Tag: Nature

  • Managerial Economics: Nature, Scope, and Principles

    Managerial Economics: Nature, Scope, and Principles

    Managerial Economics can define as the amalgamation of economic theory with business practices to ease decision-making and future planning by management. The Concept of Managerial Economics Study: Meaning, Definition, Nature of Managerial Economics, Scope of Managerial Economics, and Principles of Managerial Economics. Managerial Economics assists the managers of a firm in a rational solution to obstacles faced in the firm’s activities. It makes use of economic theory and concepts. It helps in formulating logical managerial decisions.

    Learn, Explain Managerial Economics: Nature, Scope, and Principles. 

    The key to Managerial Economics is the microeconomic theory of the firm. It lessens the gap between economics in theory and economics in practice. Managerial Economics is a science dealing with the effective use of scarce resources. It guides the managers in taking decisions relating to the firm’s customers, competitors, suppliers as well as relating to the internal functioning of a firm. It makes use of statistical and analytical tools to assess economic theories in solving practical business problems.

    Study of Managerial Economics:

    They help in the enhancement of analytical skills, assists in rational configuration as well as a solution to problems. While microeconomics is the study of decisions made regarding the allocation of resources and prices of goods and services, macroeconomics is the field of economics that studies the behavior of the economy as a whole. Managerial Economics applies microeconomic tools to make business decisions. It deals with a firm.

    The use of Managerial Economics not limits to profit-making firms and organizations. But it can also use to help in the decision-making process of non-profit organizations (hospitals, educational institutions, etc). It enables optimum utilization of scarce resources in such organizations as well as helps in achieving the goals in the most efficient manner. Managerial Economics is of great help in price analysis, production analysis, capital budgeting, risk analysis, and determination of demand. Managerial economics uses both economic theories as well as Econometrics for rational managerial decision making.

    Econometrics defines:

    As the use of statistical tools for assessing economic theories by empirically measuring the relationship between economic variables. It uses factual data for the solution of economic problems. Managerial Economics associates with the economic theory which constitutes “Theory of Firm”. The theory of the firm states that the primary aim of the firm is to maximize wealth. Decision making in managerial economics generally involves the establishment of a firm’s objectives, identification of problems involving in the achievement of those objectives, development of various alternative solutions, selection of best alternative, and finally implementation of the decision.

    Nature of Managerial Economics:

    Managers study managerial economics because it gives them insight to reign the functioning of the organization. If the manager uses the principles applicable to economic behavior in a reasonably, then it will result in the smooth functioning of the organization.

    Managerial Economics is a Science:

    Managerial Economics is an essential scholastic field. It can compare to science in the sense that it fulfills the criteria of being a science in the following sense:

    • Science is a Systematic body of Knowledge. It bases on methodical observation. Managerial economics is also a science of making decisions about scarce resources with alternative applications. It is a body of knowledge that determines or observes the internal and external environment for decision making.
    • In science, any conclusion arrives at after continuous experimentation. In Managerial economics also policies are made after persistent testing and training. Though the economic environment consists of the human variable, which is unpredictable, thus the policies made are not rigid. A managerial economist takes decisions by utilizing his valuable experience and observations.
    • Science principles are universally applicable. Similarly, policies of Managerial economics are also universally applicable partially if not fully. The policies need to change from time to time depending on the situation and attitude of individuals to those particular situations. Policies are applicable universally but modifications are requiring periodically.

    Managerial Economics requires Art:

    The managerial economist requires to have an art of utilizing his capability, knowledge, and understanding to achieve the organizational objective. The managerial economist should have art to put in practice his theoretical knowledge regarding elements of the economic environment.

    Managerial Economics for the administration of the organization:

    Managerial economics helps the management in decision making. These decisions are based on the economic rationale and are valid in the existing economic environment.

    Managerial economics is helpful in optimum resource allocation:

    The resources are scarce with alternative uses. Managers need to use these limited resources optimally. Each resource has several uses. It is the manager who decides with his knowledge of economics that which one is the preeminent use of the resource.

    Managerial Economics has components of microeconomics:

    Managers study and manage the internal environment of the organization and work for the profitable and long-term functioning of the organization. This aspect refers to the microeconomics study. The managerial economics deals with the problems faced by the individual organization such as the main objective of the organization, demand for its product, price and output determination of the organization, available substitute and complementary goods, the supply of inputs and raw material, target or prospective consumers of its products, etc.

    Managerial Economics has components of macroeconomics:

    None of the organizations works in isolation. They affecting by the external environment of the economy in which it operates such as government policies, general price level, income and employment levels in the economy, stage of the business cycle in which economy is operating, exchange rate, the balance of payment, general expenditure, saving and investment patterns of the consumers, market conditions, etc. These aspects are related to macroeconomics.

    Managerial Economics is dynamic:

    Managerial Economics deals with human-beings (i.e. human resources, consumers, producers, etc.). Nature and attitude differ from person to person. Thus to cope up with dynamism and vitality managerial economics also changes itself over some time.

    The Scope of Managerial Economics:

    Managerial Economics deals with allocating scarce resources in a manner that minimizes the cost. As we have already discussed, Managerial Economics is different from microeconomics and macroeconomics. Managerial Economics has a more narrow scope – it is solving managerial issues using micro-economics. Wherever there are scarce resources, managerial economics ensures that managers make effective and efficient decisions concerning customers, suppliers, competitors as well as within an organization. Also, understand the scope of managerial economics below is.

    The fact of scarcity of resources gives rise to three fundamental questions:

    • What to produce?
    • How to produce?
    • For whom to produce?

    To answer these questions, a firm makes use of managerial economics principles.

    The first question;

    Relates to what goods and services should produce and in what amount/quantities. The managers use demand theory for deciding this. The demand theory examines consumer behavior with respect to the kind of purchases they would like to make currently and in future; the factors influencing purchase and consumption of a specific good or service; the impact of change in these factors on the demand of that specific good or service; and the goods or services which consumers might not purchase and consume in future. To decide the number of goods and services to produce, the managers use methods of demand forecasting.

    The second question;

    Relates to how to produce goods and services. The firm has now to choose among different alternative techniques of production. It has to decide on the purchase of raw materials, capital pieces of equipment, manpower, etc. The managers can use various managerial economics tools such as production and cost analysis, project appraisal methods, etc for making these crucial decisions.

    The third question;

    It is regarding who should consume and claim the goods and services producing by the firm. The firm, for instance, must decide which is its niche market-domestic or foreign? It must segment the market. It must conduct a thorough analysis of the market structure and thus take price and output decisions depending upon the type of market.

    Managerial economics helps in decision-making as it involves logical thinking. Moreover, by studying simple models, managers can deal with more complex and practical situations. Also, a general approach implements. Managerial Economics take a wider picture of the firm, i.e., it deals with questions such as what is a firm, what are the firm’s objectives, and what forces push the firm towards profit and away from profit.

    In short, managerial economics emphasizes the firm, the decisions relating to individual firms, and the environment in which the firm operates. It deals with key issues such as what conditions favor entry and exit of firms in a market, why are people paid well in some jobs, and not so well in other jobs, etc. It is a great rational and analytical tool. Managerial Economics is not only applicable to profit-making business organizations but also non- profit organizations such as hospitals, schools, government agencies, etc.

    Managerial Economics Nature Scope and Principles
    Managerial Economics: Nature, Scope, and Principles, #Pixabay.

    Principles of Managerial Economics:

    Managerial Economics principles assist in rational reasoning and define thinking. They develop the logical ability and strength of a manager.

    Some important principles of managerial economics are:

    Marginal and Incremental Principles:

    These principles state that a decision says to be rational and sound if, given the firm’s objective of profit maximization, it leads to an increase in profit, which is in either of two scenarios:

    • If total revenue increases more than the total cost.
    • If total revenue declines less than total cost.

    The marginal analysis implies judging the impact of a unit change in one variable on the other. Marginal generally refers to small changes. Marginal revenue is the change in total revenue per unit change in output sold. The marginal cost refers to change in total costs per unit change in output produced (While incremental cost refers to change in total costs due to change in total output). The decision of a firm to change the price would depend upon the resulting impact/change in marginal revenue and marginal cost. If the marginal revenue is greater than the marginal cost, then the firm should bring about the change in price.

    The incremental analysis differs from marginal analysis only in that its analysis the change in the firm’s performance for a given managerial decision, whereas marginal analysis often generates a change in outputs or inputs. Incremental analysis is a generalization of the marginal concept. It refers to changes in cost and revenue due to a policy change.

