories and profit estimations on marginal costing basis are objected to by Tax Authorities.
8. Areas of application in the Railways
v Make or Buy decisions - in various Railways Workshops
v Fixing the tariff - Station to Station rates
v Pricing in a special job - Deposit Works.



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BREAK EVEN ANALYSIS


B R E A K- E V E N A N A L Y S I S
1. What is?
Profit maximization the ultimate objective of all business concerns. Profit is the resultant of the interplay of costs, price and volume.
v By a study of break-even-analysis, the managements knows how much sales, both in units and in value should be effected to avoid loss at the least.
v Cost-Volume-profit analysis (known otherwise) is an attempt at systematic study of the relationship existing among these variable factors and it analysis the effect of a change or changes in these factors on profits.
v It is an integral part of profit planning.
2. Breakeven Point (BEP)
v Total costs incurred total value of sales made = No loss or profit
i.e. Sale proceeds = Total costs (Fixed & variable = BEP
If sales go up beyond BEP = Profit
If sales come down = Loss
v A sale at Break-even point is the minimum amount of sales to be effected to avoid loss.
v BEP is an extension of the principles of marginal costing
v Break-even chart is a primary form of profit graph, which is a useful device to the management to inform the effects of changes in costs, volume and revenue.
Let us now construct a break-even chart on the basis of the following information (illustrativey)
Selling price - Re.0.40 per unit
Variable cost - Re.0.20 per unit
Fixed costs - Rs.2, 000
(Maximum)
From these data we can derive the following table to construct the chart
v The excess of actual sales over the break-even sales is the margin of safety
v Higher the margin of safety more will be the profits for the organization, because only after reaching the BEP, sales bring forth profits.
v This concept is useful in times of depression when the sales are gradually declining
v M-S = Actual sales – Break-even sales x 100
Actual sales
4. Angle of incidence (Profit angle or profit path)
v It indicates rate at which profit is earned in an organization after crossing the BEP.
v A wide angle represents a higher rate of profit earning and a narrow angle implies relatively a low rate of return.
v The consideration of the angle of incidence arises only after meeting the entire amount of fixed costs. Therefore the nature of angle depends upon the incidence of variable costs.
v A narrow angle indicates that variable costs form relatively a large part of the cost of the product and vice-versa
5. Profit-Volume-Ratio (P.V.R.)
v It indicates the relation between the sales value and its corresponding contribution.
v It explains the rate at which sales are contributing towards the recovery of fixed costs and profits.
v A high ratio means that the BEP is achieved sooner after which profit is earned at a higher rate and a low ratio implies the opposite.
v PVR = Sales – Variable costs (i.e. contribution) x 100
Sales
(Profit here means contribution)

Formulae:

v
P.V.R. = S-V x 100 S Where S = Sales Value V = Variable cost S-V = C (Contribution)
M.S. = P/PVR Where P = Profit

Volume of Sales = F+P / PVR Where F = Fixed Costs P= Profit
BEP (In value) = F/ PVR Where F = Fixed costs
BEP (In Units) =F/P-V Where F = Fixed costs P = Price V = Variable costs
Illustration:
The accountant of ABC Company Ltd. provides the following data for the year 1978:
Sales 15,000 units @ Rs.4 per unit = Rs.60, 000
Variable cost @ Rs.2 per unit = Rs.30, 000 (50%)
-------------
Contribution = Rs.30, 000
Less Fixed Costs = Rs.18, 000
-------------
Profit = Rs.12, 000
------------
You are required to find out the following:
a) Profit = Volume Ratio
b) Break-even Point and
c) Margin of safety

