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Learned!

To learn new things is beneficial at any age, and any kind of learning can benefit other aspects of your life. For instance, taking music lessons can increase your language skills. If you’re interested in a topic, study it. If you’d like a new skill, practice it. Your life is ever-changing and infinitely complex, and your ability to experience it depends on your willingness the learn. The more you learned, the more you live.

Embrace failure and confusion. When you are learning a new thing, you are entering into unknown territory. Allow yourself to experience the confusion of unanswered questions and unfamiliar parameters. When you study a new topic, don’t look up answers to your questions right away. Instead, spend some time trying to figure the answers out on your own. This kind of trying (and failing) helps you better understand what you are learning.

  • Creative Accounting: Methods, Techniques, and Prevention

    Creative Accounting: Methods, Techniques, and Prevention

    Definitions of Creative Accounting: The term ‘creative accounting’ can define in several ways. Initially, we will offer this definition; “A process whereby accountants use their knowledge of accounting rules to manipulate the figures reported in the accounts of a business”. The concept of Creative Accounting study: Methods of Creative Accounting, Techniques of Creative Accounting, and Prevention of Creative Accounting! Also learned, Definition, Motivation, and Ethical Considerations.

    Learn, Explain Creative Accounting: Methods, Techniques, and Prevention!

    They characterize by excessive complications and the use of novel ways of characterizing income, assets, or liabilities. This results in financial reports that are not at all dull; but have all the complications of a novel by James Joyce, hence the appellation “creative”. Sometimes the words “innovative” or “aggressive” use.

    Creative accounting, which generally involves the preparation of financial statements with the intention of misleading readers of those statements, is prima facie a form of lying. Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices but deviate from the spirit of those rules.

    It examines and rejects the arguments for considering creative accounting, despite its deceptive intent, as not being a form of lying. It then examines the ethical issues raised by creative accounting, in the light of the literature on the ethics of lying.

    This literature includes the evaluation of various excuses and justifications for lying and this examines here about creative accounting. It concludes that even in circumstances in which creative accounting would arguably serve a worthy purpose; that purpose would be at least as well served by honest communication.

    Concept:

    Creative accounting also called aggressive accounting, is the manipulation of financial numbers; usually within the letter of the law and accounting standards; but very much against their spirit and certainly not providing the “true and fair” view of a company that accounts suppose to:

    • A typical aim of creative accounting will be to inflate profit figures. Some companies may also reduce reported profits in good years to smooth results. Assets and liabilities may also manipulate, either to remain within limits such as debt covenant or to hide problems.
    • Typical creative accounting tricks include off-balance-sheet financing, over-optimistic revenue recognition, and the use of exaggerated non-recurring items.
    • Window Dressing has a similar meaning when applied to accounts; but is a broader term that can apply to other areas. In the US it is often used to describe the manipulation of investment portfolio performance numbers. In the context of accounts, “window dressing” is more likely than “creative accounting” to imply illegal or fraudulent practices, but it needs to do so.
    • The techniques of creative accounting change over time. As accounting standards change, the techniques that will work change. Many changes in accounting standards are meant to block particular ways of manipulating accounts; which means that intent on creative accounting needs to find new ways of doing things. At the same time, other, well-intentioned, changes in accounting standards open up new opportunities for creative accounting, and in the use of fair value is a good example of this.
    • Many creative accounting techniques change the main numbers shown in the financial statements but make themselves evident elsewhere, most often in the notes to the accounts. The market has been surprised before by bad news hidden in the notes, so a diligent approach can give you an edge.

    Methods of Creative Accounting:

    The following methods below are;

    1] First Methods:

    Although not technically wrong, many annual and quarterly reports and presentations dive heavily into theoretical scenarios where one-time “charges” to earnings are excluded. What this means is, for example, a lawsuit settlement amount would take out of the reported profit in one big chunk, even if its payout little by little over time.

    This practice call reserves. Often, when explaining the quarterly results, a CEO might say; “Well if we didn’t take this charge for the lawsuit, we would have made this much money”. Very often, the hypothetical situations proposed to get even more complicated. The main “creative” aspect to this is when a “one time” “exceptional” charge is very common to the business.

    2] Second Methods:

    Banks can lend out most of the money they receive in the deposit. The banks can also lend money they borrow from other banks. However, to protect against bad loans, banks must keep aside a stash of money called a “reserve”. The bank, within general guidelines, gets to set the size of this reserve to what it feels prudent compare to how risky its outstanding loans are. However, when the bank wants to make it look like it made more money this quarter than last; one way to do that is to make money from the reserve and call it is profit with the excuse that the loans are safer now than before and that amount was no longer needed.

    3] Third Methods:

    One of the main genres of “creative accounting” know as slush fund accounting; whereby some earnings from this quarter hideaway just in case the profit from next quarter is not enough for the management to make their bonuses. This happened most famously at Freddie Mac. As of 2004, there is a large investigation underway to see if retroactive insurance policies from insurers such as General Re of Berkshire Hathaway were used for slush fund accounting. The question is if these insurance policies truly transferred some risk or were merely a slush fund.

    Techniques of Creative Accounting:

    Creative accounting actively applies in six areas. The first area is regulatory flexibility, whereby changes in accounting policy permit by accounting regulation. For example, IAS permit carrying non-current assets can recover at either revalued amount or depreciated historical cost in asset valuation. Secondly, the dearth of regulation by which some accounting treatment might not be fully regulated as there are few mandatory requirements. The third area is management has a large extent of estimation in discretionary areas, such as assumption in bad debts provision. Fourthly, some transactions can time to show the desired appearance in accounts.

    For example, the manager is free to choose the timing to sell the investment just to increase earning in the accounts. Fifthly, to manipulate balance sheet amounts by using artificial transactions. Last but not least, by reclassification and presentation of financial amounts through balance sheet manipulation to smooth financial ratios; and, also based on the cognitive reference point in financial numbers’ presentation.

    Creative Accounting Methods Techniques and Prevention
    Creative Accounting: Methods, Techniques, and Prevention! #Pixabay.

    Prevention of Creative Accounting:

    Those companies most at risk for fraudulent financial reporting tend to be those that have one or more of the following attributes: weak internal control; no audit committee; a family relationship among directors and/or officers; assets and revenue less than $ 100 million; and/or a board of directors dominated by individuals with significant equity ownership; and, little experience serving as directors of other companies.

    To prevent creative accounting, the experts opine that accountants and managers should divide the duties of an internal control checklist. Furthermore, an independent audit committee should always have someone with a strong accounting background; and, audit experience who deals directly with outside auditors. The investors should diversify their investment portfolio to circumvent the problems related to creative accounting by a few unscrupulous companies.

    The company has to adhere strictly to the ethical values it has set itself in the long-run and the short-run of the life of the company. The accounting and accounting practices have to be consistent; and, show to the investors that it is following the ethical practices in all its financial dealing as well as reporting.

