Q. 1. Define break-even point.

 

Ans. When the total costs incurred and the total value of sales made are equal, the organisation attains a stage of no loss and no profit i.e., the sale proceeds are just enough to cover the total costs (both the fixed costs and variable costs). This position is called the break-even point. If sales go up beyond the break-even point, organisation makes a profit; if they come down, a loss is incurred. Thus, sales at break-even point is the minimum amount of sales that must be effect in order to avoid any loss. This figure is very useful for accountants in studying the profit factors. In this context acknowledge of the marginal costing method is essential for the study of break - even analysis. It may be said that break — even analysis is simply an extension of the principles of marginal costing.

 

Q. 2. Describe the significance of, break-even chart.

 

Ans. Graphically, break-even point is represented in a break-even chart. A break-even chart or profit graph shows the extent of profit or loss at different levels of sales. It is a graphic analysis of the relationship between costs, volumes of activity and profits. Break- even chart is an excellent tool for management planning and control. It can be used to determine the break-even volume, optimum level of output, profit for a given level of output and the effect of change in sales on costs and prices.

A typical break-even chart prepared on the basis of above of illustration is given below

                                                       

In this chart quantity of output is shown on the. X-axis. The fixed cost line is horizontal to the X-axis indicating that fixed costs remain unchanged up to 12,000 units of output. The variable cost line is superimposed on the fixed cost line to show total costs. The point at which the total revenue line intersects the total cost line is the break-even point.

At the point the quantity produced and sold is 5,000 units or the sales revenue and costs are Rs. 2,00,000. The excess of actual sales volume over the break-even sales value is called the margin of safety. Greater the safety margin higher would be the profits. A firm should have a reasonable margin of safety as resistance power-avoid losses. If the safety margin is low a firm runs the risk of incurring losses during the period of reduced business activity. The margin of safety may be low either because the actual sales are low or the fixed costs are very high.

Break-even analysis is a simple and inexpensive technique, It can be used for several purposes especially in industries which are not subject to frequent changes in technology, product-mix and factor prices. It presents a microscopic picture of the profit structure of a firm. It highlights the areas of economics strengths and weaknesses and reveals the profit vulnerability of the firm to changes in business conditions. However, breakdown analysis is based on several assumptions which are not true in practice. The selling price, rate of increase in variable cost are assumed to be constant. It is assumed that there will be no changes in input prices, product mix, labour efficiency and technology. Production and sales volumes are assumed to be equal, ie., there is no change in inventory level. Selling costs are ignored. Break-even analysis is a static picture as it assumes constant relationship of output to costs and revenue. Break-even analysis is based on accounting data which may suffer from several limitations like neglect of imputed costs, arbitrary depreciation estimates, inappropriate allocation of overheads, etc.

 

Q, 3. Describe, Managerial Uses of Break-even Analysis.

 

Ans. Managerial Uses of Break-even Analysis.

Despite its limitations, break-even analysis has been found useful in several types of managerial decisions. Some of the important managerial applications of break-even analysis are given below:

1. Capacity Planning. Sometimes, management is faced with the problem of deciding whether to expand plant capacity to meet increased demand for the product. The break- even analysis helps in understanding the impact of increase in output on the firm’s fixed costs and profits.

Example. ABC company is examining a proposal to expand its plant capacity which is expected to increase its annual sales from Rs. 40 lakhs to Rs. 60 lakh. The expansion will involve an

increase in fixed cost from Rs. 15 lakhs to Rs. 20 lakhs. The variable cost is likely to remain unchanged at 50% of the sales revenue.

Should the company go in for expansion?

Solution.

As the increase in sales (Rs. 20 lakhs) is greater than the increase in break-even point the company should go in, for expansion.

2. Choice of Technique. Break-even analysis is a useful guide in the selection of most economical production process or equipment. It gives a comparative view of costs of using alternative techniques at different levels of output. Generally, simple and traditional process/equipments are more economical at low levels of output because they require minimum costs. But at very high levels to output, highly sophisticated and expensive process/equipments might be more profitable.

3. Product-mix Decision. A multi-product firm has to decide the relative proportion of different products in the total output. The objective here is to find out the best combination (mix) of products that can maximise profits. Beak-even analysis is helpful in determining the most profitable product-mix.

Example.  Shilpa Toys Factory has a capacity to provide 3,999 hours per week. The plant can produce two types of toys x and y. Annual costs are Rs. 12,000. The maximum possible sales are estimated to be 4,000 toys of x types and 3,000 y type. Following additional information is available.

Find out the product-mix that will maximise the net profits of the factory.

4. Plant Shutdown Decision. During recession and such other periods when the demand falls considerably, a firm is faced with the problem of deciding whether to close down the plant temporarily or to continue production and sales at prices that do not .cover total costs. Break-even analysis facilitates such a decision by differentiating sunk costs from out of pocket costs. Sunk costs are the fixed costs already incurred and which will be there even it the plant is shut

down temporarily. Out of pocket costs are the expenses which need not be incurred if the production is stopped.