    For example – adding a new business, buying new inputs, processing products, etc. Change in output due to change in process, product or investment considers as an incremental change. The incremental principle states that a decision is profitable if revenue increases more than costs; if costs reduce more than revenues; if the increase in some revenues is more than the decrease in others; and if the decrease in some costs is greater than the increase in others.

    Equi-marginal Principles:

    Marginal Utility is the utility derives from the additional unit of a commodity consumed. The laws of Equi-marginal utility state that a consumer will reach the stage of equilibrium when the marginal utilities of various commodities he consumes are equal. According to modern economists, this law has been formulating in the form of the law of proportional marginal utility. It states that the consumer will spend his money-income on different goods in such a way that the marginal utility of each good is proportional to its price, i.e.,

    MUx / Px = MUy / Py = MUz / Pz

    Where MU represents marginal utility and P is the price of the good.

    Similarly, a producer who wants to maximize profit (or reach equilibrium) will use the technique of production which satisfies the following condition:

    MRP1 / MC1 = MRP2 / MC2 = MRP3 / MC3

    Where MRP is the marginal revenue product of inputs and MC represents the marginal cost.

    Thus, a manager can make the rational decision by allocating/hiring resources in a manner which equalizes the ratio of marginal returns and marginal costs of various use of resources in specific use.

    Opportunity Cost Principles:

    By opportunity cost of a decision is meant the sacrifice of alternatives require by that decision. If there are no sacrifices, there is no cost. According to Opportunity cost principle, a firm can hire a factor of production if and only if that factor earns a reward in that occupation/job equal or greater than it’s an opportunity cost.

    Opportunity cost is the minimum price that would be necessary to retain a factor-service in it’s given us use. It also defines the cost of sacrificed alternatives. For instance, a person chooses to forgo his present lucrative job which offers him Rs.50000 per month and organizes his own business. The opportunity lost (earning Rs. 50,000) will be the opportunity cost of running his own business.

    Time Perspective Principles:

    According to these principles, a manager/decision-maker should give due emphasis, both to the short-term and long-term impact of his decisions, giving apt significance to the different periods before reaching any decision. Short-run refers to a period in which some factors are fixed while others are variable. The production can increase by increasing the number of variable factors.

    While long-run is a period in which all factors of production can become variable. Entry and exit of seller firms can take place easily. From consumer’s point of view, the short-run refers to a period in which they respond to the changes in price, given the taste and preferences of the consumers, while long-run is a period in which the consumers have enough time to respond to price changes by varying their tastes and preferences.

    Discounting Principles:

    According to these principles, if a decision affects costs and revenues in the long-run, all those costs and revenues must discount to present values before the valid comparison of alternatives is possible. This is essential because a rupee’s worth of money at a future date is not worth a rupee today. Money has a time value. Discounting can define as a process uses to transform future dollars into an equivalent number of present dollars. For instance, $1 invested today at 10% interest is equivalent to $1.10 next year.

    FV = PV*(1+r)t

    Where FV is the future value (time at some futures time), PV is the present value (value at to, r is the discount (interest) rate, and t is the time between the future value and present value. Maybe you’d better know about Managerial Economics and their topics Nature, Scope, and Principles.

  • Capital Budgeting: Nature, Importance, and Limitations

    Capital Budgeting: Nature, Importance, and Limitations

    Definition and Meaning of Capital Budgeting: Economics is concerned with the allocation of scarce resources between alternative or choice uses to obtain the best purpose. The Concept of Capital Budgeting: Nature of Capital Budgeting, Importance of Capital Budgeting, and Limitations of Capital Budgeting. Capital expenditure/budgeting, on the other hand, concentrates on these allocations over time; on decisions that involve current outlays in return for expectations of future benefits, i.e., a return for an anticipated flow of future benefits. Also learned, Capital Budgeting: Nature, Importance, and Limitations!

    Learn, Explain Capital Budgeting and its Nature, Importance, and Limitations. 

    In other words, it is applied to evaluate expenditure decisions that involve current outlays but the benefits are likely to be produced in the future, i.e., over a longer period. The said benefits may be earned either in the form of the reduction in cost or the form of increased revenues. And that is why it includes addition, alteration, modification, disposition, and replacement of fixed assets.

    Nature of Capital Budgeting:

    It is the way toward settling on speculation choices in capital expenditures. Capital Expenditure may define as an expenditure for the benefits of which are expected to be received over a period exceeding one year.

    The main characteristic of capital expenditure is that the expenditure incurs or endure at one spot in time whereas the benefits of the expenditure are collected with realized at different spots in time in the future. In simple language, we may say that capital expenditure incurs or endure for acquiring or improving the fixed assets, the benefits of which expect to receive over several years in the future.

    The following are some of the examples of capital expenditure:

    • Cost of acquisition of permanent assets as land and building, plant and machinery, goodwill, etc.
    • Cost of addition, expansion, improvement, or alteration in the fixed assets.
    • Research and development project cost, etc.
    • Cost of replacement of permanent assets.

    Capital expenditure:

    Capital expenditure involves the non-flexible long-term commitment of funds. Thus, capital expenditure decisions are also called long-term investment decisions. Capital budgeting involves the planning and control of capital expenditure. It is the process of deciding whether or not to commit resources to a particular long-term project whose benefits are to realize over some time, longer than one year. Capital budgeting also knows as Investment Decision Making, Capital Expenditure Decisions, Planning Capital Expenditure, and Analysis of Capital Expenditure.

    • Charles T. Horngreen has defined capital budgeting as, “Capital budgeting is long-term planning for making and financing proposed capital outlays.”
    • According to G.C. Philippatos, “Capital budgeting is concerned with the allocation of the firm’s scarce financial resources among the available market opportunities. The consideration of investment opportunities involves the comparison of the expected future streams of earnings from a project with the immediate and subsequent streams of earnings from a project, with the immediate and subsequent streams of expenditures for it”.
    • Richard and Greenlaw have referred to capital budgeting as acquiring inputs with the long-run return.
    • In the words of Lynch, “Capital budgeting consists of planning development of available capital to maximize the long-term profitability of the concern.”

    Features, characteristics, symptoms, or highlights of Capital Budgeting:

    From the above description, it’s going to conclude that the important features which distinguish capital budgeting decision from the standard day to day business decisions are:

    • Capital budgeting decisions involve the exchange of current funds for the advantages to realize within the future.
    • The money or funds are invested in non-flexible and long-term activities, any funds can be investing for the long-term to get more profitable or return.
    • They have a long-term and significant effect on the profitability of the priority.
    • They involve, generally, huge funds.
    • The future benefits are expected to be realized over a series of years, and.
    • They are irreversible decisions.

    They are “strategic” investment decisions, involving large sums of cash, a serious departure from the past practices of the firm, a significant change of the firm’s expected earnings related to a high degree of risk, as compared to “tactical” investment decisions which involve a comparatively bit of funds that don’t end in a serious departure from the past practices of the firm.

    Need and Importance of Capital Budgeting:

    Capital budgeting means planning for capital assets.

    Capital budgeting decisions are vital to any organization as they include the choices as to:

    • Whether or not funds should invest in long-term projects such as setting an industry, purchase of plant and machinery, etc.
    • Analyze the offer with a proposal for expansion or creating additional efficiency.
    • To decide the replacement of permanent assets such as building and types of equipment.
    • To make the financial analysis of various proposals regarding capital investments to choose the best out of many alternative proposals.

    The importance of capital budgeting can well understand from the fact that an unsound investment decision may prove to be fatal to the very existence of the concern.

    The following the need, significance, or importance of capital budgeting arises mainly thanks to the follows below are:

    1] Large Investments:

    Capital budgeting decisions, generally, involve the large investment of funds. But the funds available with the firm always limit and the demand for funds far exceeds the resources. Hence, a firm needs to plan and control its capital expenditure.

    2] Long-term Commitment of Funds:

    Capital expenditure involves not only a large number of funds but also funds for long-term or more or less permanently. The long-term commitment of funds increase and grow the financial risk involved in the investment decision. The greater the risk involved, the greater is the need for careful planning of capital expenditure, i.e. Capital budgeting.

    3] Irreversible Nature:

    The capital expenditure decisions are irreversible. Once the decision for realization or acquiring a permanent asset takes; it becomes very difficult to dispose or determine of these assets without enduring and incurring heavy losses.