    How Enron Played the Game of Creative Accounting:

    According to Mulford, the expert in the field, the most common creative accounting practices include improper revenue recognition and misreporting expenses. However, Enron’s game, explains Mulford, involved special-purpose entities.

    “Enron conducted much of its business in these entities that they controlled. They transacted with themselves. That kind of self-dealing allowed them to report profits when they weren’t traditionally making a profit.”

    Though Mulford wrote the book before and published shortly after Enron’s dealings became public, the authors included a special note in the preface regarding the company’s accounting practices, noting that Enron’s “investors and creditors had not fully discounted the risk associated with the firm’s trading activities, its off-balance sheet liabilities, and its related-party transactions.” The authors add they believe careful attention to steps outlined in The Financial Numbers Game “would have provided an early alert to the possibility of developing problems.”

  • Creative Accounting: Definition, Motivation, and Ethical Considerations

    Creative Accounting: Definition, Motivation, and Ethical Considerations

    Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices but deviate from the spirit of those rules. The Concept of Creative Accounting: Definition of Creative Accounting, Motivation for Creative Accounting, the existence of Creative Accounting, and Ethical Perspective of Creative Accounting! They are characterized by excessive complication and the use of novel ways of characterizing income, assets, or liabilities and the intent to influence readers towards the interpretations desire by the authors.

    Learn, Explain Creative Accounting: Definition, Motivation, and Ethical Considerations!

    The terms “innovative” or “aggressive” are also sometimes used. Other synonyms include Cooking the books and Enronomics. Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices but deviate from the spirit of those rules – by Wikipedia.

    Definition of Creative Accounting:

    Creative accounts an accounting practice that falls outside the regulation and gives benefits to certain people. It can describe as a practice with a clear aim to interrupt the financial reporting process which affects reported income to make it looked normal; and, provides no true economic advantages to relevant parties like shareholders. Concisely, it is the transformation of financial accounting figures from what they are to what users desire by taking advantage of the accounting policies which permit by the accounting standard.

    Creative accounts a practice that potentially undertakes as a result of some individual care more on their interest and indirectly causes issues to arise in the ethical dimension of creative accounting. From the information perspective, agency theory gives a clear picture of the creative accounting scenario. Whereby managers misuse their privileged position in manipulating financial reporting in their interest which providing superior information content to the shareholder. Lack of personal skill or unwillingness to carry out detailed analysis making individual shareholders do not have a clear view of the effect of accounting manipulation gives a high possibility of the incidence of creative accounting.

    The motivation for Creative Accounting:

    Several motivations have to identify in stimulating the behavior of creative accounting in the organization. Firstly, the significant motivator for creative accounting is to report a decrease in business income to lower the tax paid. Second, to enable the company’s performance to appear better in the future; the company will maximize the reported loss to make a bad loss that year. This is calls ‘big bath’ accounting to smooth the income. Thirdly, to provide a positive view on expectations, securities valuation, and reduction on risk for analysts in anticipated capital market transactions; and, maintain the firm’s performance in analyst’s expectations.

    Other motivations are to manipulate profit to match the reported income to profit forecasts; and, to distract attention from negative news by boosting company profit figures through the change in accounting policies. Manager’s motivations in managing earning aim to report a stable growth in profit not only to reduce the perception of variability toward an organization’s earnings but also are about income measurement. To make the company faces less risk and gain more benefit in the aspect of raising funds; takeover bids as well as prevent the takeover by other companies.

    It is needed to maintain or promote the share price and create a good profit growth. To gain benefit from inside knowledge, the director of the company engages creative accounting to postpone the release of information to the market. Last but not least, many types of contractual rights, obligations, and constraints based on the amount reported in the accounts also motivate the company to apply creative accounts. What are the Role and Duties of the Management Accountant?

    The existence of Creative Accounting:

    Theoretically, the manager’s motivation in there is acceptable. However, certain companies apply a particular technique of creative accounting to some extent; for example, applied in the non-discretionary component of the bad debts provision. Other evidence is Classificatory smoothing by using the extraordinary items; such as pensions cost, dividends from unconsolidated subsidiaries, extraordinary charges and credits; and, research and development costs in manipulating the figure of income in financial statements.

    The behaviors can identify by having a thoughtful analysis of a financial statement or observe by the reasonably well-inform user of the financial statement. But, how clearness the users of statement observe creative accounting is questionable. Anyway, the value of the information contained in the financial statement is concerned even though financial statements give adequate information that enables users to adjust for them as certain investors rely on reported earning numbers in an income statement.

    Creative Accounting Definition Motivation and Ethical Considerations
    Creative Accounting: Definition, Motivation, and Ethical Considerations! #Pixabay.

    Ethical Perspective of Creative Accounting:

    There are some ethical issues concerning the exercise of creative accounting. Loopholes in accounting standards provide managers some spaces in the sense of manipulating the timing in income reporting. Accounting is a tool to supervise contracts between managers and financial groups, identify the possibility of accounting manipulation; and, how properly it reflected in pricing and contracting decisions. Ethics of bias in choosing accounting policy which implies in they can see through accounting regulators and management level.

    Managers tend to misapply accounting principles to give a better appearance in the financial statement to investors. Conflict of interest, client requests to alter account, and tax evasion are the most frequent ethical issues. Accountants’ attitudes toward creative accounting depend on whether it has arisen from the misuse of accounting principle and manipulation of transactions. Accountants more critical in the misuse of accounting principles as the accountant’s duty is rule-based; and, it falls within their expertise. Failure to act ethically may damage the reputation as an accountant unless he or she reports the abuse to the appropriate party. Slotting is not an acceptable accounting treatment in company practices.

    There is some action can take by accounting regulators to restrain creative accounting:
    • Decrease allowable accounting method or fixed method used in the different conditions so that the scope for choosing the accounting method can narrowly down. Companies should also be consistent in using the method chosen by them.
    • Some rules should establish to reduce the abuse of justice. For instance, International Accounting Standards presently have almost removed the “extraordinary item” from operating profit. Also, companies should be consistent in applying accounting policy to restrain the abuse of justice.
    • Implementation of “Substance over form” can decrease artificial transaction and this can make linked transactions become one as the whole.
    • To restrict the use of timing of the genuine transaction, item in the account should regularly evaluate. Also, the increases or decreases in value should state in the account each year the revaluation occurs. International Accounting Standards also tends to value items at fair value rather than historical cost.
    • Besides alteration in accounting regulations, ethical standards and governance codes must be properly executed to avoid individuals from performing creative accounts.
    How Enron Played the Game of Creative Accounting:

    According to Mulford, the expert in the field, the most common creative accounting practices include improper revenue recognition and misreporting expenses. However, Enron’s game, explains Mulford, involved special-purpose entities.

    “Enron conducted much of its business in these entities that they controlled. They transacted with themselves. That kind of self-dealing allowed them to report profits when they weren’t traditionally making a profit.”

    Though Mulford wrote the book before and published shortly after Enron’s dealings became public; the authors included a special note in the preface regarding the company’s accounting practices, noting that Enron’s; “investors and creditors had not fully discounted the risk associated with the firm’s trading activities; its off-balance sheet liabilities, and its related-party transactions”.