Example. A toys factory is facing recession. Its sunk costs are Rs. 50 lakhs per annum while the out of pocket costs are Rs. 80 per unit. The factory has a capacity to produce 24,000 units per years. Due to recession the maximum expected sales for six months are 6,000 units at a selling price of Rs 100 per unit. The recession is expected to last 6 months. Should the factory be shut down for this period?

Solution. If the factory is shut down the total loss will be Rs. 2.5 lakhs (half of annual

sunk costs). But if the factory operates :

 

                                                 

The factory should not be shut down.

5. Drop or add a product. In the course of product planning the management has to decide whether to add a product to the existing product line. Similarly, management may feel that an existing product has outlived its utility and should be deleted from the product line. Break-even analysis is useful in such decisions as it indicates the impact of such decisions on the costs and revenues of the firm.

6. Make or Buy Decisions. Management of a firm has often to take a decision whether to buy a component or to manufacture it. For example, an automobile manufacturer can make spark plugs or buy them from the market Break-even analysis can enable the manufacturer to take a decision of this type.

Example. An automobile manufacturer buys a certain components at Rs. 8 per unit. In case he makes it himself, his fixed and variable Costs would be Rs. 18,000 and Rs. 5 per unit, respectively. Should the manufacturer make or buy the component?

Solution.

                                   

So it would be profitable for the manufacturer to make the component if he needs more than 6,000 units per year.

Make or buy decisions, however, should be taken after considering the following points:

(a) Is the supply from the market certain and timely?

(b) Is the required quality available?

(c) Does the supplier try to take any monopoly advantage?

In addition to the above uses, break-even analysis can also be used to determine volume required to earn target profits, to find out impact of changes in costs and prices, to determine promotion mix, etc.

 

Q. 4. Define Margin of safety.

 

Ans. Excess of actual sales revenue over the break-even sales revenue, expressed usually as a percentage. The greater this margin, the less sensitive the firm to any abrupt fall in revenue. Formula: (Actual sales revenue-Break-even sales revenue) x 100 ÷ Actual sales revenue.

Margin of safety is a concept used in may areas of life, not just finance. For example, consider engineers building a bridge that must support 100 tons of traffic. Would the bridge be built to handle exactly 100 tons ? Probably not. It would be much more prudent to build to handle, say, 130 tons, to ensure that the bridge will not collapse under a heavy load. The same can be done with securities. If you feel that a stock is worth $10, buying is at $7.50 will give you a margin of safety in case your analysis turns out to be incorrect and the stock is really only worth $9.

 

Q. 5. Define Angle of incidence.

 

Ans. Angle of incidence indicates the rate at which profit is earned in an organisation after crossing the break-even point. In a break even chart, the angle at which the sales line cuts the total cost line is called the angle of incidence. While the point at which the sales and total cost line cut each other is called the break-even point, the angle at which these lines intersect is called the angle of incidence. Sales after break even point will bring profit; therefore, this angle indicates the profit earning rate of the business. Hence, it is also called profit angle or profit path1n this sense, the concept of angle of incidence is an important tool for management in times of expansion of the market for the product.

Every business concern would like to have as large an angle of incidence as possible because a wide angle represents a higher rate of profit earning and a narrow angle implies relatively a low rate of return. The consideration of the angle of incidence arises only after meeting the entire amount of fixed costs; therefore, the nature of the angle depends upon the incidence of variable costs. In other words, a norrow angle indicates that variable costs form relatively a large part of the cost of the product and vice versa.

 

Q. 6. What is Profit-volume ratio (P.V.R.) ?

 

Ans. This indicates the relation between the sales value and its corresponding contribution. This explains the rate at which sales are contributing towards the recovery of fixed costs and profit. A high ratio means that break even point is achieved soon after which profit is earned at a higher rate and a low ratio implies the opposite. The following formula calculates this ratio.

                      

From the above discussion, we can understand that the term “Profit Volume Ratio” is rather misleading, because the term profit where actually means, the contribution of the sales and the term volume actually means sales value and not the sales volume. Therefore, properly speaking it should be called Contribution Sales Ratio (C.S.R.). However, since the term P.V.R. is widely used, we also use the same name in our lessons. Every organisation strives to improve their P.V. ratio ether by reducing the variable cost per unit or by increasing the selling price per unit whichever is possible. A high P.V. ratio earns profits at an accelerated rate and vice versa. The P.V. ratio can be depicted graphically.

 

Q. 7. How to construct a profit-volume chart?

 

Ans. (1) Use the horizontal axis for the sales value and the vertical axis for the costs and profit.

(2) Measure the sales value (in terms of Rupees) on the horizontal axis by drawing “Sales line” just in the middle of the chart so as to cut the graph into two areas, the area above the line representing the “profit area” and the area below the line representing the “loss area”.