    4] Long-Term Effect on Profitability:

    Capital budgeting decisions have a long-term and significant effect on the profitability of a priority. Not only these earnings of the firm affect by the investments in capital assets but also the longer-term growth and profitability of the firm depend on the investment decision taken today. An unwise decision may prove disastrous and fatal to the very existence of the priority. Capital budgeting is of utmost importance or significance to avoid over-investment or under-investment in fixed assets.

    Difficulties of Investment Decisions:

    The long-term investment decisions are difficult to take because:

    • The decision extends to a series of years beyond the current accounting period,
    • Uncertainties of future and
    • The higher the degree of risk.
    1] National Importance:

    Investment decision though taken by individual concern is of national importance because it determines employment, economic activities, and economic process. Thus, we may say that without using capital budgeting techniques a firm may involve itself during a losing project. Proper timing of purchase, replacement, expansion, and alternation of assets is important.

    2] Importance of Capital Budgeting:

    Capital Budgeting decisions have given the first importance to financial decision-making since they’re the foremost crucial and important business decisions as they need a big impact on the profitability aspect of the firm. As the capital budgeting/expenditure decision affects the fixed assets only which are the sources of earning revenue, i.e., the profitability of the firm, special attention must give to their treatment.

    Capital budgeting decisions have established greater accentuation or emphasis due to:

    3] Capital budgeting has long-term implications:

    The most significant reason that capital budgeting decisions take is that its long-term implications, i.e. its effects will extend into the longer term, and can need to be endured for an extended period than the results of current operating expenditure. Because, a correct investment decision can yield spectacular returns, whereas a wrong investment decision can endanger the very survival of the firm.

    That is why it’s going to state that the capital budgeting decisions determine the longer-term destiny of the firm. Moreover, it also changes the danger of the complexion of the enterprise. When the typical benefits of the firm increase as a result of an investment proposal which can cause frequent fluctuations in its earnings which will become a risky situation.

    4] Capital budgeting requires a large number of funds:

    Capital investment decisions require a large number of funds which the majority of the firms cannot provide since they have scarce capital resources. As a result, investment decisions must be thoughtful, wise, and correct. Because a wrong/incorrect decision would result in losses and the same prevents the firm from earning profits from other investments as well due to the scarcity of resources.

    5] Capital budgeting is not reversible:

    Once the capital budgeting decisions take, they are not easily reversible. The rationale is that there may neither be any marketplace for such second-hand capital goods nor there’s any possibility of conversion of such capital assets into other usable assets, i.e., the sole remedy is to dispose-off an equivalent sustaining an important loss to the firm.

    They are the most difficult decisions:

    Capital investment decisions are, no doubt, the foremost significant since they’re very difficult to form. It is because their assessment depends on the future uncertain events and activities of the firm. Similarly, it is practically a difficult task to estimate the accurate future benefits and costs in terms of money as there are economic, political, and technological forces that affect the said benefits and costs.

    Capital Budgeting Nature Importance and Limitations Image
    Capital Budgeting: Nature, Importance, and Limitations, Image from Pixabay.

    Limitations of Capital Budgeting:

    Capital budgeting techniques suffer from the following limitations:

    • All the technology of capital budgeting presumes that various investment offers with proposals under opinion are mutually exclusive; which may not practically be true in some exceptional circumstances.
    • The techniques of capital budgeting require the estimation of future cash inflows and outflows. The future is always uncertain and the data collected for the future may not be exact. Obliviously the results based on wrong data may not be good.
    • There are certain factors like the morale of the employees, goodwill of the firm, etc., which cannot be correctly quantified but which otherwise substantially influence the capital decision.
    • Urgency is another limitation in the assessment of capital investment decisions.
    • Uncertainty and risk pose the biggest limitation to the technology of capital budgeting.
  • Capital Budgeting: Meaning, Definition, Nature, and Procedure

    Capital Budgeting: Meaning, Definition, Nature, and Procedure

    Capital expenditure budget or Capital budgeting is a process of making decisions regarding investments in fixed assets which are not meant for sales such as land, building, machinery, or furniture. Meaning of Capital Budgeting: Capital Budgeting is the process of making the investment decision in fixed assets or capital expenditure. Capital Budgeting also knows as an investment, decision making, planning of capital acquisition, planning and analysis of capital expenditure, etc. Also, learn about EVA and MVA.

    Learn, Explain Capital Budgeting and its Meaning, Definition, Concept, Nature, and Procedure. 

    The word investment refers to the expenditure which requires making in connection with the acquisition and the development of long-term facilities including fixed assets. It refers to the process by which management selects those investment proposals which are worthwhile for investing available funds. For this purpose, management is to decide whether or not to acquire, or add to or replace fixed assets in the light of the overall objectives of the firm.

    What is a capital expenditure? It is a very difficult question to answer. The terms capital expenditure associate with accounting. Normally capital expenditure is one which intends to benefit future periods i.e., in more than one year as opposed to revenue expenditure, the benefit of which suppose to exhaust within the year concern.

    Definition of Capital Budgeting:

    It is the process by which a company determines whether projects (such as investing in R&D, opening a new branch, replacing a machine) are worth pursuing. A scheme or plan or project is worth pursuing if it increases the value of the company.

    A project and scheme typically add value to the company if it earns a rate of return that exceeds the cost of capital. The opportunity cost of capital expects to return that is foregone by investing in the scheme rather than in comparable financial securities, such as shares, with the same risk as to the project under consideration.

    While capital budgeting is a fairly straightforward or easy process from a conceptual viewpoint, it can be very challenging in practice or training. Not only is it difficult to determine the group’s appropriate cost of capital, but it is also often even trickier to accurately forecast the incremental cash flows that result from taking on the project.

    Concept of Capital Budgeting:

    Capital budgeting may define as the decision-making process by which, firms evaluate the purchase of major fixed assets, including buildings, machinery, and equipment; It also covers decisions to acquire other firms, either through the purchase of their common stock; or, groups of assets that can use to conduct ongoing business.

    They scribes the firm’s formal planning process for the acquisition and investment of capital; and, results in capital budgets that is the firm’s formal plan for the expenditure of money to purchasing assets. A capital-budgeting decision is a two-sided process. First, the analyst must evaluate a proposed project to calculate the likely or expected return from the project.

    This calculation generally begins with the expenditure of the project’s service life; and, a stream of cash flowing into the firm over the life of the project. The calculation of expected, the turn may be done by two methods: 1) internal rate of return or 2) net present value, These two methods discuss later in this.

    Explanation;

    The second side of a capital-budgeting decision is to determine the required return from a project. We may calculate the likely return to being 12 percent but the question is whether this is good enough for the proposal to accept. To determine whether the return is adequate; the analysts must evaluate the degree of risk in the project and then must calculate the required return for the given risk level. Two techniques may use to perform this analysis.

    The weighted-average cost of capital uses when the new proposal assumes to have the same degree of risk as the firm’s existing activities. The capital asset pricing model uses if the risk in the project views as different from the firm’s current risk level. It is important for the future well-being of the firm; it is also a complex, conceptually difficult topic.

    A, we shall see later in this article, the optimum capital budget-the the level of investment that maximizes the present value of the firm simultaneously determined by the interaction of supply and demand forces under conditions of uncertainty. Supply forces refer to the supply of capital, the firm, or its cost of capital schedule or panel.

    Demand forces related to the investment opportunities or chance open to the firm; as measured by the stream of revenues that will result from an investment decision Uncertainty or non-calculability enters the decision; because, it is impossible to know exactly either the cost of capital; or, the stream of revenues that will derive from a project.

    Nature of Capital Budgeting:

    Nature of capital budgeting can explain in brief as under:

    • Capital expenditure plans involve a huge investment in fixed assets.
    • Capital expenditure once approved represents the long-term investment that cannot reserve or withdrawn without sustaining a loss.
    • Preparation of coital budget plans involves forecasting of several years profits in advance to judge the profitability of projects.

    It may assert here that the decision regarding capital investment should take very carefully; so that the plans of the company do not affect adversely.

    Capital Budgeting Meaning Definition Concept Nature and Procedure Image
    Capital Budgeting: Meaning, Definition, Concept, Nature, and Procedure, Image from Pixabay.

    The procedure of Capital Budgeting:

    Capital investment decisions of the firm have a pervasive influence on the entire spectrum of entrepreneurial activities; so careful consideration should regard in all aspects of financial management.