    The authors add they believe careful attention to steps outlined in The Financial Numbers Game; “would have provided an early alert to the possibility of developing problems”.

  • What is the Cost Accounting Information System?

    What is the Cost Accounting Information System?

    Cost Accounting Information System (CAIS) is an accounting information system that determines the costs of products manufactured or services provided and records these costs in the accounting records. Also, The concept of CAIS studying: Functions of Cost Accounting Information System, Technology of Cost Accounting Information System, and Development of Cost Accounting Information System! It is the key to management’s assessment of the company’s efforts to achieve profit. Since it is so important, the CAIS must be careful to design and properly maintains. Also learn, Financial Accounting, What is the Cost Accounting Information System?

    Learn, Explain What is the Cost Accounting Information System? Functions, Technology, and Development!

    An accounting information system (AIS) is a system of collecting, storing, and processing financial and accounting data that are used by decision-makers. An accounting information system is generally a computer-based method for tracking accounting activity in conjunction with information technology resources. Also, The resulting financial reports can uses internally by management or externally by other interested parties including investors, creditors, and tax authorities.

    Accounting information systems are designed to support all accounting functions and activities including auditing, financial accounting & reporting, managerial/ management accounting, and tax. Also, The most widely adopted accounting information systems are auditing and financial reporting modules.

    What is the Accounting Information System? Accounting Information System refers to the computer-based method used by the companies to collect, store and process the accounting and the financial data which is used by the internal users of the company to give a report regarding various information to the stakeholders of the company such as creditors, investors, tax authorities, etc.

    The cost accounting information system with its operating accounts must correspond to the organizational division of authority; so that the individual foreman, supervisor, department head, or manager can be held accountable for the costs incurred in his department. Also, The concept of authority and responsibility is closely allied with accountability; which recognizes the need for measuring a manager’s discharge of his responsibilities.

    Functions of Cost Accounting Information System:

    Generally, the purposes or functions of cost accounting information systems fall into four categories. These include providing information for:

    1. External financial statements,
    2. Planning and controlling activities or processes,
    3. Also, Short-term strategic decisions and
    4. Long-term strategic decisions.

    These four functions relate to different audiences, emphasize different types of information, require different reporting intervals, and involve different types of decisions.

    The technology of Cost Accounting Information System:

    They are below;

    Input:

    The input devices commonly associated with CAIS include standard personal computers or workstations running applications; scanning devices for standardized data entry; electronic communication devices for electronic data interchange (EDI) and e-commerce. Also, many financial systems come “Web-enabled” to allow devices to connect to the World Wide Web.

    Process:

    Basic processing achieves through computer systems ranging from individual personal computers to large-scale enterprise servers. However, conceptually, the underlying processing model is still the “double-entry” accounting system initially introduced in the fifteenth century.

    Output:

    Output devices used include computer displays, impact and non-impact printers, and electronic communication devices for EDI and e-commerce. Also, The output content may encompass almost any type of financial report from budgets and tax reports to multinational financial statements.

    Development of Cost Accounting Information System:

    The development of a Cost Accounting Information System includes five basic phases: planning, analysis, design, implementation, and support.

    The period associated with each of these phases can be as short as a few weeks or as long as several years.

    Planning, project management objectives, and techniques: 

    Also, The first phase of systems development is the planning of the project. This entails the determination of the scope and objectives of the project, the definition of project responsibilities, control requirements, project phases, project budgets, and project deliverables.

    Analysis: 

    The analysis phase is using to both determine and document the cost accounting and business processes used by the organization. Such processes are redesign to take advantage of best practices or the operating characteristics of modern system solutions.

    Design:

    The design phase takes the conceptual results of the analysis phase and develops detailed, specific designs that can implement in subsequent phases. It involves the detailed design of all inputs, processing, storage, and outputs of the proposed accounting system. Also, Inputs may be define using screen layout tools and application generators.

    Processing can show through the use of flowcharts or business process maps that define the system logic, operations, and workflow. Also, Logical data storage designs are identified by modeling the relationships among the organization’s resources, events, and agents through diagrams.

    Also, the entity-relationship diagram (ERD) modeling is using to document large-scale database relationships. Output designs are documented through the use of a variety of reporting tools such as report writers, data extraction tools, query tools, and online analytical processing tools. Also, all aspects of the design phase can perform with software toolsets provide by specific software manufacturers.

    Implementation:

    The implementation phase consists of two primary parts: construction and delivery. Also, Construction includes the selection of hardware, software, and vendors for the implementation; building and testing the network communication systems; building and testing the databases; writing and testing the new program modifications; and installing and testing the total system from a technical standpoint.

    Delivery is the process of conducting the final system and user acceptance testing; preparing the conversion plan; installing the production database; Also, training the users, and converting all operations to the new system.

    Support:

    The support phase has two objectives. The first is to update and maintain the CAIS. Also, This includes fixing problems and updating the system for business and environmental changes. For example, changes in generally accepted accounting principles (GAAP) or tax laws might necessitate changes to conversion or reference tables used for financial reporting.

    Also, The second objective of the support is to continue development by continuously improving the business through adjustments to the CAIS caused by business and environmental changes. These changes might result in future problems, new opportunities, or management or governmental directives requiring additional system modifications.

    What is the Cost Accounting Information System Image
    What is the Cost Accounting Information System? Image from Pixabay.

  • What are the Role and Duties of the Management Accountant?

    Management Accountant is an officer who is entrusted with the Management Accounting function of an organization. He plays a significant role in the decision-making process of an organization. The organizational position of Management Accountant varies from concern to concern depending upon the pattern of the management system. He may be an executive in some concern, while a member of the Board of Directors in case of some other concern. However, he occupies a key position in the organization. In large concerns, he is responsible for the installation, development and efficient functioning of the management accounting system. He designs the framework of the financial and cost control reports that provide with the most useful data at the most appropriate time. Also Learned, Cost Accounting, What are the Role and Duties of the Management Accountant?

    Learn, Explain What are the Role and Duties of the Management Accountant?

    The Management Accountant sometimes describing as Chief Intelligence Officer because apart from top management, no one in the organization perhaps knows more about various functions of the organization than him. Tandon has explained the position of Management Accountant as follows: “The management accountant is exactly like the spokes in a wheel, connecting the rim of the wheel and the hub receiving the information. He processes the information and then returns the processed information back to where it came from”.

    #Role of Management Accountant:

    Management Accountant otherwise calls Controller, is considering to be a part of the management team since he has the responsibility for collecting vital information. Both from within and outside the company. The functions of the controller have been laid down by the Controller’s Institute of America.