(3) Measure the fixed costs on the vertical axis below the sales line (in the loss area) measuring from the zero point (see the chart).

(4) Measure title profit on the vertical axis above the sales line (in the profit area).

(5) Draw a straight line connecting the points of total fixed costs and the profit volume

of the maximum sales.

        

Q. 8. What are Shortcomings of the Break-even Analysis?

 

Ans. (1) The Break-even Point (BEP) is based on some assumptions, such as sales -price, costs, production, sales, etc The technique will be only of financial value unless all these assumptions are well calculated. Besides, the technique is a preliminary and supplementary tool in the whole exercise of ratio analysis.

(2) The technique is to provide cost-escalation as built-in safeguard against increase in prices.

(3) The proper analysis of various costs into fixed costs and variable costs is very important. This is so because; some of the items will neither fall under fixed costs nor under variable costs. Hence, semi-variable costs may cost its effect on the BEP. BEP may not prove useful to rapidly growing enterprises and to enterprises that frequently change their product mix.

(4) It has limited utility in case of multi products.

(5) It does not due cognizance of factors like uncertainty and risk involved in estimates for costs, volume and profits.

(6) It is not a patent tool for long Range Planning.

 

Q. 9. Differentiate Risk and uncertainty.

 

Ans. “Risk” and “uncertainty” are two terms basic to any decision making framework. Risk can be defined as imperfect knowledge where the probabilities of the possible outcomes are known, and uncertainty exists when these probabilities are not known. A more common usage of these terms would state uncertainty as imperfect knowledge and risk as uncertain consequences. If a person says “I am uncertain about the weather tomorrow, : this would be a value-free statement implying imperfect knowledge about the future. If this same person says, “I am planning a picnic for tomorrow and there is a risk of rain”, now h or she is indicating preference for an alternative consequence. Taking a risk can now be defined as exposing one’s self to a significant chance of injury or loss. Thus risk is variability or randomness that can be quantified. Risk can lead to an unfavourable outcome, but also to a favourable outcome (i.e. there can be a “risk of a positive outcome”). Risk often stems from a process that is repeated many times. Uncertainty is randomness which cannot be described by a distribution. Uncertainty often stems from an infrequently occuring, discrete event.

 

Q. 10. Effect of Risk and uncertainty on lot size.

 

Ans. Any project related decision or policy is affected by many variables subject to uncertainty. It does not imply, however, that it is practically impossible to assess the reliabilities of finding from cost benefit analysis. In many cases, it might be useful to focus on risks which are well-defined and quantifiable and disregard uncertainties which are very unlikely to materialise.

As in mm-max inventory control two points are to be known, i.e. recorder point and the quantity to be ordered. If there is no uncertainty, the graph between the time and the balance on hand shows a pattern as shown in Fig. given below:

         

Fig. 1.1 Graph between the balance in hand, and time under the condition of certainty.

In this case, when the quantity on hand falls to recorder point, an order must be placed for the ordered quantity. Since there is no uncertainty, this ordered quantity will— arrive just as the stock at hand falls to minimum. Then with the new arrival the stock position reaches to maximum (i.e.  minimum + ordered quantity = maximum). As consumption continues, the stock will again fall towards the recorder point.

But under uncertainty, this is not the situation. As if no uncertainty is there, there is no need to maintain the minimum quantity, i.e. safe reserve at all; because the new order would arrive exactly on time, when inventory falls to zero. Now under uncertainty there are two types of uncertainty. Uncertainty about the rate of consumption of inventory an uncertainty about the amount of time required for delivering the new order. The consumption increases with the demand and shows down in periods of declining in sales. The time required for supplying depends upon the supplier and on the transportation facilities — these are subjected to uncertainty. Further if the parts stored are manufactured by the company itself. There is undertinly due to the bottleneck in production, breakdown in machines and so on.

This is clear that mm-max inventory control involves uncertainty, and to solve such problem the theory of probability is used. Now the pattern of graph (Fig. 1.1) changes to graph shown in Fig. 1.2.

       

Fig. 1.2. Graph between the balance in hand and the condition of uncertainty.

The graph shown in Fig. 1.2 shows that inventory will fall below the minimum, even down to the zero, because of rapid consumption or delay in the delivery or ordered quantity. Many times the inventory will reach above the maximum, because the slower consumption after the order was placed, or because of rapid delivery.

The consumption required for recorder point and ordered quantity is quite tedious

and complicated which requires lengthy statistical procedures and is beyond the scope of this book.