    In the capital budgeting process, the main points to be borne in mind how much money will need of implementing immediate plans; how much money is available for its completion, and how are the available funds going to assign tote various capital schemes or projects under consideration. The financial and risk policy of the management should be clear in mind before proceeding with their process.

    The following procedure may adopt in preparing capital budgeting:

    1] The organization of Investment Proposal.

    The first step in the capital budgeting process is the conception of a profit-making idea. The proposals may come from rank and file worker of any department or any line officer. The department head collects all the investment proposals and reviews them in light of the financial; and, risk policies of the organization to send them to the capital expenditure planning committee for consideration.

    2] Screening the Proposals.

    In large organizations, a capital expenditure planning board or committee establishes and sets up for the screening of various offers with the best proposals received by it from the heads of various departments and the line officers of the company. The committee screens the various proposals within the long-range policy-framework of the organization. It is to ascertain by the committee whether the proposals are within the selection criterion of the firm; or, they do no lead to department imbalances or they are profitable.

    3] Evaluation of Projects. 

    The next step in the capital budgeting process is to evaluate the different proposals in term of the cost of capital; the expected returns from alternative investment opportunities and the life of the assets with any of the following evaluation technology;

    • The degree of Urgency Method (Accounting Rate of return Method).
    • Pay-back Method.
    • Return on Investment Method, and.
    • Discounted Cash Flow Method.
    4] Establishing Priorities.

    After the proper screening of the proposals, uneconomic or unprofitable proposals drop. The profitable projects or in other words accepted projects than put in priority. It facilitates their acquisition or production according to the sources available and avoids Immaterial or unnecessary and costly delays and serious cot-overruns. Generally, priority is fixed in the following order.

    • Current and incomplete projects give priority.
    • Plans and schemes for maintaining the present efficiency of the firm.
    • Projects for supplementing income.
    • Safety projects and projects are necessary to carry on the legislative requirements.
    • Projects for the expansion of a new product.
    5] Final Approval.

    Proposals finally recommended by the committee are sent to the top management along with the detailed report; both of the capital expenditures and sources of funds to meet them. The management affirms its final seal to proposals with offers taking in view the urgency, beneficial or profitability of the projects, schemes, and the available financial resources. Projects are then sent to the budget committee for incorporating them into the capital budget.

    6] Evaluation. 

    Last but not the least important step in the capital budgeting process is an evaluation of the program after it has been fully implemented. Budget proposals and the net investment in the projects compare periodically and based on such evaluation; the budget figures may review and present more realistically.

  • Commercial Banks: Meaning, Functions, and Significances

    Commercial Banks: Meaning, Functions, and Significances

    Commercial Banks: Banks have developed around 200 years ago. The nature of banks has changed as time has changed. This article explains Banks and their topics – Meaning, Functions, and Significances. The term bank relates to financial transactions. It is a financial establishment that uses, money deposited by customers for investment, pays it out when required, makes loans at interest exchanges currency, etc. however to understand the concept in detail we need to see some of its definitions. Many economists have tried to give different meanings to the term bank.

    Learn, Explain Commercial Banks: Meaning, Functions, and Significances.

    Meaning of Commercial Banks:

    A commercial bank is a financial institution that performs the functions of accepting deposits from the general public and giving loans for investment to earn a profit. Banks, as their name suggests, ax profit-seeking institutions, i.e., they do banking business to earn a profit.

    They generally finance trade and commerce with short-term loans. They charge a high rate of interest from the borrowers but pay much less rate of Interest to their depositors with the result that the difference between the two rates of interest becomes the main source of profit of the banks. Most of the Indian joint stock Banks are Commercial Banks such as Punjab National Bank, Allahabad Bank, Canara Bank, Andhra Bank, Bank of Baroda, etc.

    Definitions of Commercial Banks:

    While defining the term banks it takes into account what type of task performs by the banks. Some of the famous definitions are given below:

    According to Prof. Sayers,

    “A bank is an institution whose debts are widely accepted in settlement of other people’s debts to each other.”

    In this definition, Sayers has emphasized the transactions from debts raised by a financial institution.

    According to the Indian Banking Company Act 1949,

    “A banking company means any company which transacts the business of banking. Banking means accepting for the purpose of lending or investment of deposits of money from the public, payable on demand or otherwise and withdrawable by cheque, draft or otherwise.”

    Nature of Commercial Banks:

    They are an organization that normally performs certain financial transactions. It performs the twin task of accepting deposits from members of the public and making advances to needy and worthy people from society. When banks accept deposits its liabilities increase and it becomes a debtor, but when it makes advances its assets increase and it becomes a creditor. Banking transactions are socially and legally approved. It is responsible for maintaining the deposits of its account holders.

    Functions of Commercial Banks:

    The main functions of commercial banks are accepting deposits from the public and advancing them loans. However, besides these functions, there are many other functions that these banks perform.

    Paul Samuelson has defined the functions of the Commercial bank in the following words: 

    “The Primary economic function of a commercial bank is to receive demand deposits and honor cheques drawn upon them. A second important function is to lend money to local merchants farmers and industrialists.”

    The major functions performed by the commercial banks are:

    Accepting Deposits:

    This is one of the primary functions of commercial banks. The banks accept different types of deposits, the deposits may broadly classify as demand deposits and time deposits. The former refers to the deposits which are repayable by the banks on demand by the depositors, while the time deposits are accepted by the banks for a fixed period before the expiry of which they don’t return the deposit.

    The demand deposits include the current account deposits and savings bank account deposits. These two types of deposits earn a very low rate of interest as they can withdraw at any time. In the case of savings deposits, the depositor did not allow withdrawing more than a fixed number of times or amount over some time.

    More things:

    The time or term deposits include the fixed deposit and recurring deposits. In the former, a sum deposits for a fixed period determined at the time of deposit and never allows to withdrawal before the expiry of the period of deposit. Any such foreclosures will invite a penalty apart from forfeiting the interest.

    Recurring deposits are the type of deposits in which a depositor agrees to deposit a fixed sum of amount every month for several months as determined in advance, and at the end of which the depositor will be repaid his deposit amount along with interest. Every bank will be interested in mobilizing as much deposit as possible as it would improve its liquidity with which the bank can meet its liabilities and expand its business.

    Advancing of Loans:

    They accept deposits and use them for the expansion of their business. The banks never keep the deposits mobilized idle. After keeping some cash reserve, they invest the funds and earn. They also lend loans and advances to the common men after satisfying themselves about the creditworthiness of the borrowers. They grant different types of loans like ordinary loans in which the banks lend money against collateral security.

    Cash credit is another type of loan in which the entire amount sanctioned credits into the borrower’s account and he permits to withdraw only a specified sum at a time. Overdraft is yet another facility under which the customer allows to withdraw an amount subject to the ceiling fixed, from his account and he pays interest on the amount of overdrawn.

    Discounting bills of exchange is another type of advance granted by the banks in which a genuine trade bill discount by the banks and the holder of the bill gives the amount and the banks arrange to collect the due from the drawer of the bill on the date of maturity.

    Investment of Funds:

    One of the main functions of commercial banks is to invest their funds so as learn interest and returns apart from productively utilizing their funds. In India as per the statutes, banks must invest a part of their total investments in government securities and other approved securities to impart liquidity.

    Banks apart from enabling them to earn out of their investments, nowadays have set up mutual funds through which they mobilize funds from the people who invest them in very attractive projects which is a help rendered to the investors who otherwise will not have the benefit of participating in the project. Banks administer these mutual funds through specialists and experts whose services are not available to the common men.

    Agency Functions of Commercial Banks:

    Banks function as the agent of their customers and help them in several ways. For these agency services, the banks charge a nominal amount. The agency services include the transfer of customer’s funds, collection of funds on behalf of the customers, transactions in the shares and securities for their customers, collection of dividends on shares and interest on debentures for their customers, payments of subscriptions, dues, bills, premia on behalf of the customers, acting as the Trustees and Executor of the customers, offering financial and other consultancy services, acting as correspondents of the customers, etc.

    Purchase and Sale of Foreign Exchange:

    The banks account for by far the largest proportion of all trading of both a commercial and speculative nature and operate within what knows as the interbank market. This is essentially a market composed solely of commercial and investments that buy and sell currencies from each other.

    Strict trading relationships exist between the member banks and lines of credit are established between these banks before they are permitted to trade. They are a fundamental part of the foreign exchange market as they not only trade on their behalf and for their customers but also provide the channel through which all other participants must trade.