    These functions are:
    • To establish, coordinate and administer, as an integral part of management, an adequate plan for the control of operations. Such a plan would provide, to the extent required in the business cost standards, expense budgets, sales forecasts, profit planning, and program for capital investment and financing. Together with the necessary procedures to effectuate the plan.
    • To compare performance with operating plan and standards and to report and interpret the results of the operation to all levels of management, and to the owners of the business. This function includes the formulation and administration of accounting policy and the compilations of statistical records and special reposts as required.
    • To consult withal segments of management responsible for policy or action conserving any phase of the operations of the business. As, it relates to the attainment of the objective, and the effectiveness of policies, organization structures, procedures.
    • The administer tax policies and procedures.
    • To supervise and coordinate the preparation of reports to Government agencies.
    • The assured fiscal protection for the assets of the business through adequate internal; control and proper insurance coverage.
    • To continuously appraise economic and social forces and government influences, and interpret their effect upon business.

    #Duties and Responsibilities of Management Accountant:

    The primary duty of Management Accountant is to help management in taking correct policy-decisions and improving the efficiency of operations. He performs a staff function and also has line authority over the accountants. If the management accountant feels that a decision likely to take by the management based on the information tendered by him shall be detrimental to the interest of the concern. He should point out this fact to the concerned management, of course, with tact, patience, firmness, and politeness. On the other hand, if the decision was taken happens to be the wrong one on account of inaccuracy. Biased and fabricated data furnished by the management accountant. He shall be held responsible for the wrong decision takes by the management.

    Controllers Institute of America has defined the following duties of Management Accountant or controller:

    • The installation and interpretation of all accounting records of the Corporative.
    • The preparation and interpretation of the financial statements and reports of the corporation.
    • Continuous audit of all accounts and records of the corporation wherever located.
    • The compilation of costs of distribution.
    • The compilation of production costs.
    • The taking and costing of all physical inventories.
    • The preparation and filing of tax returns and to the supervision of all matters relating to taxes.
    • Preparation and interpretation of all statistical records and reports of the corporation.
    • The preparation as budget director, in conjunction with other officers and department heads, of an annual budget covering all activities of the corporation of submission to the Board of Directors prior to the beginning of the fiscal year. The authority of the Controller, with respect to the veto of commitments of expenditures not authorized by the budget, shall, from time to time, fix by the board of Directors.

    Continuously;

    • The ascertainment currently that the properties of the corporation are properly and adequately insured.
    • The initiation, preparation, and issuance of standard practices relating to all accounting. Matters and procedures and the coordination of the system throughout the corporation including clerical and office methods, records, reports, and procedures.
    • The maintenance of adequate records of authorizing appropriations and determination. That all sums expend pursuant there into properly accounts for.
    • The ascertainment currently that financial transactions cover by minutes of the Board of Directors and/ or the Executive committee are properly executing and recording.
    • The maintenance of adequate records of all contracts and leases.
    • The approval for payment(and/or countersigning ) of all Cheques, promissory notes and other negotiable instruments of the corporation. Which have to sign by the treasurer or such other officers as shall have to authorize by the by-laws of the corporation or from time to time designated by the Board of Directors.
    • The examination of all warrants for the withdrawal of securities from the vaults of the corporation and the determination. That such withdrawals are made in conformity with the by-laws and /or regulations establishing from time by the Board of Directors.
    • The preparation or approval of the regulations or standard practices. Required to assure compliance with orders or regulations issued by duly constituted governmental agencies.
  • Cost Accounting: Objectives, Nature, and Scope

    Cost Accounting: Objectives, Nature, and Scope

    Cost accounting examines the cost structure of a business. It does so by collecting information about the costs incurred by a company’s activities, assigning selected costs to products and services and other cost objects, and evaluating the efficiency of cost usage. Discuss the topic, the Concept of Cost Accounting: Meaning of Cost Accounting, Definition of Cost Accounting, Objectives of Cost Accounting, Nature and Scope of Cost Accounting, and Limitations of Cost Accounting! It is mostly concern with developing an understanding of where a company earns and loses money, and providing input into decisions to generate profits in the future. Also learned, Management Accounting; Objectives, Nature, and Scope.

    Learn, Explain Cost Accounting: Objectives, Nature, and Scope.

    Cost accounting involves the techniques for as: 1) Determining the costs of products, processes, projects, etc. to report the correct amounts on the financial statements, and 2) Assisting management in making decisions and in the planning and control of an organization.

    For example, cost accounts used to compute the unit cost of a manufacturer’s products to report the cost of inventory on its balance sheet and the cost of goods sold on its income statement. This is achieving with techniques such as the allocation of manufacturing overhead costs and through the use of process costing, operations costing, and job-order costing systems.

    It assists management by providing analysis of cost behavior, cost-volume-profit relationships, operational and capital budgeting, standard costing, variance analyses for costs and revenues, transfer pricing, activity-based costing, and more. They had their roots in manufacturing businesses, but today it extends to service businesses.

    For example, a bank will use cost accounting to determine the cost of processing a customer’s check and/or a deposit. This, in turn, may provide management with guidance in the pricing of these services.

    Key activities include:

    • Defining costs as direct materials, direct labor, fixed overhead, variable overhead, and period costs.
    • Assisting the engineering and procurement departments in generating standard costs, if a company uses a standard costing system.
    • Using an allocation methodology to assign all costs except period costs to products and services and other cost objects.
    • Defining the transfer prices at which components and parts are selling from one subsidiary of a parent company to another subsidiary.
    • Examining costs incurred about activities conducted, to see if the company is using its resources effectively.
    • Highlighting any changes in the trend of various costs incurred.
    • Analyzing costs that will change as the result of a business decision.
    • Evaluating the need for capital expenditures.
    • Building a budget model that forecasts changes in costs based on expected activity levels.
    • Determining whether costs can be reduced.
    • Providing cost reports to management, so they can better operate the business.
    • Participating in the calculation of costs that will require to manufacture a new product design, and.
    • Analyzing the system of production to understand where bottlenecks are position, and how they impact the throughput generate by the entire manufacturing system.

    Meaning of Cost Accounting:

    An accounting system is to make available necessary and accurate information for all those who are interested in the welfare of the organization. The requirements of the majority of them are satisfied using financial accounting. However, the management requires far more detailed information than what conventional financial accounting can offer.

    The focus of the management lies not in the past but on the future. For a businessman who manufactures goods or renders services, cost accounts a useful tool. It was developed on account of limitations of financial accounting and is the extension of financial accounting. The advent of the factory system gave an impetus to the development of cost accounting.

    It is a method of accounting for cost. The process of recording and accounting for all the elements of the cost calls cost accounting.

    Definition of Cost Accounting:

    The Institute of Cost and Works Accountants, London defines costing as,

    “The process of accounting for cost from the point at which expenditure incur or commit to the establishment of its ultimate relationship with cost centers and cost units. In its wider usage, it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carry out or plan.”

    The Institute of Cost and Works Accountants, India defines cost accounting as,

    “The technique and process of ascertainment of costs. Cost accounts the process of accounting for costs, which begins with the recording of expenses or the bases on which they are calculating and ends with the preparation of statistical data.”

    To put it simply, when the accounting process is applying to the elements of costs (i.e., Materials, Labor and Other expenses), it becomes Cost Accounting.