 

Q. 11. What is life-cycle analysis ?

 

Ans. Life-cycle analysis

Life-cycle cost analysis involves the consideration of all relevant costs of a project, beginning with the planning and design stage, through development and testing, production operation, and maintenance to the final stage sale or disposal. It is widely used under government contracts, such as defense procurement and public works, in order to minimize the total cost of the project over its useful life In business, life-cycle cost analysis has been costs to justify a project’s price vis-a-vis its competition’s when all other costs associated with owning the project over its lifetime are taken into consideration. When a consumer is faced with the choice between durable good. Such as automobiles or refrigerators, the economic cost of each alternative can be established, using present worth analysis, by adding to the product’s price the present value of all other expenses required to operate and maintain that product over its useful life, or by calculating the equivalent annual cost to own, operate, and maintain the product its lifetime.

 

Q. 12. What is Bill of materials ?

 

Ans. In order to ensure proper inventory control, the ‘basic principle to be kept in mind is that proper material is available for production purposes whenever it is required. This aim can be achieved by preparing what is normally called as “Bill of Materials.” A bill of material is the list of all the materials required for a job, process or production order. It gives the details of the necessary materials as well as the quantity of each item. As soon as the order for the job is received, bill of materials is prepared by Production Department or Production Planning Department.

 

Q. 13. What are advantages of ABC analysis ?

 

Ans. Advantage of ABC Analysis

(a) A close and strict control is facilitated on the most important items which constitute a major portion of overall inventory valuation or overall material consumption and due to this the costs associated with inventions may be reduced.

(b) The investment in inventory can be regulated in a proper manner and optimum utilisation of the available funds can be assured.

(c) A strict control on inventory items in this manner helps in maintaining a high inventory turnover ratio. However, it should be noted that the success of ABC analysis depends mainly upon correct categorisation of inventory items and hence should be handled by only experienced and trained personnel.

 

Q. 14. Define Inventory.

 

Ans. The term ‘inventory’ refers to the stock of raw materials, parts and finished products held by a business firm. It is the aggregate quantity of materials, resources and goods that are idle at a given point of time. In a wider sense. “inventory consists of usable but idle resources. The resources may be of any type; for example, men, materials, machines or money. When the resources involved is materials or goods in any stage of completion, inventory is referred to as stock”. It may, therefore, be said that inventory comprises 4 Ms-men, materials, machines and money. But in a practical sense, inventory consists of the following:

(a) raw materials

(b) work-in-progress, e.g., semi-finished goods

(c) bought out components,

(d) finished products,

(e) maintenance spare parts, and

(f) consumable supplies.

 

Q. 15. What are the Objectives of Inventory Control?

 

Ans. The main objectives of controlling inventory are as follows:

(i) to minimise capital investment in inventory by eliminating excessive stocks;

(ii) to ensure availability of needed inventory for uninterrupted production and for meeting consumer demand;

(iii) to provide a scientific basis for planning of inventory needs;

(iv) to tiding over the demand fluctuations by maintaining reasonable safety stock;

(v)to minimise risk of loss due to obsolescence, deterioration etc, and

(vi) to maintain necessary records for protecting against thefts, wastes leakages of inventories and to decide timely replenishment of stocks.

 

Q. 16. Explain Advantages of Inventory Control

 

Ans. Scientific inventory control provides the following benefits:

 1. It improves the liquidity position of the firm by reducing unnecessary tying up of capital in excess inventories.

2. It ensures smooth production operations by maintaining reasonable stocks of materials.

3. It facilitates regular and timely supply to customers through adequate stocks of finished products.

4. It protects the firm against variations in raw materials delivery time.

It facilitate production scheduling, avoids shortage of materials and duplicate ordering.

6. It helps to minimise loss by obsolescence, deterioration, damage etc.

 

Q. 17. Describe EOQ.

 

Ans. It indicates that quantity which is fixed in such a way that the total variable cost of managing the inventory can be minimised. Such cost basically consists of two parts. First, Ordering Cost (which in turn consists of the costs associated with the administrative efforts connected with preparation of purchase requisitions, purchase enquiries, comparative statements and handling of more number of bills and receipts) Second, Carying Cost i.e., the cost of carying or holding the inventory (which in turn consists of the cost like godown rent, handling and upkeep expenses, insurance, opportunity cost of capital blocked i.e. interest etc.) There is a reverse relationship between these two types of costs i.e. if the purchase quantity increases, ordering cost may get reduced but the carying cost increases and vice versa. A balance is to be struck between these two factors and it is possible at Economic Order Quantity where the total variable cost of managing the inventory is minimurn.

It is possible to fix the Economic Order Quantity with the help of mathematical formula. The following assumptions may be made for this purpose.

Let Q be Economic Order Quantity.

A be Annunal Requirement of materials in units.

O be cost of placing an order (which is assumed to remain constant  irrespective of size of order.)

C be cost of carrying one unit per year.

Now, if A is the annual requirement and Q is the size of one order, the total number of orders will be A/Q and the total ordering cost will be - A/QxO.

Similarly, if the size of one order is, Q and if it is assumed that the inventory is reduced at a constant rate from order quantity to zero when it is repurchased, the average inventory ill be Q/2 and the cost of carrying one unit per year being C, the total carrying cost will be Q/2XC.