    They are in essence the principal sellers within the Forex market. One important thing to remember is that commercial and investment banks do not only trade on behalf of their customers but also trade on their behalf through proprietary desks, whose sole purpose is to make a profit for the bank. It should always remember that commercial banks have exceptional knowledge of the marketplace and the ability to monitor the activities of other participants such as the central banks, investment funds, and hedge funds.

    Financing Domestic and International Trade:

    This is a major function of commercial banks. International trade depends to a large extent on the financial and other support given by the banks. Apart from encouraging bills transactions, the banks also issue the letter of credit facilitating the importers to conduct their trade smoothly.

    The banks also process all the documents through consultancy services and reduce the botheration of the traders. They also lend based on commercial bills, warehouse receipts, etc., which help the traders to expand their business.

    Creation of Credit:

    It is worth noting the credit created by the commercial banks. In the process of their lending operations, they create credit. The process involves the following mechanism; whenever the banks lend loans, they do not pay cash to the be borrowers; instead, they credit the accounts of the borrowers and allow them to withdraw from their accounts.

    This means every loan given will create a deposit for the banks. Since every deposit is equal to money, banks are said to be creating money in the form of credit. As a result, the volume of funds required by the trade. The government and the country are met by the banks without any necessity to use actual cash.

    Other Functions:

    Other functions of commercial banks include providing safety vault facilities for the customers, issuing traveler’s cheques acting as referees of their customers in times of need, compiling statistics and other valuable information, underwriting the issue of shares and debentures, honoring the bills drawn on them by their customers, providing consultancy services on financial and investment matters to customers, etc.

    In the process of performing all the above-mentioned services. The banks play a key role in economic development and nation-building. They help the country in achieving its socio-economic objectives. With the nationalization of banks, the priority sector and the needy people provide sufficient funds which helm them in establishing themselves. In this way, the banks provide a firm and durable foundation for the economic development of every country.

    Commercial Banks Meaning Functions and Significances - ilearnlot
    Commercial Banks: Meaning, Functions, and Significances!

    Types of Commercial Banks:

    The following chart depicts the main types of commercial banks in India.

    Scheduled Banks and Non-scheduled Banks:

    Banks classify into two broad categories—scheduled banks and non-scheduled banks.

    Scheduled banks are those banks which include in the Second Schedule of the Reserve Bank of India. A scheduled bank must have a paid-up capital and reserves of at least Rs 5 lakh. RBI provides special facilities including credit to scheduled banks. Some of the important scheduled banks are the State Bank of India and its subsidiary banks, nationalized banks, foreign banks, etc.

    Non-scheduled Banks:

    The banks which did not include in the Second Schedule of RBI are known as non-scheduled banks. A non-scheduled bank has a paid-up capital and reserves of less than Rs 5 lakh. Such banks are small banks and their field of operation also limited.

    A passing reference to some other types of commercial banks will be informative.

    Industrial Banks provide finance to industrial concerns by subscribing (buying) shares and debentures of companies and also giving long-term loans to acquire machinery, plants, etc. Foreign Exchange Banks are commercial banks that are branches of foreign banks and facilitate international financial transactions through buying and selling of foreign bills.

    Agricultural Banks finance agriculture and provide long-term loans for buying tractors and installing tube wells. Saving Banks mobilize small savings of the people in the savings account, e.g., Post office savings bank. Cooperative Banks organizing by the people for their collective benefits. They advance loans to their members at a fair rate of interest.

    The Significances of Commercial Banks:

    Banks play such an important role in the economic development of a country that a modern industrial economy cannot exist without them. They constitute a Nerve center of production, trade, and industry of a country.

    In the words of Wick-sell,

    “Bank is the heart and central point of the modern exchange economy.”

    The following points highlight the significance of commercial banks:

    1. They promote savings and accelerate the rate of capital formation.
    2. They are the source of finance and credit for trade and industry.
    3. It promotes balanced regional development by opening branches in backward areas.
    4. Bank credit enables entrepreneurs to innovate and invest which accelerates the process of economic development.
    5. They help in promoting large-scale production and growth of priority sectors such as agriculture, small-scale industry, retail trade, and export.
    6. They create credit in the sense that they can give more loans and advances than the cash position of the depositor’s permits.
    7. It helps commerce and industry to expand their field of operation.
    8. Thus, they make optimum utilization of resources possible.
  • Merchant Banks: Definition, Nature, and Characteristics

    Merchant Banks: Definition, Nature, and Characteristics

    Merchant Banks is a combination of Banking and consultancy services, Banks Essay, Definition, Nature, Functions, and Characteristics. It provides consultancy to its clients for financial, marketing, managerial and legal matters. Consultancy means providing advice, guidance, and service for a fee. It helps a businessman to start a business. It helps to raise (collect) finance. Also, They help to expand and modernize the business. It helps in the restructuring of business. This helps to revive sick business units. It also helps companies to register, buy and sell shares at the stock exchange. Also learned, Set-Up of Merchant Banking.

    Learn, Explain Banks of Merchant Banking: Definition, Nature, and Characteristics.

    Definition: Banking can define as a skill-oriented professional service provided by banks to their clients, concerning their financial needs, for adequate consideration, in the form of a fee. The Concept of Merchant Banking is studying and explains – Definition, Nature, Functions, and Characteristics. 

    Definition of Merchant Banking:

    The Notification of the Ministry of Finance defines merchant banker as;

    “Any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager-consultant, adviser or rendering corporate advisory services in relation to such issue management.”

    The Amendment Regulation specifies that issue management consists of a prospectus and other information relating to the issue, determining the financial structure, tie-up of financiers, and final allotment and refund of the subscriptions, underwriting, and portfolio management services.

    In the words of Skully,

    “A Merchant Bank could be best defined as a financial institution conducting money market activities and lending, underwriting and financial advice, and investment services whose organization is characterized by a high proportion of professional staff able to able to approach problems in an innovative manner and to make and implement decisions rapidly.”

    Nature of Merchant Banking:

    It is skill-based activity and involves serving every financial need of every client. It requires a focused skill-base to provide for the requirements of the client. As well as SEBI has made the quality of manpower one of the criteria for registration as a banker. These skills should not be concentrated in issue management and underwriting alone, which may hurt business.

    Merchant bankers can turn to any of the activities mentioned above depending upon resources, such as capital, foreign tie-ups for overseas activities, and skills. The depth and sophistication in the banking business are improving since the avenues for participating in capital market activities have widened from issue management and underwriting to private placement, bought out deals (BODS), buy-back of shares, mergers, and takeovers.

    The services of merchant banks cover project counseling, pre-investment activities, feasibility studies, project reports, the design of the capital structure, issue management, underwriting, loan syndication, mobilization of funds from Non-Resident Indians, foreign currency finance, mergers, amalgamation, takeover, venture capital, buyback, and public deposits. Also, A Category-1 banker can undertake issue management only. Separate registration is not necessary to carry on the act as the underwriter; next, we are going to study the functions of banking.

    Functions of Merchant Banking Organization:

    The following functions of merchant banking below are:

    1] Portfolio Management:

    Banks provide advisory services to institutional investors, on account of investment decisions. Also, They trade in securities, on behalf of the clients, to provide portfolio management services.

    2] Raising funds for clients:

    Banking organization assists the clients in raising funds from the domestic and international market, by issuing securities like shares, debentures, etc., which can be deployed for starting a new project or business or expansion activities.

    3] Promotional Activities:

    One of the most important activities of banking is the promotion of a business enterprise, during its initial stage, right from conceiving the idea of obtaining government approval. There is some organization, which even provides financial and technical assistance to the business enterprise.

    4] Loan Syndication:

    Loan Syndication means service provided by the bankers, in raising credit from banks and financial institutions, to finance the project cost or working capital of the client’s project, also termed as project finance service.

    5] Leasing Services:

    Banking organizations render leasing services to their customers. Also, Some banks maintain venture capital funds to help entrepreneurs.

    They help in coordinating the operations of intermediaries, concerning the issue of shares like registrar, advertising agency, bankers, underwriters, brokers, printers, and so on. Further, it ensures compliance with the rules and regulations, of the capital market.

    Merchant Banking Definition Nature and Characteristics
    Merchant Banking: Definition, Nature, and Characteristics! Image credit from #Pixabay.