Workings:
a) Profit – Volu me Ratio = S – V x 100
S
P.V.R. = 60,000 - 30,000 x 100 = 50%
60,000
b) Break-even Point = Fixed costs
P/V Ratio
= 18,000 = 18,000 x 100 = Rs.36000
50% 50
c) Margin of Safety = Profit
P/V Ratio
Ms = 12,000 = 12000 x 100 = Rs.24000
50% 50
The results can be verified as follows:
Break-even Point Sales = Rs.36, 000
At this level the total costs are –
Fixed costs = Rs, 18,000
Variable costs = Rs.18, 000 (50% of sales)
------------
Total cost = Rs.36, 000
------------
Margin of Safety = Rs.24, 000
Sales beyond break-even point constitute the Margin:
.
. . Ms = Actual sales – BEP
= 60,000 – 36,000
= Rs.24, 000


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Tuesday, September 15, 2009

RATIO ANALYSIS

RATIO ANALYSIS OR ACCOUNTING RATIOS

01. Ratio Analysis:
v A ratio is simply a quotient of two numbers.
v This is an instrument for diagnosis of the financial health of an enterprise.
v It does by evaluating important aspects of the conduct of business like liquidity, solvency, profitability, capital gearing, etc.
v It is an invaluable aid to management in the discharge of basic functions of forecasting, planning, co-ordination, communication, and control.
v The technique used by Accountants to facilitate the discussion of the questions ( a few are listed below) listed below is Ratio analysis -

-
Profitability Are the profits adequate for the capital employed?
Solvency Can the concern repay its creditors?
Ownership What extent of the business is financed by its creditors?
Financial Strength Has it got sufficient resources to enable it to expand?
Trend Are the profits on a rising scale or Are they falling away?
Gearing How certain are dividends?

02. What they are:
v Pure ratios - (e.g. = 2:1) (Current Assets: Current Liabilities).
v No. of times -(e.g. : Stock Turnover being 6 times a year)
v Percentages - (e.g.: 30% Gross profit on Sales).
03. Handling of Ratios:
By itself may be meaningless unless it is interpreted against some standard and analysed on a comparative basis.
v Usefulness depends upon the ingenuity and experience of the analyst who employs them.
v Properly used, can assist for improving efficiency. In the wrong hands, may mislead.
04. Why Ratios?
v Absolute figures are often misleading.
v The value of absolute figures increases manifold if they are studied with ratio analysis.
v Ratios enable mass of data to be summarised and simplified for presentation to management for decision making.
v "Time series analysis" - the comparison of ratios of the same company over a period of time for evaluating the CO's financial condition and profitability.
v "Cross Sectional Analysis" an analysis of the future based on projected financial statements. It may also be in comparison with those of similar companies in the same line of business and with an industry average.
v Past ratios indicate trends in costs, sales, profit and other relevant facts. For forecasting likely events, they may be very useful.
v By accounting ratios, the plans made can be 'signposted'.
v To establish the desirable co-ordination or balance they may be used.
v Control of performances (e.g. Sales quotas) as well as control of costs may be materially assisted by the use of ratios.
v Ratios may be used as measures of efficiency for inter-firm and intra-firm comparisons.
v Ratios can play a vital role in informing what has happened.
v If properly selected, correctly calculated, and timely presented, accounting ratios often prove very handy and useful tools for helping the management to have a clear grasp of the trend of the business resulting from the policy followed so far.

05. Limitations
Ratio analysis has a number of pitfalls:
v Ratios are calculated from the data drawn from accounting records. As such, it suffers from the inherent weakness of the accounting system itself which is the source of data.
v Ratios compared from single set of figures will not have much significance. They must be compared with independent standards. But, as ratios share with other statistical concepts the fact that all the limitations of the latter in the determination of a proper standard for comparison can't be ignored
v Ratios are clues, not bases for immediate conclusions. They are only the means to reach conclusions and not conclusion in themselves. They give just a fraction of information needed for decision making.
v Conclusions from analysis of statements are not sure indicators of bad or good management. They give room to suspicion and should be carefully looked into. For example, a high inventory turnover generally considered to be indication of operating efficiency may be temporarily achieved by unwarranted price reduction or failure to maintain stock-in-hand.
v As ratios are simple to calculate and easy to understand, there is a tendency to employ them profusely. When too many ratios are calculated, they are likely to confuse instead of revealing meaningful conclusions.
v Different agencies adopt different definitions, thereby making the ratios non-comparable.