Thus, Total Cost = Ordering Cost + Carying Cost

                     

The intention is that the value of Q should be such that the total cost should be minimum. Hence, taking the first derivative of the equation with respect to Q and setting the result to zero,

                                              

Where

Q = Economic Order Quantity

A = Annual requirements

O = Ordering Cost

C = Unit carrying cost/year.

 

Q. 18. From the Following data, work out the EOQ of a particular component.

 

Ans. Annual Demand : 5000 Units

Ordering Cost : Rs. 60 per Order

Price per Unit Rs 100

Inventory carrying Cost : 15% on average inventory,

Solution:

 

Q. 19. Define:

(i) Lead time (ii) Safety Stock.

 

Ans. Lead time. It refers to the interval between placing on order for a particular item and its actual receipt. Suppose, an order is placed for a particular item on 1st January and the matrialis is received on February. In this case the lead time is one month. Longer is the lead time, higher will be the average level of inventory.

Safety stock. It implies the stock of inventory held as a safety measure against fluctuation in demand and lead time. Safety stock is a function of lead time. ‘11w longer the lead time, the greater the safety stock. Safety stock is also known as buffer stock or minimum stock. Safety stock should be differentiated from working stock. Safety stock refers to the stock of inventory which is supposed to take care of shortages. On the other hand, working stock refers to the inventory generated by orders.

 

Q. 20. Consider the following data of a company for the year 1997:

Sales = Rs. 1,20,000

Fixed cost = Rs. 25,000

Variable cost = Rs. 45,00Q

Find the following:

(a) Contribution                         (b) Profit

(c) BE                                          (d) M.S.

 

Solution.

        (a)                          Contribution = Sales - Variable costs

                                = Rs. 1,20,000 - Rs. 45,000

                                 = Rs. 75,000

 

Q. 21. Consider the following data of a company for the year 1998.

Sales = Rs. 80,000

Fixed cost = Rs. 15,000

Variable cost = 35,000

Find the following:

(a) Contribution                         (b) Profit

(c) BEP                                (d) M.S.

 

Solution.

 

Q. 22. Alpha Associated has the following details:

Fixed cost = Rs. 20,00,000

Variable cost per unit = Rs. 100

Selling price per unit=Rs. 200 V

Find

(a)The break-even sales quantity,

(b)The break-even sales

(c) If the actual production quantity is 60,000, find (1) contribution; and (ii) margin of safety by all methods.

 

Solution.

 

Q. 23. A manufacturing company shows the trading results of records as follows:

(a) P/V ratio

(b) Fixed cost

(c) Break-even point (sales value)

(d)Margin of Satety at a profit of Rs. 3,500.

Solution.

Profit is realised only after meeting the fixed costs fully. Therefore, any variation in the profit will be caused only by a variation in contribution. Here, the increase in Net Profit can be taken as the increase in contribution.

For an increase of Rs. 8,000 in sale, the contribution is increased by Rs. 2,000.

 

Q. 24. Describe Minimum cost analysis.

 

Ans. In evaluating alternative investments it is possible to find the best alternative on the basis of minimum cost rather than maximum benefit. The decision is justifiable, if the benefit of cash alternative is expected to the same. Similarly, when considering the optimum size of a project, such as a piece of machinery or equipment, it is proper to determine its minimum cost over a range of relevant values of the independent variable, i.e. size of capacity, provided that the expected benefit is the same. In terms of economic theory, the total cost of a project can be said to be a function of the sum of two cost functions, one which increase directly with the independent variable, and the other decreasing as the independent variable increases as follows :

                                 

One of the most frequently encountered total cost functions in engineering economy takes the form

                                            

where X is an independent variable in is either zero or a fixed cost and b and c are constants. As shown in Fig 1.3, the increasing cost function is assumed to the linear, the decreasing function is non linear, and their sum, which yields the total cost function, is a polynomial the lowest point of the total cost curve is the minimum cost of the project and corresponds to a value of the independent variable that defines the optimum size or capacity of the project.

Mathematically, the optimum value of the independent variable, Xo, is obtained h’ differentiating the total cost function and setting it equal to zero;

The minimum cost in dollars is then found by substitution X0 in the total cost equation.

A classic application of this model, first observed by Lord Kelvin, is that the economic size of the conductor occurs when the annual investment cost is equal to the annual cost of lost energy this is known as Kelvin’s Law.

 

Q. 25. Explain value analysis.

 

Ans. Value analysis is a technique of cost reduction. It involves study of cost in relation to product design. Before making or buying a product/material/equipment, a study of its value

(function) is made. The purpose is to reduce the cost of the prescribed function without sacrificing the required standard of performance. First, the required function is determined and then the best way to perform it at a lower cost is found.