    Objectives of Cost Accounting:

    It was born to fulfill the needs of manufacturing companies. Its a mechanism of accounting through which costs of goods or services are ascertaining and control for different purposes. It helps to ascertain the true cost of every operation, through a close watch, say, cost analysis and allocation.

    The main objectives of cost accounting are as follows:-

    1] Cost Ascertainment: 

    The main objective of cost accounts to find out the cost of product, process, job, contract, service or any unit of production. It is done through various methods and techniques.

    2] Cost Control: 

    The very basic function of cost accounts to control costs. A comparison of actual costs with standards reveals the discrepancies (Variances). The variances reveal whether the cost is within the control or not. Remedial actions are suggesting to control the costs which are not within control.

    3] Cost Reduction: 

    Cost reduction refers to the real and permanent reduction in the unit cost of goods manufactured or services rendered without affecting the use intended. It can be done with the help of techniques called budgetary control, standard costing, material control, labor control, and overheads control.

    4] Fixation of Selling Price: 

    The price of any product consists of total cost and the margin required. Cost data are useful in the determination of selling price or quotations. It provides detailed information regarding various components of cost. It also provides information in terms of fixed cost and variable costs, so that the extent of price reduction can be decided.

    5] Framing business policy: 

    It helps management in formulating business policy and decision making. Break-even analysis, cost volume profit relationships, differential costing, etc help make decisions regarding key areas of the business.

    Nature and Scope of Cost Accounting:

    Cost accounts concerned with ascertainment and control of costs. The information provided by cost-accounting to the management is helpful for cost control and cost reduction through functions of planning, decision making, and control. Initially, they confined itself to cost ascertainment and presentation of the same mainly to find out product cost.

    With the introduction of large-scale production, the scope was widened and providing information for cost control and cost reduction has assuming equal significance along with finding out the cost of production. To start with cost-accounting was apply in manufacturing activities but now it applies in service organizations, government organizations, local authorities, agricultural farms, Extractive industries and so on.

    The guide for the ascertainment of the cost of production. It discloses as profitable and unprofitable activities. They help management to eliminate unprofitable activities. It provides information for estimates and tenders. They disclose the losses occurring in the form of idle time spoilage or scrap etc. It also provides a perpetual inventory system.

    It helps to make effective control over inventory and for the preparation of interim financial statements. They help in controlling the cost of production with the help of budgetary control and standard costing. They provide data for future production policies. It discloses the relative efficiencies of different workers and for the fixation of wages to workers.

    Cost Accounting Objectives Nature and Scope
    Cost Accounting: Objectives, Nature, and Scope! #Pixabay.

    Limitations of Cost Accounting:

    The following limitations below are;

    • It is based on estimation: as cost accounting relies heavily on predetermined data, it is not reliable.
    • No uniform procedure in cost accounting: as there is no uniform procedure, with the same information different results may be arrived by different cost accounts.
    • A large number of conventions and estimate: There are several conventions and estimates in preparing cost records such as materials are issuing on an average (or) standard price, overheads are charging on the percentage basis, Therefore, the profits arrive from the cost records are not true.
    • Formalities are more: Many formalities are to be observed to obtain the benefit of cost accounting. Therefore, it does not apply to small and medium firms.
    • Expensive: Cost accounts expensive and requires reconciliation with financial records.
    • It is unnecessary: Cost accounts of recent origin and an enterprise can survive even without cost accounting.
    • Secondary data: It depends on financial statements for a lot of information. Any errors or shortcomings in that information creep into cost accounts also.

  • What is the Financial Statement Analysis?

    Learn, Explain What is the Financial Statement Analysis?

    Financial performance, as a part of financial management, is the main indicator of the success or failure of the companies. Financial performance analysis can be considered as the heart of the financial decisions. Rational evaluation of the performance of the companies is essential to prepare sound financial policies and to attract potential investors. Shareholders are interested in EPS, dividend, net worth and market value per share. Also learned, Concept of Accountability in Financial Management, What is the Financial Statement Analysis?

    Management is interested in all aspects of financial performance to adopt a good financial management system and for the internal control of the company. The creditors are primarily interested in the liquidity of the company. Government is interested from the regulatory point of view. Besides, other stakeholders such as economists, trade associations, competitors, etc are also interested in the financial performance of the company. Therefore, all the stakeholders are interested in the performance of the companies but their perspective may be different.

    Financial statement analysis helps to highlight the financial performance of the company. It is the process of identifying the financial strength and weakness of a firm by properly establishing the relationship between the items on the Balance Sheet and those on the Profit and Loss Account. It is a general term referring to the process of extracting and studying information in financial statements for use in management decision making, for example, financial statement analysis typically involves the use of ratios, comparison with prior periods and budget, and other such procedures. The financial appraisal is a scientific evaluation of the profitability and strength of any business concerns. It seeks to spotlight the significant impacts and relationships concerning managerial performance, corporate efficiency, financial strength and weakness and creditworthiness of the company.

    The objective of financial statement analysis is a detailed cause and effect study of the profitability and financial position. Financial Analysis is the process of determining the significant operating and financial characteristics of a firm from accounting data and financial statement. The goal of such analysis is to determine the efficiency and performance of the firm’s management, as reflected in the financial records and reports. Financial statements are such records and reports, which contain the data required for performance management. It is therefore important to analyze the financial statements to identify the strengths and weaknesses of the company.

    The financial statements of a business enterprise are intended to provide much of the basic data used for decision making, and in general, evaluation of performance by various groups such as current owners, potential investors, creditors, government agencies, and in some instance, competitors. Financial statements are the reports in which the accountant summarizes and communicates the basic financial data. The financial statements provide the summary of accounts of the company the Balance Sheet reflecting the assets, liabilities, and capital as of a certain date and the Profit and Loss Account showing the results of operation during a period. The financial statements are a collection of data organized according to logical and consistent accounting procedures. The function of financial statement is to convey an understanding of some financial aspects of the company.

    Financial statement analysis involves appraising the financial statement and related footnotes of an entity. This may be done by accountants, investment analysts, credit analysts, management and other interested parties. Financial statements indicate an appraisal of a company’s previous financial performance and its future potential. The analysis of a financial statement is done to obtain a better insight into a firm’s position and performance. Analyzing a financial statement is a process of evaluating the relationship between component parts of the financial statement to obtain a better understanding of the firm’s position and performance. The financial analysis is thus the analysis of the financial statements, which is done to evaluate the performance of the company. Ratio Analysis, Trend Analysis, Comparative Financial Statement Analysis and Common Size Statement Analysis are the major tools of the financial analysis.

    Financial statement analysis involves the computation of ratios to evaluate a company’s financial position and results of operation. A ratio is an important tool for financial statement analysis. The relationship between two accounting figures expressed mathematically is known as the financial ratio. The ratio used as an index of yardstick for evaluating the financial position and performance of the firm. It helps analysts to make a quantitative judgment about the financial position and performance of the firm. It uses financial reports and data and summarizes the key relationship in order to appraise financial performance.