    Characteristics of Merchant Banking:

    They are below as;

    • The high proportion of decision-makers as a percentage of total staff.
    • Quick decision process.
    • Also, The high density of information.
    • Intense contact with the environment.
    • Loose organizational structure.
    • A concentration of short and medium-term engagements.
    • Emphasis on fee and commission income.
    • Innovative instead of repetitive operations.
    • Sophisticated services on a national and international level.
    • Also, The low rate of profit distribution, and.
    • High liquidity ratio.
    Qualities of a Banker:
    • Ability to analyze.
    • Also, Abundant knowledge.
    • Ability to built up a relationship.
    • Innovative approach, and.
    • As well as Integrity.

    Merchant Banking in India:

    The activity was formally initiated into the Indian capital markets when Grind lays the bank received a license from Reserve Bank in 1967. Grind lays started with the management of capital issues, recognized the needs of the emerging class of entrepreneurs for diverse financial services ranging from production planning and system design to market research.

    Even it provides management consulting services to meet the requirements of the small and medium sectors rather than a large sector. Also, Citibank set up its banking division in 1970. The various tasks performed by these divisions namely assisting new entrepreneurs, evaluating new projects, raising funds through borrowing, and issuing equity.

    Indian banks started banking services as a part of the multiple services they offer to their clients from 1972. The state bank of India started the banking division in 1972. In the initial years, the SBI’s objective was to render corporate advice and assistance to small and medium entrepreneurs.

    Merchant banking activities are of course organized and undertaken in several forms. Commercial banks and foreign development finance institutions have organized them through formation divisions, nationalized banks have formed subsidiaries companies and share brokers and consultancies constituted themselves into public limited companies or registered themselves as private limited companies. Some banking outfits have entered into the collaboration with bankers abroad with several branches.

  • 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.
  • Management Accounting: Objectives, Nature, and Scope

    Management Accounting: Objectives, Nature, and Scope

    What is the definition of management accounting? Management accountants (also called managerial accountants) look at the events that happen in and around a business while considering the needs of the business. Management Accounting is comprising of two words “Management” and “Accounting”. Discuss the topic, Management Accounting: Meaning of Management Accounting, Definition of Management Accounting, Objectives of Management Accounting, Nature and Scope of Management Accounting, and Limitations of Management Accounting! From this, data and estimates emerge. Cost accounting is the process of translating these estimates and data into knowledge that will ultimately use to guide decision-making.

    Learn, Explain Management Accounting: Objectives, Nature, and Scope!

    Management Accounts a tool to assist management in achieving better planning and control over the organization. It is relevant for all kinds of an organization including a not-for-profit organization, government, or Sole Proprietorship’s. It has a significant place in the businesses and widely used by management to achieve better control and quality decision making. Also Learned, In the Hindi language: प्रबंधन लेखांकन का उद्देश्य, प्रकृति, और दायरा, Financial Accounting!

    Meaning of Management Accounting:

    Management Accounts not a specific system of accounting. It could be any form of accounting which enables a business to conduct more effectively and efficiently. It’s largely concerned with providing economic information to managers for achieving organizational goals. It is an extension of the horizon of cost accounting towards newer areas of management. Much management accounts information is financial but has been organizing in a manner relating directly to the decision at hand.

    Management Accounts comprised of two words ‘Management’ and ‘Accounting’. It means the study of the managerial aspect of accounting. The emphasis of management accounting is to redesign accounting in such a way that it is helpful to the management in the formation of policy, control of execution, and appreciation of effectiveness. Management Accounts of recent origin. This was first used in 1950 by a team of accountants visiting U. S. A under the auspices of Anglo-American Council on Productivity.

    Definition of Management Accounting:

    Definition: It is, also called managerial accounting or cost accounting, is the process of analyzing business costs and operations to prepare the internal financial report, records, and account to aid managers’ decision making process in achieving business goals. In other words, it is the act of making sense of financial and cost data and translating that data into useful information for management and officers within an organization.

    “Management accounting is the practical science of value creation within organizations in both the private and public sectors. It combines accounting, finance, and management with the leading edge techniques needed to drive successful businesses.”

    More of it:

    Anglo-American Council on Productivity defines as:

    “The presentation of accounting information in such a way as to assist management in the creation of policy and the day to day operation of an undertaking.”

    The American Accounting Association defines as:

    “The methods and concepts necessary for effective planning for choosing among alternative business actions and for control through the evaluation and interpretation of performances.”

    The Institute of Chartered Accountants of India defines as follows:

    “Such of its techniques and procedures by which accounting mainly seeks to aid the management collectively has come to be known as management accounting.”

    From these definitions, it is very clear that financial data is recorded, analyzed, and presented to the management in such a way that it becomes useful and helpful in planning and running business operations more systematically.

    Objectives of Management Accounting:

    The fundamental objectives of management accounting are to enable the management to maximize profits or minimize losses. The evolution of managerial accounting has given a new approach to the function of accounting.

    The main objectives of management accounting are as follows:

    Planning and policy formulation:

    Planning involves forecasting based on available information, setting goals; framing policies determining the alternative courses of action, and deciding on the program of activities. Management Accounts can help greatly in this direction. It facilitates the preparation of statements in light of past results and gives an estimation for the future.

    Interpretation process:

    Management Accounts to present financial information to the management. Financial information is technical. Therefore, it must present in such a way that it is easily understood. It presents accounting information with the help of statistical devices like charts, diagrams, graphs, etc.

    Assists in the Decision-making process: 

    With the help of various modern techniques management accounting makes the decision-making process more scientific. Data relating to cost, price, profit, and savings for each of the available alternatives are collected and analyzed and provides a base for making sound decisions.

    Controlling:

    It is useful for managerial control. Their tools like standard costing and budgetary control help control performance. Cost control is effected through the use of standard costing and departmental control is made possible through the use of budgets. The performance of every individual is controlled with the help of managerial accounting.

    Reporting:

    Management Accounts keeps the management fully informed about the latest position of concern through reporting. It helps management to take proper and quick decisions. The performance of various departments is regularly reported to the top management.

    Facilitates Organizing:

    “Return on Capital Employed” is one of the tools of Management Accounts. Since managerial accounting stresses more on Responsibility Centre’s to control costs and responsibilities, it also facilitates decentralization to a greater extent. Thus, it helps set up an effective and efficient organization framework.

    Facilitates Coordination of Operations:

    Management accounts provide tools for overall control and coordination of business operations. Budgets are an important means of coordination.

    Nature and Scope of Management Accounting:

    Managerial Accounting involves the furnishing of accounting data to the management for basing its decisions. It helps in improving efficiency and achieving organizational goals. You may know is that Comparative analysis is the scope of management accounting.

    The following paragraphs discuss the nature and scope of management accounting.

    Provides accounting information: 

    Management accounting is based on accounting information. It is a service function and it provides the necessary information to different levels of management. Managerial Accounting involves the presentation of information in a way it suits managerial needs. The accounting data collected by the accounting department is used for reviewing various policy decisions.

    Cause and effect analysis: 

    The role of financial accounting is limited to find out the ultimate result, i.e., profit and loss; Managerial Accounting goes a step further. Managerial Accounting discusses the cause and effect relationship. The reasons for the loss are probed and the factors directly influencing the profitability are also studied. Profits are compared to sales, different expenditures, current assets, interest payable’s, share capital, etc.

    Use of special techniques and concepts:

    It uses special techniques and concepts according to the necessity to make accounting data more useful. The techniques usually used include financial planning and analyses, standard costing, budgetary control, marginal costing, project appraisal, control accounting, etc.

    Taking important decisions: 

    It supplies the necessary information to the management which may be useful for its decisions. The historical data is studied to see its possible impact on future decisions. The implications of various decisions are also taking into account.

    Achieving objectives:

    It is uses accounting information in such a way that it helps in formatting plans and setting up objectives. Comparing actual performance with targeted figures will give an idea to the management about the performance of various departments. When there are deviations, corrective measures can take at once with the help of budgetary control and standard costing.

    No fixed norms: 

    No specific rules are followed in Managerial Accounting as that of financial accounting. Though the tools are the same, their use differs from concern to concern. The deriving of conclusions also depends upon the intelligence of the management accountant. The presentation will be in the way which suits the concern most.

    Increase in efficiency: 

    The purpose of using accounting information is to increase the efficiency of the concern. The performance appraisal will enable the management to pinpoint efficient and inefficient spots. An effort makes to take corrective measures so that efficiency improves. The constant review will make the staff cost-conscious.