06. Classification of Ratios:

Structural point of view Balance sheet ratios, Profit & Loss Account ratios, Composite Ratios.
Functional point of view - Solvency Ratios, Profitability Ratios, Efficiency & performance Ratios.

STRUCTURAL POINT OF VIEW
RATIO ANALYSIS
BALANCE SHEET RATIOS
PROFIT & LOSS ACCOUNT RATIOS
COMPOSITE RATIOS
Current (or 2 to 1) Ratio.
Gross Profit Ratio
Return on Proprietor's Fund.
Quick Ratio or Liquid Ratio or Acid Test Ratio.
Net Profit Ratio
Return on Proprietor's Equity.
Proprietory Ratio.
Expense Ratio
Return on Equity Share Capital
Assets Proprietorship Ratio.
Operating Ratio
Return on Capital Employed.
Debt-Equity Ratio.
Stock Turnover Ratio
Return on total Assets
Capital gearing Ratio.
Turnover of Fixed Assets.
Turnover of Total Assets.
Turnover of Working Capital.
Debtors' Turnover
Creditors' Velocity

FUNCTIONAL POINT OF VIEW
RATIO ANALYSIS
SOLVENCY
PROFITABILITY
EFFICIENCY
&
PERFORMANCE
SHORT TERM
IMME-DIATE
LONG TERM
Gross Profit Ratio
Solvency Ratio

Current
Ratio
Quick
Ratio
Proprietory
Ratio
Net Profit Ratio
Capital Gearing Ratio



Dividend Per Share Ratio
Stock Turn Over Ratio
Return on Capital Employed
Operating Ratio
Return on Equity
Expense Ratio


Return on total assets etc.
Turnover of Total assets etc.
07. Operating Ratio - in Management Accounting:-
v This is obtained by dividing the total of the cost of goods sold plus operating expenses by the amount of sales. Lower the ratio the better it is! The ratio is calculated as
Cost of goods Sold + Manufacturing, Administrative, Selling Expenses and financial Expenses
X
100
Net Sales

v A comparison of operating ratio would indicate whether the cost content is higher or low in the figure of sales.

v A rise in the operating ratio indicates decline in efficiency;

Net Profit Ratio + Operating Ratio = 100

v This is the most general measure of operating efficiency and is important to managements in judging its operations.

v In general, for manufacturing concerns, operating ratio is expected to touch a percentage of 75 to 85.

v The difference between the operating ratio and 100 is the ratio of operating profit to net sales. Lower the operating ratio, higher the margin of profit.

v While this ratio serves as an index of overall efficiency, its usefulness is limited by its vulnerability to changes resulting from management decisions.

08. Inventory Turnover Ratio (or Stock turnover Ratio or Inventory Ratio). (in Management Accounting).

v It shows the number of times the stock is turned over during the accounting period. It is the ratio between the average stock (i.e. Closing Stock + Opening Stock divided by 2) held and the cost of sales (Opening Stock + Purchases - Closing Stock).

v For Example, the opening stock, purchases and closing stock of a company are Rs.18, 000/-, Rs.3, 44,000/-, Rs.20, 000/- respectively. The Stock turnover ratio is worked out as
X
= 18 timesCost of Goods Sold 3, 42,000
Average Stock 19,000

v High inventory turnover indicates that more sales are being produced by a unit of investment in stocks and thus reflects an effective inventory management.

v A low turnover ratio may indicate that the concern has accumulated unsaleable goods or may be the inventories are over valued.

v It affords useful information whether capital is being locked-up in slow moving stocks or whether Gross Profit may be increased by reducing prices in order to induce a rapid rate of turnover. Therefore, an increase in the ratio may indicate expansion of the business and a decrease the opposite.

v This ratio can be improved in one of the three ways.
By keeping sales at the same level, while reducing the stock of finished goods.
By increasing sales, while keeping the stock of finished goods at the same level.
By increasing sales, while at the same time reducing the stock of finished goods.
v This ratio also shows whether the concern is indulging in overtrading or undertrading. A sharp increase in this ratio along with sharp increase in the ratio of inventory to working capital may indicate over trading, and a sharp fall in this ratio may indicate undertrading.