Value analysis is a systematic application of established techniques to identify the functions of a product or component and to provide the desired functions at the lowest total cost. It is a creative approach to eliminating unnecessary costs which add neither to quality for to the appearance of the product. Value analysis is a study and structured process consisting of (a) functional analysis to define the reason for the existence of a product or its components. (b) creativity analysis for generating new and better alternatives, and (c) measurement for evaluating the value of present and future concepts.

Value analysis is closely related to value engineering, though the two are not identical. Value analysis refers to the work done in this regard by purchasing department whereas work which engineers do in this area is called value engineering. Value analysis requires close co-operation between purchase, engineering, production and costing departments and also that of the vendor’s expertise. It is a team job requiring lot of discussion and deliberations. Any new idea is fully investigated to analyse its feasibilities. The product is considered from all angles and all possible alternatives are explored.

The main questions asked under value analysis include

(1) Is the cost vis-a-vis the usefulness of the product reasonable?

(2) Can lower cost design work as well?

(3) Can another less costly item fil1he need?

(4) Will less expensive material do the job?

(5) Does the function contribute value?

(6) Are the features reasonable?

(7) Can scrap be reduced by changing the design or material?

(8) Is there an alternative product/process design which is less expensive?

Some examples of savings through value analysis are as follows

(a) Use of new and cheaper materials in place of traditional materials.

(b) Discarding tailored products where standard components can do the job.

(c) Dispensing product features not required by customers, e.g., doing away with headphone in a radio set.

 

Q. 26. What is ABC analysis?

 

Ans. The main objective of inventory control is to minimise the carrying costs of inventory. Very often all items of inventory are not equally important. A small number of important items account for the dominant part of total inventory investment while a large number of items constitute so small a value that they have little effect on the results. Therefore, much greater control is required on the first type of items than on the others. The stock of items which are expensive has to be kept at the minimum. Items which are voluminous but relatively inexpensive are kept in large stocks as frequent ordering of such items is costlier. The two types of items are categorised as “A” and “C”, the items falling midway between these are put into “B” category. Maximum attention is focused on items in category A as they constitute the most important constitute an intermediate position. Items in category C have negligible importance and therefore, minimum attention is paid to them. This selective inventory control is called ABC analysis.

 

Q. 27. What the required essentials of an effective cost reduction ?

 

Ans. The foregoing obstacles can be overcome through an effective cost reduction programme. The following points should be incorporated in a sound programme of cost reduction.

(1) The co-operation of every employee should be obtained by identifying his self- interest with the company’s interests. A deep sense of involvement among employees should be generated and their suggestions should be sought. The role and responsibility of each should be made clear to him. The cooperation of trade unions should also be obtained.

(2) Resistance to change should be minimised by disseminating full details about the proposed changes and by convincing the employees that the changes are ultimately in their own interest. The likely benefits of cost reduction should be explained to inspire confidence among employees. -

(3) Cost reduction should be a continuing function rather than ad hoc exercise.

(4) Efforts should be concentrated in the area where the potential savings are likely to be the maximum.

(5) There should be periodic meetings with the employees to review the progress made towards cost reduction.

(6) A proper organisational set-up should be created for cost reduction. Cost reduction requires healthy self-criticism and coordination at all levels of management. The organisation would depend upon the size and nature of business. In a large company, a high powered committee consisting of responsible executives from various functional areas may be constituted. The committee fixes priorities, formulates programmes and monitors implementation. In small firms it may not be possible to have full time staff for cost reduction and the responsibility may be given to the cost accountant or to an outside consultant.

(7) Top management must lend full support and assistance to cost reduction. Sustained interest and commitment of management is essential.

(8) An efficient system of data collection and reporting should be created.

(9) There must be an atmosphere of close co-operation and mutual trust. Well-thought- out procedures should be developed for regular evaluation of the programme.

(10) The programme should not be confined to reduction in expenditures and wastes. It must also seek to eliminate uneconomic activities, to improve productivity, etc. A cost reduction programme must keep in view the cost inter-relationship between different products, processes and departments. For example, reduction in labour cost may result in higher machine cost. Cost reduction is not arbitrary cutting, of expenditure and it must be based on careful analysis or study. Cost reduction must contribute to profit improvement. A crash cost reduction programme cannot offer substantial and continuing operating economies in the long run. A well integrated and systematic approach is needed

 

Q. 28. Differentiate fixed and variable cost.

 

Ans. Fixed and Variable Costs -

Fixed costs do not vary in proportion to the quantity of output. General administrative expenses, taxes and insurance, rent building and equipment depreciation, and utilities are examples of cost items that are usually invariant with production volume and hence are termed fixed costs. Such costs may be fixed only over a given range of production; they may then change and be fixed for another range of production. Variable costs vary in proportion to quantity of output. These costs are usually for direct material and direct labor.

Many cost items have both fixed and variable components. For example, a plant maintenance department may have a constant number of maintenance personnel at fixed salaries over a wide range of production output. However, the amount of maintenance work done and replacement parts required on equipment may vary in proportion to production to production output.