    Supplies information and not the decision: 

    The management accountant is only to guide and not to supply decisions. The data is to use by the management for taking various decisions. “How is the data to utilize” will depend upon the caliber and efficiency of the management.

    Concerned with forecasting: 

    The management accounts concerned with the future. It helps the management in planning and forecasting. The historical information is used to plan the future course of action. The information is supplied to the object to guide management in making future decisions.

    Techniques and Procedures Design and Installation:

    Management accounting is identifying with the most productive and monetary arrangement of accounting reasonable for any size and kind of embraced. Additionally, it utilizes the best utilization of mechanical and electronic gadgets. Maybe you got your answer; 10 points of Nature of Management Accounting with their scope.

    A portion of the Acts, which have their impact on management choices, are as per the following:

    The Companies Act, MRTP Act, FEMA, SEBI Regulations, and so forth.

    Inside Audit:

    This incorporates the improvement of an appropriate arrangement of inside reviews for inner control. An interior review is led by the business association with the assistance of a paid worker who has careful accounting information. All the significant records are kept up under the management accounting framework with the goal that the inner review is directed in a successful way.

    Inner Reporting:

    This incorporates the arrangement of quarterly, half-yearly, and other interval reports and pays articulations, income and assets stream explanations, scarp reports, and so on.

    Limitations of Management Accounting:

    Hence, it suffers from all the limitations of a new discipline. Some of these limitations are:

    Limitations of Accounting Records:

    Management accounting derives its information from financial accounting, cost accounting, and other records. It is concerned with the rearrangement or modification of data. The correctness or otherwise of the Managerial Accounting depends upon the correctness of these basic records.

    It is only a Tool: 

    Management accounts not alternate or substitute for management. It is a mere tool for management. Ultimate decisions are taking by management and not by management accounts.

    Heavy Cost of Installation: 

    The installation of the Managerial Accounting system needs a very elaborate organization. This results in heavy investment which can afford only by big concerns.

    Personal Bias: 

    The interpretation of financial information depends upon the capacity of the interpreter as one has to make a personal judgment. Personal prejudices and biases affect the objectivity of decisions.

    Psychological Resistance:

    The installation of Managerial Accounting involves the basic change in the organization set up. New rules and regulations are also required to frame which affects the number of personnel, and hence there is a possibility of resistance from some or the other.

    Evolutionary stage: 

    Management accounts only in a developmental stage. Its concepts and conventions are not as exact and established as those of other branches of accounting. Therefore, its results depend to a very great extent upon the intelligent interpretation of the data of managerial use.

    Provides only Data:

    Managerial Accounting provides data and not decisions. It only informs, not prescribes. This limitation should also keep in mind while using the techniques of management accounting.

    Broad-based Scope: 

    The scope of management accounts for wide and this creates many difficulties in the implementation process. Management requires information from both accounting as well as non-accounting sources. It leads to inexactness and subjectivity in the conclusion obtained through it. Also Learned, In the Hindi language: Management Accounting: Objectives, Nature, and Scope (प्रबंधन लेखांकन का उद्देश्य, प्रकृति, और दायरा).

    Management Accounting Objectives Nature and Scope
    Management Accounting: Objectives, Nature, and Scope, Image credit from @Pixabay.

  • Explain essay on the Co-Ordination of an Organization!

    Learn, Explain essay on the Co-Ordination of an Organization!

    Before start studying, you must know what common question types asked around the place. Essay for Articles: What is the Essay on the Meaning of Co-Ordination? What is the Essay on the definition of Co-Ordination? What is the Essay on the Need for Co-Ordination? What is the Essay on the Techniques of Co-Ordination? What is the Essay on the Nature of Co-Ordination? and What is the Essay on the Importance of Co-Ordination? Also Learned, Explain essay on the Direction of an Organization! That is similar to Explain essay on the Co-Ordination of an Organization!

    Now Explain it:

    #The Essay on the Meaning of Co-Ordination:

    Co-ordination is the process of synchronization and harmonization of the different activities within the enterprise with reference to time, the progress of work, performance standards, etc. If the objectives of the business are to be realized with a minimum of friction and a maximum of cooperation, a system of coordination through the establishment of the formal relationship among different individuals and departments has to be instituted.

    #The Essay on the Definition of Co-Ordination:

    Henri Fayol, Louis A. Allen, and Ordway Tead considered coordination as a separate managerial function. James D. Mooney considered coordination as the first principle of organization. According to Mooney and Railey, “Co-ordination is the achievement of orderly group effort and unity of action in the pursuit of a common purpose.”

    It is that process whereby an executive develops an orderly pattern of the group effort among his subordinates and secures unity of action in the pursuit of common purpose. “It is the orderly synchronization of efforts to provide the proper amount, timing and quality of execution resulting in harmonious and unified actions towards a stated objective.”

    George R. Terry and Theo Haimann regard coordination as a permeating function of management passing through the managerial functions of planning, organizing, staffing, directing and controlling.

    #The Essay on the Need for Co-Ordination:

    It is a pervasive function. The managers seek to achieve co-ordination through planning, organizing, staffing, commanding and controlling. Performance of any of these functions is an exercise towards coordination. When all these functions are related to each other harmoniously into a unified whole, co-ordination is achieved.

    In fact, managers at all levels, preside over the “nerve centers” of co-ordination in respect of their own spans of control. This means that coordination is the function of all levels of management and not merely of the top management.

    #The Essay on the Techniques of Co-Ordination (How to Achieve Co-Ordination?):

    #Clearly Defined Goals:

    The goals of the enterprise should be laid down clearly. Every individual in the enterprise should understand the overall objectives and the contribution of his job to these objectives.

    #Precise and Comprehensive Programmes and Policies:

    Laying down well-defined programmes and policies is another measure for achieving effective coordination. This brings uniformity of action because everybody understands the programmes and policies which act as guides for taking decisions.

    #Clear Lines of Authority and Responsibility:

    An enterprise is composed of several vertical and horizontal authority relationships. Authority flows from the top through various positions down to the level of operative workers. There is a line of authority in every enterprise which indicates that who is accountable to whom. This line of authority and responsibility should be clearly defined to achieve co­ordination.

    #Effective Communication:

    Effective communication is key to proper coordination. The channel of communication used in the enterprise should be reliable so that they are able to create proper understanding in the mind of the receiver. As advised by Mary Follett, personal contacts should be encouraged as it is the most effective means of communications for achieving coordination.

    #Effective Leadership and Supervision:

    Management can achieve better coordination through effective leadership and supervision. Effective leadership ensures coordination both at the planning and the implementing stage. Effective supervision is also necessary to guide the activities of individuals in the proper direction. This will bring unity of action which is essential to coordination.

    #The Essay on the Nature of Co-Ordination:

    Co-ordination means an orderly synchronization of efforts of the people working in the organization for the achievement of organizational objectives. It is a continuous process of achieving unity of purpose in the organization.

    It includes all such deliberate efforts on the part of management whereby efforts of various parts of the enterprise are so blended that they move harmoniously towards the accomplishment of an organizational objective.

    Where a number of persons are working for the achievement of a common purpose, coordination is essential to achieve the purpose and synchronize their efforts. Co-ordination is an all-inclusive principle of organization. It is also the all-inclusive function of management and not just one of its functions.

    Management seeks to achieve co-ordination by performing various functions like planning, organizing, directing and controlling. When all these functions are related to each other harmoniously, co-ordination is achieved. As a matter of fact, coordination is the essence of managing.

    #The Essay on the Importance of Co-Ordination:

    In order to achieve coordination among the subordinates and sub-units, the management performs the functions of planning, organizing, staffing, directing and controlling. Coordination is required in every function of management. Plans of different departments and divisions must be properly coordinated, otherwise, the objectives of the organization as a whole cannot be accomplished,

    Co-ordination is equally important in organizing. All activities required to achieve the desired objectives must be properly grouped and assigned to the right people. In staffing, a balance must be attained between job requirements and the qualities of the personnel who are placed on different jobs.

    The direct function of management is an attempt at achieving coordination. Supervision, motivation, leadership, and communication are designed to secure unity of action in a group. Co-ordination is also involved in controlling. Corrective measures must be synchronized with the cause and time of deviations from the desired performance.

    Thus, coordination is the silken thread running through the entire process of management. That is why it is called the essence of management.