    Ratio analysis is such a powerful tool of financial analysis that through it, the economic and financial position of a business unit can be fully x-rayed. Ratios are just a convenient way to summarize large quantities of financial data and to compare the performance of the firms. Ratios are exceptionally useful tools with which one can judge the financial performance of the firm over a period of time. Performance ratio can provide an insight into a bank’s profitability, return on investment, capital adequacy and liquidity.

    The above theories suggest that financial analysis helps to measure the performance of the companies. Different analysts desire different types of ratios, depending largely on whom the analysts are and why the firm is being evaluated. Short-term creditors are concerned with the firm’s ability to pay its bills promptly. In the short run, the amount of liquid assets determines the ability to pay off current liabilities. They are interested in liquidity. Long-term creditors hold bonds or debentures; mortgages against the firm are interested in current payment of interest and the eventual repayment of the principal.

    The company must be sufficiently liquid in the short-term and have adequate profits for the long-term. They examine liquidity and the profitability. Stockholders, in addition to liquidity and profitability, are concerned about the policies of the firm’s stock. Without liquidity, the firm could not pay the cash dividends. Without profits, the firm could not be able to declare dividends. With poor policies, the common stock would trade at a lower price in the market.

    Analysis of the financial statement of a company for one year or for a shorter period would not truly reflect the nature of its operations. For this, it is essential that the analysis reasonably cover a longer period. The analysis made over a longer period is termed as Trend Analysis. Trend Analysis of the ratio indicates the direction of change. This method involves the calculation of percentage relationship that each item bears to the same item in the base year. Trend percentage discloses the changes in the financial and operating data between specific periods and makes it possible to form an opinion as to whether favorable and unfavorable tendencies are reflected by the data.

    Comparative Statement Analysis is another method of measuring the performance of the company. It is used to compare the performance and position of the firm with the average performance of the industry or with other firms, such a comparison will identify areas of weakness which can then be addressed to rectify the situation.

  • What is the Concept of Accountability in Financial Management?

    Accountability has different forms. First, the individualizing form of accountability can be studied in which the accountability contributes to making the realization of the image an individual perceives it. This perspective helps a person to polish his senses and action thereby improving his image that is noticed by others. The second view of accountability is the socializing form in which a person can improve its performance and efficiency by interacting with some of the experienced people in the organization. Accountability institutionalizes the use of accounting through which it operates in the organizations and firms. Also learned, Types of Product, What is the Concept of Accountability in Financial Management?

    Learn, Explain What is the Concept of Accountability in Financial Management?

    “Accountability breeds responsibility” This is a famous quote by Dr. Stephen R. Covey gives the meaning of accountability in rather general terms. The concept of accountability can be defined as the process through which a person is held answerable for his actions and deeds. Under the umbrella of the organization, the notion of accountability can be stated as the phenomenon through which whether a person at the higher level of hierarchy or at the lower level is accountable for his works and services that he renders to the organization. Accountability from the organizational perspective bears great importance as it is the measure through which the performance of the organization and a person serving can be judged and analyzed.

    How Does Accountability work?

    Accountability within the organizations mainly works through three different levels of accounting. They are auditing, management accounting, and financial reporting. Financial reporting and management accounting aspect of accounting has been dealt with in detail in representation and control part respectively. The third and more applicative form in which accountability holds in the organizations is the auditing in which companies accounts are checked and verified by some agency or authority assigned for it is covered in detail here.

    When it comes to organizational perspective the application of accountability expands. From the past, there has been a practice in business and organizations to maintain the accounts of each and every transaction that takes place in the organization. In the modern era, this system has become more advanced and transparent. The organizations can be judged or held responsible economically on the grounds of the accounts or financial statements that they produce. This involves the concept of auditing of company accounts. Audit serves as a vital economic process and plays an important role in serving the public interest by strengthening the accountability and reinforcing the trust and confidence in financial reporting.

    Auditing of accounts are generally performed by the people employed by the owner of the company, these persons are called auditors, agents or stewards. They generally work in the interest of the company with the focus on the economic performance of the institution. This phenomenon is called an agency theory which suggests that because of the information asymmetries people employ agents or stewards who work for the benefit of the company. Auditing gives a clear idea of accounts and also imparts the correct information to the shareholders.

    The interplay between Accounting and Accountability:

    Accounting can be defined as the process of identifying, measuring and communicating the financial information about the entity to permit informed judgments and decisions by users of information. Initially, there were cruder forms of accounting first one was double entry system which was a binary system method used for recording the events in which all the debts and credits were represented in the tabular form and the second was bookkeeping which was the maintenance or the summary of all the financial transactions taken place. Accountability often comes to play where there is some accounting failures or discrepancies and the company or the person producing the account is held responsible.

  • Marketing Concept: Features, Importance, and Benefits!

    Learn, Explain Marketing Concept: Features, Importance, and Benefits!

    The Marketing Concept is the philosophy that firms should analyze the needs of their customers and then make decisions to satisfy those needs, better than the competition. Today most firms have adopted the marketing concept, but this has not always been the case. In 1776 in the Wealth of Nations, Adam Smith wrote that the needs of producers should be considered only with regard to meeting the needs of consumers. Also learned, NPD (New Product Development), Explain it each one, Marketing Concept: Features, Importance, and Benefits!

    In a modern industrial economy, productive capacity has been built up to a point where most markets are buyers markets (i.e. the buyers are dominant) and sellers have scramble hard for consumers and ultimately consumers began to occupy a place of unique importance. The business firms recognize that “there is only one valid definition of business purpose to create a customer”. In other words, the recognition of the importance of marketing leads to the acceptance of marketing concept.

    To better understand the marketing concept, it is worthwhile to put it in perspective by reviewing other philosophies that once were predominant. After world war II the variety of products increased and hard selling no longer could be relied upon to generate sales. With increased discretionary income, the customer could afford to be selective and buy only those products that precisely met their changing needs, and these needs were not immediately obvious.

    The key questions became :

    1. What do customers want?
    2. Can we develop it while they still want it
    3. How can we keep our customers satisfied?

    In response to these discerning customer, firms began to adopt the marketing concept, which involves:

    1. Focusing on customer needs before developing the product.
    2. Aligning all functions of the company to focus on those needs, and.
    3. Realizing a profit by successfully satisfying customer needs over the long-term.

    When firms began to adopt the marketing concept, they typically set up separate marketing departments whose objective it was so satisfying customer needs. In other words, marketing concept aims customer’s needs and wants orientation backed by integrated marketing effort aimed at generating customer satisfaction as the key to satisfying organizational goals.