 

Q. 29. Explain the concept of ratio-analysis.

 

Ans. Ratio is a statistical yardstick which provides a measure of relationship between two figures: This relationship may be expressed as a rate (costs per rupees of sales), as a percentage (cost of sales as a percentage of sales) or as a quotient/proportion (sales as number of times the inventory). Ratios are widely used in the analysis of operations as the use of absolute figures might be misleading. Relative figures are better for control purposes.

Under ratio analysis, a desirable ratio is determined beforehand. The actual ratio is compared with this predetermined ratio and wherever necessary corrective action is taken. It is possible to compute several types of ratios relating to liquidity, profitability, solvency, etc. But for cost reduction, only operating cost ratios are used. Some of the commonly used ratios for cost comparisons are given below

(a) Net profits/Sales

(b) Sales/Direct labour

(c) Sales/Inventory

(d) Sales/Over heads

(e) Sales/ Direct materials

(f) Production cost/Cost of sales

(g) Selling costs/Cost of sales

(h) Administration cost/Cost of sales

(i) Material costs/Cost of production

(j) Labour costs/Cost of production

(k) Overheads/Cost of production.

Ratios serve as standards of comparison for evaluation of performance. They can be used for cost reduction in two ways

(1) A business may compare its ratios with the ratios of other firms in the industry. Sometimes comparison is made with standard ratios in the industry which are average of the results of all firms in the industry.

(2) A firm’s ratios for the period under scrutiny may be compared with similar ratios of previous periods. Such comparison over time would reveal the areas that need attention.

 

Q. 30. Define Cost reduction.

 

Ans. Cost reduction implies deliberate savings in the cost of production and distribution through the elimination of water and in efficiency. It involves reduction in unit costs by improvements in product design an4 related techniques or practises. According to the Institute of Costs and Works Accountants of London cost reduction is the achievement of real and permanent reduction in the unit costs of good manufactured or services rendered without impairing their suitability for the use intended

 

Q. 31. Differentiate Cost reduction and cost control.

 

Ans. Both cost reduction and cost control are tools of increasing profitability. But the two differ in terms of their procedures and approach. The differences between them are given below:

1. Nature. Cost reduction is a corrective function and it may operate along with a cost control programme. On .the other hand cost control is preventive function as costs are optimised before they are incurred.

2. Emphasis. Cost control lays emphasis on present and past behaviour of costs. The stress in cost reduction is on present and future cost.

3. Standards. Cost control involves setting cost standards, analysing variances from the standards and taking corrective actions. Cost reduction is not concerned with standards. It involves obtained potential savings. Cost control attempts to keep actual costs in line with established cost

standards. Cost reduction challenges these standards form with. It tries to reduce costs on a continuous basis. In a cost control programme, standards act as targets but cost reduction questions the standard itself.

4. Application. Cost reduction can be applied to each and every area of business. It has universal application and does not depend on standards. But cost control is limited to areas where standards can be set. It has limited application to items for which standards exists.

5. Aim. Cost control seeks to achieve lowest possible cost under given conditions. On the other hand, cost reduction recognises that no condition is permanent. It calls for change in conditions if they result in lower cost.

6. Content. Cost control represents efforts involved in attaining targets or standards. Cost reduction symbolises achievement in reducing cost.

7. Continuity. Cost reduction programme can be finished. Cost control, on the other hand, is an ongoing or never-ending process

Cost control, as generally practised, takes the dynamic approach to many of the factors affecting costs which planned cost reduction demands. For example, under cost control, the tendency is to accept standards once they are fixed and leave them unchallenged over a period In cost reduction on the other hand, standards must be constantly challenged for improvement. There is no phase of business which is example from cost reduction Products, processes, procedures and personnel are subject to continuous scrutiny to see where and how they cart be reduced in cost.

 

Q 32 Name the techniques of cost reduction

 

Ans. The main techniques used for cast reduction are as follows:

1. Cost Accounting and Analyses

2. Ratio Analysis

3 Break-even Analysis

4. Methods Study

5. Management Audit

6. Value Analysis.

 

Q. 33. Describe Break-even analysis.

 

Ans. Break-even analysis or cost volume Profit analysis is the study of interrelationship among a firm’s sales, costs and operating profit an various levels of output. It reveals the effect of fixed costs, variable costs, prices, sales mix, etc. on the profitability of a firm. In break-even analysis, break-even point and break-even chart are of particular significance.

Break-Even Point. Break-even analysis involves the determination of the volume at which the firm’s costs and revenues will be equal. The break-even point may be defined as that level of sales at which total revenues and total costs are equal, i.e., the level of operations at which the firm breaks even. It is also known as “no-profit-no-loss point”. If a firm produces and sells more than the level given by the break-even point, it makes profits. In case it produces and sells less than that suggested by the break-even point, the firm would incur losses. Management can change the break-even point by changing fixed cost, variable cost and selling price.