    Co-ordination results in the creation of a true whole that is larger than the sum total of its parts. The analogy of the conductor of a symphony orchestra is appropriate here. The conductor by his coordinating skills of vision, leadership and simultaneous attention to the totality of the orchestra group and its individual instrument players, creates a living musical performance and not mere noise.

    In any case, management has no alternative but to perform mediating, moderating and motivating roles in securing coordinated action. Mediation with the external environment, moderation while controlling internal environment and motivation of individual organizational members are integral coordinating functions of management.

  • Direction: Meaning, Definition, Nature, and Importance

    Direction: Meaning, Definition, Nature, and Importance

    Direction: Before studying this article Content you will learn about what is it? – 1) Meaning, 2) Definition, 3) Nature, 4) Importance, and 5) Principles of Direction. Also, each one explains it, Explain Principles for Achieving Effective Direction in Management!

    Learn, Explain each, Direction: Meaning, Definition, Nature, and Importance.

    These Common questions are very asked by readers:

    First, What is the Meaning of Direction? Second, What is the Definition of Direction? Third, What is the Nature of Direction? Forth, What is the Importance of Direction? Final, What are the Principles of Direction?

    Directing: A basic management function that includes building an effective work climate and creating an opportunity for motivation, supervising, scheduling, and disciplining.

    Meaning of Direction:

    Planning and organizing provide a foundation for the organization and direction initiate action towards the achievement of the goals. Having appointed the workforce, managers ensure they work to achieve the organizational standards of performance and in the course of doing so, satisfy their personal wants and needs also. They act as catalysts for achieving organizational and individual goals.

    They act as agents who influence the behavior of employees to achieve the organizational goals and also ensure that organizational plans and policies satisfy the interests of the workforce. Managers, thus, direct employees’ behavior towards organizational and individual/group goals.

    Definition of Direction:

    Directing is “A managerial function that involves the responsibility of managers for communicating to others what their roles are in achieving the company plan.” — Pearce and Robinson.

    It is “Getting all the members of the group to want and to strive to achieve objectives of the enterprise and the members because the members want to achieve these objectives.” — Terry and Franklin.

    It is important to create an environment in which people work as active group members to achieve organizational goals. Also, Managers use behavioral sciences to influence the behavior of the workforce. They remain in constant touch with the employees to ascertain their needs and forces that drive them to work. The motivational factors (monetary and non-monetary) that influence an individual to work are analyzed while directing them to action.

    Hersey and Blanchanrd define management as “the process of working with and through individuals and groups and other resources to accomplish organizational goals”.

    Nature of Direction:

    The following points highlight the nature of direction:

    Process of action:

    Direction initiates an action at the top level of the organization and flows down the hierarchy. It follows that subordinates have to be directed by their superiors only.

    On-going process:

    Directing is not an intermittent function of management. It is a process of continuously guiding the behavior of others.

    Not supported by rules:

    Since the behavior of people cannot be predicted through mathematical or statistical tools, the function of directing is based on behavioral sciences. It is not supported by rules or regulations.

    Directing is situational:

    Managers influence the behavior of employees according to the situation. Also, directions change from situation to situation. Factors like environment, nature of workers, group behavior, attitude towards work, etc. affect directing.

    Behavioral science:

    Since directing deals with human behavior, managers study different aspects of human psychology to understand how to influence their behavior.

    Understand group behavior:

    No person can work alone. While working in the organization, he becomes part of the informal groups (formed based on the common interests of individuals). Also, the behavior of a person is different as an individual and a member of the group. It is, therefore, essential that managers understand the nature of group behavior to direct effectively.

    Participative:

    Direction initiates action on the part of employees. To ensure greater participation of workers in carrying out the organizational activities, they should take part in the meetings to discuss various direction policies.

    Pervasive:

    Managers at all levels in all functional areas direct their subordinates. As well, Top managers guide middle and lower-level managers who further direct supervisors and workers. It is performed at every level of management. Every person in the organizational hierarchy is superior to some and subordinate to others except those at the top and the bottom. Direction maintains and strengthens superior-subordinate relationships and inspires everyone in the organization to have a common vision, that is, contribution to organizational goals.

    Importance of Direction:

    Direction puts plans into action.

    Well executed direction function has the following merits:

    Initiates action:

    Direction initiates an action that motivates people to convert the resources into productive outputs. It gives substance to managerial functions of planning, organizing, staffing, and controlling. Also, People learn to manage the resources in the most effective way that results in their optimum utilization.

    Creates a sound work environment:

    If directions are issued in consultation with employees (participative); it creates an environment of understanding where people work to their maximum potential, willingly and enthusiastically to contribute towards organizational goals.

    Develops managers:

    Managers who are personally motivated to work can also direct others to work. Also, Managers develop their skills and competence to direct others to follow. If managers and employees work in harmony, it promotes the skills of the employees and develops managers to assume responsibilities of higher levels in the organization. As well as, Motivation, leadership, and communication help in bringing people together. They exploit employees’ talent to the fullest and also provide scope for their skill enhancement. This is beneficial for both the employees and the organization. Direction, thus, prepares future managers.

    Behavioral satisfaction:

    Since direction involves human behavior and psychology, employees feel behaviorally satisfied and personally inspired to achieve organizational goals.

    Increase in productivity:

    Personally satisfied employees contribute towards the output and efficiency of the organization. Also, Direction gets maximum out of subordinates by exploiting their potential and increasing their capabilities to work.

    Achieves coordination:

    Directing aims at continuous supervision of activities. Also, they achieve coordination by ensuring that people work towards planned activities in a coordinated manner. It integrates the actions of employees that increase their understanding of mutual interdependence and their collective effort to achieve the organizational goals. Also, helps to harmonize individual goals with organizational goals.

    Facilitates control:

    Coordination brings actual performance in conformity with planned performance. The controlling function is, thus, facilitated through the effective direction.

    Facilitates change:

    Direction helps in introducing change in the organization structure and adapting the organization structure to the external environment. As well as, Organisation operates in society as an open system and has to accept social changes for its survival and growth. Also, People are not easily receptive to changes. Direction helps in changing the attitude of people towards change and accepts it as a way of life.

    Facilitates growth:

    An organization open to change is responsive to growth. Also, Direction harmonizes physical, financial, and human resources balance various parts of the organization, and create commitment amongst people to raise their standards of performance.

    Direction Meaning Definition Nature and Importance Image
    Direction: Meaning, Definition, Nature, and Importance; Image from Pixabay.

    Principles of Direction:

    Direction function deals with people. Understanding the behavior of people is a complex phenomenon, and directing them to contribute to organizational goals with a common vision is, thus, a complex task. Related question – What are the Principles of Direction?

  • Hiring Process and Hiring Decision: Meaning, Definition with Nature of Hiring!

    Hiring Process and Hiring Decision: Meaning, Definition with Nature of Hiring!

    Learn, Explain Recruitment & Selection – Hiring Process and Hiring Decision: Meaning, Definition with Nature of Hiring!

    Hiring Process and Hiring Decision: Nature of Hiring, Regular, Temporary, full time, part time, Apprentice, Contractual, Outsourcing, Existing Post or New Post to be Created, Need Analysis, Job Analysis. Continue after Job Analysis: Meaning, Definition, and Purpose with Methods. For Study of Recruitment & Selection!

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    1. Nature of Hiring.
      1. Regular.
      2. Temporary.
      3. Full Time.
      4. Part Time.
      5. Apprentice.
      6. Contractual: For example, a person is more likely to be considered an independent contractor than an employee in the following situations…
      7. Outsourcing.
    2. Existing Post or New Post to be created.
    3. Need Analysis: A need has been described as…
    4. Cost Analysis.
    5. Job Analysis.

    Practical Component.

    RECOMMENDED BOOKS.

    REFERENCE BOOKS.

    Hiring Process and Hiring Decision: Meaning, Definition with Nature of Hiring! PDF, PDF Reader Online or Maybe Free Download: Recruitment & Selection – Hiring Process and Hiring Decision!

    Hire is defining: Obtain the temporary use of (something) for an agreed payment.

    Meaning of Hiring: The act of giving someone a job; an employer taking on a new employee. “After several interviews, the CEO told me that he wanted to hire me for the management position and that I could start work next week.”

    Definition of Hiring: The practice of finding, evaluating, and establishing a working relationship with future employees, interns, contractors or consultants.

    Hiring Process and Hiring Decision_ Meaning Definition with Nature of Hiring - ilearnlot