09. Return on Capital Employed [or on investment (ROR)]
Ratio - 1
v
Return of Capital Employed
=
Profits
X
100
Capital Employed

Ratio - 2
v Return on Capital Employed
=
Profit
X
Sales
X
100
Sales
Capital Employed

v Ratio 1 -reveals the efficiency of trading operation of the business. It is a profitability ratio.

v Ratio 2 -reveals the degree, of success in the utilization of capital used in the business. It is a capital-turnover ratio

v A business might be efficient in trading operations, showing a high profitability ratio. But this may be accompanied by excessive employment of capital in relation to the value of sales achieved by the business.

10. Common standards:

v Ratios in themselves are meaningless unless they are compared to some appropriate standard.

v What is an appropriate standard? It is very difficult to answer. It is only mental generalisation of what is adequate and normal. There are four common standards used in this connection. They are as follows:

1. Absolute Standards.
2. Historical Standards
3. Horizontal Standards.
4. Budgetted Standards.

v 1. Absolute Standards are those which become generally recognised as being desirable regardless of type of company. However, there can hardly be an independent absolute standard which is desirable in all cases.

v 2. Historical Standards (also known as Internal Standards) involve comparing a company's own past performance as a standard for the present or future. It simply shows that the current period is better or worse than the past. However, it does not provide a sound basis for judgement, as historical standard may not have represented an acceptable standard.

v 3. Horizontal Standards (also known as External Standards) compared one company with another company or companies of the same nature. We know that no two companies are similar variations in accounting methods lead to significant differences in ratios. Such industry standards are periodically published in the Reserve Bank of India Bulletin and other financial dailies.

v 4. Budgeted Standard is arrived at after preparing the budget for a period. Such standards may be set by management as goals. They can be very useful because they are evolved after taking into account the prevailing conditions and the specific company situation. In fixing the budgeted standards, the management has to pay due attention to historical as well as horizontal standards.

11. Railway Financial Ratios:

v Financial Ratios: - The financial efficiency of operating an enterprise can best be seen from the 'financial ratios' which are worked out from the Statement of Profit and Loss for the year and the Balance Sheet (of Assets and Liabilities) as at the end of the year. The glossary of terms which should be used in Railway Estimates and Financial statements is given in para 308-F.
v The important financial ratios, applicable to Indian Railways, may now be described as shown below: -

(a) Operating Rate, i.e., percentage of gross working expenses [item (xiii) of para 308-F] to gross earnings [item (vi)] of para 308-F).

(b) Return on Capital -
(i) Percentage of (revenue) surplus (item xxi of Para 308-F) to Capital-at-charge (item xxii of para 308-F).

(ii) Percentage of net receipts (item xix of para 308-F_ to Capital-at-charge.

(c) Current Assets/Liabilities -
(i) Stores in stock in terms of month's consumption.
(ii) Work-in-progress (workshops) as a percentage of the value of workshop outturn.
(iii) Stores Inventory (stores, 'purchases', 'sales', and miscellaneous advance, capital, etc.,) as percentage the total issue of stores.
(iv) Unrealised earnings at the year-end in terms of number of days, earnings.

v The above ratios, compared from year to year, provide useful information for judging the financial performance of the Railways.

v Glossary of terms used

(i) Coaching Earnings (less refunds)

(ii) Goods Earnings (less refund)

(iii) Traffic Earnings = (i) + (ii)

(iv) Sundry Other Earnings (Less refunds) = Other than Traffic Earnings.

(v) Gross Earnings = (iii) +) iv) = true or accrued earnings in an accounting period whether or not actually realised.

(vi) Suspense.

(vii) Gross Receipts = (v) + (vi) = Earnings actually realised during an accounting period.