    Features of Marketing Concept:

    The salient features of the marketing concept are:

    • Consumer Orientation: The most distinguishing feature of the marketing concept is the importance assigned to the consumer. The determination of what is to be produced should not be in the hands of the firms but in the hands of the consumers. The firms should produce what consumers want. All activities of the marketer such as identifying needs and wants, developing appropriate products and pricing, distributing and promoting them should be consumer – oriented. If these things are done effectively, products will be automatically bought by the consumers.
    • Integrated Marketing: The second feature of the marketing concept is integrated marketing i.e. integrated management action. Marketing can never be an isolated management action. Marketing can never be an isolated management function. Every activity on the marketing side will have some bearing on the other functional areas of management such as production, personnel or finance. Similarly, any action in a particular area of operation in production or finance will certainly have an impact on marketing and ultimately on the consumer. In a business firm that accepts the marketing concept as the cornerstone of its business philosophy, no management area can work in isolation. Therefore in an integrated marketing setup, the various functional areas of management get integrated with the marketing function. Integrated marketing presupposes a proper communication among the different management areas with marketing influencing the corporate decision-making process. Thus, when the firms objective is to make the profit – by providing consumer satisfaction, naturally it follows that the different departments of the company are fairly integrated with each other and their efforts are channelized through the principal marketing department towards the objective of consumer satisfaction.
    • Consumer Satisfaction: The third feature of the marketing concept is consumer satisfaction. The objective of the company adopting marketing concept is to satisfy the customers’ needs so perfectly that they will become regular or permanent satisfied customer. For example, when a consumer buys a tin of coffee, he expects a purpose to be served, a need to be satisfied. If the coffee does not provide him the expected flavor, the taste and the refreshments his purchase has not served the purpose. Or more precisely, the marketer who sold the coffee has failed to satisfy his consumer. Thus, ‘satisfaction’ is the proper foundation on which alone any business can build its future.
    • Realization of Organizational Goals: Though the organizational goals may differ from firm to firm, though key areas such as innovation, market standings, profits and social responsibility are common to all firms. According to the marketing concept, the right way to achieve these organizational goals is through ensuring consumer satisfaction.
    • Profit Creation: A distinguishing feature of the marketing concept is that it considers the creation of profits as an essential requirement for any business concern. The marketing concept is against profiteering but not against profits. Reasonable returns or surplus are essential for the survival and growth of business organizations.

    Importance of marketing concept:

    Business enterprises are conducting their marketing activities under the following five marketing concepts.

    1. Production concept:

    Production concept is the oldest concept under which the businessmen produce goods thinking customers are interested only in low priced, extensively and easily available goods. Finishing and the interest of customers are not important for the manufacturers. They focus only on large scale production and try to make it available on large scale. They try to achieve high production efficiency and creating wide distribution coverage.

    2. Product concept:

    Consumers favor those products that offer the most quality, performance and features is the basis of product concept.  They believe that consumers are willing to pay higher cost for the goods or services which has extra quality. Companies which concentrate on product concept is focused on product improvement.  They constantly improve the product quality and features to satisfy and attract the customers.  Too much focus on product may go off the track and fail.  For example, a biscuit manufacturer produced  a new brand of biscuits with good color, ingredients and packing etc., without taking much importance in consumer tastes and preferences. This may fail in the market if the biscuit does not taste good to the ultimate consumer.

    3. Selling concept:

    In selling concept, producers believe that the aggressive persuasion and selling is the  essence of  their  business  success. They think without such aggressive methods they cannot sell or exist in the market. They are focused on finding ways and means to sell their products. They believe that consumer  themselves will not buy enough of the enterprises products or service by themselves. Hence they do a considerable promotional efforts to sell their product through advertisements and  other means. Sales agents of electrical equipment’s, insurance agents, soft drink/health drink companies and fundraisers for social or religious causes comes under this category. That is why we are getting lots of calls from insurance agents, even though insurance is a subject matter of solicitation. In short, selling concepts assumes that consumers on their own will not buy enough of enterprises products, unless the enterprise undertakes aggressive sales and promotional efforts.

    4. Marketing concept:

    Under marketing concept the task of marketing begins with finding what the consumer want and produce a product which will meet the  consumer requirement and provides maximum satisfaction. “Customer is the King” concept emerged from this point of view. In the process of evolution many organizations changed their way of thinking to match  the  marketing concept. Under this concept producers considers the needs and wants of consumers as the guiding spirit and deliver such goods which can satisfy the consumer needs more efficiently and effectively than the competitors. The marketing concept is consumer oriented and looks forward to achieving long-term profits by making a network of satisfied consumers. When an organization practice the marketing concept, all their activities  such as research and development, distribution, quality control, finance, manufacturing, selling etc., are focused to satisfy the consumer needs and wants.

    5. Societal concept:

    With the growing awareness of the social responsibility of the business, attempts made successfully to turn the business organizations socially responsible. Environmental deterioration, excessive exploitation of resources and growing consumer movements have necessitated the recognition and relevance of marketing based on socially responsible. Societal concept is the extension of marketing concept to cover the society in addition to the consumers. Under the societal concept the business organization must take into account the needs and wants of the consumers and deliver the goods and services efficiently so as to balance the consumers satisfaction as well as the society’s well being.

    Benefits of Marketing Concept:

    The major benefits of marketing concept are described below:

    1. Benefits to Firms: A firm that believes in the marketing concept always feels the pulse of the market through continuous marketing audit and marketing research. It is fast in responding to the changes in buyer behavior. It rectifies any drawback in its product and this proves beneficial to the firm. The firm gives more importance to planning, research and innovation and its decisions are no longer based on hunches but on reliable scientific data and the proper interpretation of such data. The profits for the firm become more certain.
    2. Benefits to Consumers: The concept on the part of various competing firms to satisfy the consumer puts the later in an enviable position. Reasonable prices, better quality and easy availability at convenient places are some of the benefits that accrue to the consumer as a direct result of the marketing concept.
    3. Benefits to Society: The practice of marketing concept contributes to the better lifestyle, better standard of living and also results in the development of entrepreneurial talents. All these sets the pace for social and economic development.

    Thus the marketing concept benefits the organization, the consumer and society at large. A proper understanding of this concept is fundamental to the study of modern marketing.

  • New Product Development: Definition, Planning, and Role!

    Learn, Explain New Product Development: Definition, Planning, and Role!

    Cost, time and quality are the main variables that drive customer needs. Aiming at these three variables, companies develop continuous practices and strategies to better satisfy customer requirements and to increase their own market share by a regular development of new products. There are many uncertainties and challenges which companies must face throughout the process. The use of best practices and the elimination of barriers to communication are the main concerns for the management of the NPD. Also learned, What is the Role of Group Influence in Consumer Behavior? New Product Development: Definition, Planning, and Role!

    In business and engineering, new product development (NPD) covers the complete process of bringing a new product to market. A central aspect of NPD is product design, along with various business considerations. New product development is described broadly as the transformation of a market opportunity into a product available for sale. The product can be tangible (something physical which one can touch) or intangible (like a service, experience, or belief), though sometimes services and other processes are distinguished from “products.” NPD requires an understanding of customer needs and wants, the competitive environment, and the nature of the market.