(viii) Miscellaneous Receipts = Guarantee recoverable from State governments + Other Miscellaneous Receipts, such as Government share of surplus profits, sale of land of subsidized companies, receipts from surcharge on Passenger fares, etc.

(ix) Total Revenue receipts = (vii) + (viii)

(x) Ordinary Working Expenses = Expenses booked under final heads, excluding appropriation to Depreciation Reserve Fund, and Pension Fund. (Payments on account of accident compensation and Pensionary payments should also be excluded).
(xi) Appropriation to Depreciation Reserve Fund.

(xii) Appropriation to Pension Fund.

(xiii) Gross Working Expenses = (x) + (xi) + (xii) = True expenses in an accounting period whether or not actually disbursed.

(xiv) Suspense.

(xv) Gross Expenditure = (xiii) + (xiv) = Working, Expenses actually disbursed during an accounting period.

(xvi) Miscellaneous expenditure = surveys + Land for subsidized companies; subsidy + other Miscellaneous Railway Expenditure. Appropriations to Pension Fund relating to Railway Board and Miscellaneous establishments booked under grants 1 & 2 and Accident Compensation, Safety and Passenger Amenities fund and Open Line Works (Revenue_ expenditure, and payments to worked lines.

(xvii) Total Revenue Expenditure = (xv) + (xvi)

(xviii) Net earnings = (v) - (xiii)

(xix) Net Receipts = (ix) - (xvii)

(xx) Payments to General Revenues.

(xxi) Surplus/Shortfall = (xix) - (xx).

Note: The "Surplus or Shortfall" shown in item (xxi) differs from the "gain or loss" given in Account No.110 of the Finance and Revenue Accounts of the Government of India, as besides dividend, the former takes into account all the Miscellaneous Receipts (viii) and Expenditure (xvi) attributable to a Railway, whereas the latter does not.

(xxii) Capital-at-charge represents the Central Government's investment in the Railways by way of Loan Capital and value of the assets created therefrom.

12. Railway Operating Ratio: (Time series analysis)
Year @
Indian Railways
Southern Railway
1991-92
89.5%
117.81 %
1992-93
87.4%
118.51 %
1993-94
82.9%
110.60 %
1994-95
82.6%
109.47 %
1995-96
82.5%
105.62%
1996-97
86.2%
106.98 %
1997-98
90.9%
111.81 %
1998-99
93.3%
114.29 %
1999-2000
93.3%
114.29%
2000-01(RE)
98.5%
-
2001-02 (BE)
98.8%
-

v Cross Sectional Analysis

RAILWAYS
INDIAN ZONAL RAILWAYS
1992-93
1993-94
1994-95
1995-96
1996-97
Central
76.51
74.33
77.97
80.79
84.38
Eastern
98.40
93.49
91.79
95.83
97.71
Northern
86.51
81.65
83.25
80.45
83.56
North Eastern
182.67
174.06
177.39
158.21
164.74
North East Frontier
187.88
186.70
186.51
196.01
210.74
Southern
118.51
110.60
109.47
105.62
106.98
South Central
85.76
81.98
84.03
78.98
80.96
South Eastern
69.00
65.18
62.75
63.93
68.73
Western
70.87
67.83
64.90
64.66
69.52
Total Indian Rlys.
*87.36
*82.93
*82.64
*82.45
*86.22



13. Ratio of net revenue to capital-at-charge:
(Please see annexure enclosed)


14. Railway inventory turnover ration (Excl. Fuel)

Year
Indian Railways
Southern Railway
Central Railway
1991-92
20.97 % (RE)
24.19 %
-
1992-93
21.93 % (BE)
36.53 %
-
1993-94
-
22.34 %
28.15 %
1994-95
-
16.81
22.54 %
1995-96
-
12.80 %
17.77 %
1996-97
12.00 %
9.69 %
16.00 %
1997-98
11.00 %
10.58 %
13.35 %
1998-99
-
13.12 %
-
1999-2000
11.00 %
14.33 %
-
2000-2001(RE)
14.00 %
-
-
2001-2002 (BE)
14.00 %
-
-