    Definition of New Product Development:

    • New Product Development is a process which is designed to develop, test and consider the viability of products which are new to the market in order to ensure the growth or survival of the organization.
    • New Product Development can be defined as the process of innovating and inventing new ideas and concepts, with a view to developing a successful new product in the anticipation of customer needs.
    • The new product development can be defined as the term used to describe the complete process of bringing a new product or service to market.

    There are two parallel paths involved in the new product development process. The first involves the idea generation, product design, and detail engineering whereas the other involves market research and marketing analysis. Basically, Companies typically see new product development as the first stage in generating and commercializing new products within the overall strategic process of product lifecycle management where it is used to maintain or grow their market share. It is important the new product which is based on current market trends should be launched so that it can give greater benefit to the customers. At the same time, it can also help them to understand what are the needs of their customers helps to increase the sales of their business in terms of maximizing the profits.

    Planning of New Product Development:

    New product planning has been defined by the American Marketing Association as “the act of making out and supervising the search, screening, evelopment, and commercialization of new products; the modification of existing lines; and the discontinuance of marginal or unprofitable items”.  Simply stated, product planning decides the nature and other related aspects of the articles produced and sold.  Product development is a more limited term but includes the technical activities of product research, engineering and design.  Product planning and development is the result of the co-ordinated the efforts of large number of specialists – engineers, scientists, marketers, etc.  Product planning is usually described as ‘Merchandising’ and it covers both, the existing and potential products.  This activity, therefore, must deal with the proper balance between the old and the new products.

    New product planning is a very long and complex process, and it deals with changes in:

    • The kinds of goods or services offered by a marketer for various segments.
    • The number of kinds of products, or different lines, that the company offers in various segments.
    • The width of product line offered.
    • The quality levels or levels acceptable to various classes of consumers in various target markets.
    • The degree of distinctiveness.
    • Increased societal and governmental constraints.
    • The growing shortage of new product ideas in certain areas.
    • Shorter time spans between the emergence of the idea and the physical launch of the product.
    • The costliness of the new product development process.

    The following decisions are important in new product planning :

    1. Improving the existing product lines and services,
    2. Weeding out unprofitable items in the product line (simplification),
    3. Expansion of the current product line (diversification),
    4. New product development for the present customers, and
    5. New product development for new customers (diversified products).

    Role of New Product Development:

    Whatever may be the size and nature of operations of a firm, product planning and development is necessary for its survival and growth in the long-run.  Every product has a life cycle and it becomes obsolete after the completion of its life-cycle.  Therefore, it is essential to develop new products and alter or improve the existing ones to meet the often-changing requirements of customers.

    The role of new product development can be stated in terms of :
    1. Ensuring that the product mix, matches changing environmental conditions and that product obsolescence is avoided.
    2. Enabling the marketer to compete in new and developing segments of the market.
    3. Reducing the marketer’s dependence upon particular elements of the product range or vulnerable market segments.
    4. Filling excess capacity.
    5. Achieving greater long-term growth and profit.

    Introducing new product is rather difficult as it involves long-range planning.  Customers’ need should be identified, competing and substitute products should be evaluated and, above all, the strength of the company should be examined before deciding to produce a new product.  Product failure defeats the very objectives of a firm.  In a survey conducted by Booze, Allen, and Hamilton, it was revealed that firms with well-organized product planning programmes have only 40-50 percent product failures.  When this percentage is compared with the overall industry product failures (80 percent), one could easily be convinced of the need for product planning.

  • The types of Product in Marketing Management!

    Learn, Explain The types of Product in Marketing Management!

    A product is something that must be capable of satisfying a need or want, it includes physical objects, personalities, places, organizations, and ideas. Product may be classified broadly into two major categories namely consumer goods and industrial goods. Also learned, Marketing Research, Process, The types of Product in Marketing Management!

    A. Consumer Goods:

    Consumer goods are those goods meant for use by the ultimate household consumer and in such form that they can be used by him without further commercial processing.

    Consumer goods are generally divided into three sub-categories according to the method in which they are purchased namely convenience goods, shopping goods are specialty goods.

    1. Convenience Goods: There are goods which the consumer usually purchases frequently and with the minimum efforts. Usually, they have easy substitutes and the unit value will be low. The consumer may not have much of a preference for a particular brand. E
    2. Shopping Goods: These are goods which the consumer purchase less frequently and the unit value will be higher. The consumer will look for their suitability, quality, price, and style. The consumer will exercise considerable effort in choosing the product. Many consumer durables come under this category.
    3. Specialty Goods: These are consumer goods which the consumer buys rarely and the unit value will be very high. Hence buyers expect certain special characteristics and for which they make a special purchasing effort.

    Features of Consumer Goods:

    The marketing of consumer goods generally possesses the following features.

    1. The consumer goods are those goods which are bought by ultimate consumer for their consumption.
    2. The consumer goods are manufactured on the mass scale.
    3. The number of buyers is also large and widespread.
    4. Majority of consumer goods are non-durable.
    5. Demand is primary in nature.
    6. Other than essential products, most of the durable consumer goods have elasticity in demand.
    7. The unit cost of consumer goods is normally not very high.
    8. The unit of purchase is normally low. But the frequency of purchase is greater.
    9. The consumer goods are very often bought by emotional impulse.
    10. The goods are subject to serve competition. They may be price competition, quality competition and competition from substitute products.
    11. Branding and packaging also add some strength to the products.
    12. The goods are under constant threat from fashion/design changes.
    13. The channel of distribution is normally long as the buyers are widespread.
    14. The mass advertisement is a must. The marketer has to give equal importance to personal as well as impersonal methods of sales promotion.
    15. The products are not technically complex in nature.

    B. Industrial Goods:

    Industrial goods are those goods which a reused in producing other goods or rendering services. They cannot be used without further processing. Industrial goods fall into three main categories.

    1. Raw Materials: These are industrial goods which in part or in whole become a part of the physical product and which have undergone only a minor change before becoming ready for a final consumption. Stainless steel which is used for making steel utensils is an example.
    2. Equipment’s: These goods are exhausted only after repeated use such as installation, equipment, accessories etc.
    3. Fabricated Materials: These are industrial goods which have undergone processing Metals, plastics, cement come under this category.

    Features of Industrial Goods:

    The marketing of industrial goods generally possesses the following features.

    1. Industrial goods are those which are produced by and sold to industries. They are mostly meant for producing consumer goods.
    2. The demand for industrial goods is a derived demand. For example, the demand for paper manufacturing machinery will increase when the demand for paper increases.
    3. Industrial marketing is normally backed by technical details and usually done by people with technical knowledge. In many cases, there may not be substituted.
    4. Industrial buying is comparatively a rational process. Precise specifications and quality of products are the main criteria.
    5. The number of buyers is limited.
    6. Advertising in the industrial market is made in technical and trade journals backed by direct marketing and personal selling.
    7. In many cases, it is the short channel, involving either direct selling or with a limited number of middlemen.
    8. Each sale would generally be high value.
    9. Supplier’s reliability and reputation is the important criterion in the industrial market.
    10. The demand is normally inelastic.