There are two approaches used for representing a break-even point: (a) the algebraic method, and (b) the graphical method.

Algebraic Determination of Break-even Point

Algebraically, break-even point can be determined either in terms of physical units or in terms of sales value or as a percentage of the total capacity. The former method is convenient for a single product firm while the latter is more suitable for a multi-product firm.

 

Q. 34. ABC Motors purchase 9,000 motor spare parts for its annual requirements, ordering one-month usage at a time. Each spare part costs Rs. 20. The ordering cost per order is Rs. 15 and the carrying charges are 15% of the average inventory per year. You have been asked to suggest a more economical purchasing policy for the company. What advice would you offer and how much would it save the company per year?

 

Solution.

Present Policy :

                     

 

Q. 35. You are given the following information about two competing companies during the year 2008.

                            

A friend of your’s seeks your advice as to which company’s shares he should purchase. Assuming that the capital invested is equal for the two companies, state the advice that you will give.

 

Ans. The prospects of shareholders in these two companies; must be compared in terms of P.V. ratio. Fixed costs, BEP sales and Margin of Safety as at present. The company which commands more merits that the other must be chosen for investment.

 

From this table, we ascertain that though theP.V. ratio is higher in the case of company ‘13’, all other factors—namely I3EP sales, Margin of safety and the incidence of fixed costs are in favour of company ‘A’. (Despite higher P.V. ratio company B has to go a long way to reach the BEP and also to suffer from a narrow margin of safety. This is solely because of a huge amount of fixed expences)

Company ‘A’ is preferable.

 

Q. 36. XYZ Company Ltd., is manufacturing a uniform product. At present, the company incurs the expenses as follows:

Variable cost per unit Rs. 6.

Fixed expenses for one year Rs. 35,000

Consider the price range of substitutes and of similar goods, produced by other concerns, the company has fixed the selling price at Rs. 10 per unit. Management considers that Rs 30,000 as profit will be a fair return on investment for the year. Assuming that the fixed costs, remain constant for the next trading period, find out the volume of sales required to earn the desired profit.

 

Solution:

 

Q. 37. XYZ Company Ltd., produces a uniform product, ‘X’. Out of competition, it is forced to reduce the price of its product. The Company plans to announce a price reduction of 10% to capture more market. The accountnant gives the relative data as follows:

Though, price is reduced the company wants to maintain the present volume of profit through increased sales. Therefore, it wants to know the required volume of sales. Assume that fixed expenses will remain constant at the new level of activity.

Since the price is going to be reduced, we have to find out the P.V. Ratio for the same volume of sales (20,000 units) but at the reduced price rate; then only the require volume of sales can be calculated.

 

Q. 38. ABC Ltd. Data is given below:

        

You are required to calculate the Break Even point and Margin of safety and also to provide information to the management regarding the possible effects of the following contingencies (each to be considered separately.)

1. Fixed costs increase by 10%

2. Variable costs decrease by 20%

3. Selling price is increased by 20%.

Suitable charts may be presented showing the effect of these change in profit factors

Workings:

Note : Since fixed costs have increased by Rs. 6,000 profit will be reduced to some extent: (because other factors are remaining constant). This can be verified as follows:

Sales = Rs.2,00,000

Note : Since fixed costs have increased the Break-even sales will also be increased, in the chart shown below, the total costs line and the sales line intersect at a point indicating break-even sales of Rs. 1,32,000. Thus break-even sales is increased by Rs.12,000 (i.e., to absorb the additional fixed costs of Rs. 6,000. The company has to effect the sales for Rs. 12,000 more and react the B.E.P.) This can be checked as follows:

i.e., an increase of Rs. 12,000.

At the present level of sales, the break-even sales have increased. Therefore, the remaining margin(Margin of Safety) will be decreased i.e.,

 

These effect can be depicted by the following chart :

                    

(2) Effects of a decrease in variable cost by 20%

When the variable costs decrease, the contribution ratio (P.V. Ratio) increases, there by reducing the break even sales volume and increasing profits and Margin of Safety. That is, the company reaches the break even point sooner than before, and after that stage profit is earned at an accelerated rate in our illustration 20% decrease in variable cost will give following results.

(a)Increase in Profits

               

(b) Decrease in the break-even point

Since a reduced variable cost leaves more contribution, fixed costs are absorbed sooner. So the break-even volume is reduced as follows:

       

(c) Increase m Margin of Safety

\At the same volume of sales, fixed costs are recovered sooner. Therefore, Margin of Safety will be increased as follows :

                     

Thus, a decrease in margin cost by 20% results in an additional contribution of Rs. 20,000 with the consequences of:

(a) Rs. 20,000 increase in profit

(b) Rs. 20,000 increase in Margin of Safety and

(c) Rs. 20,000 decrease in B.E.P. Sales

These are well depicted in the next given chart:

               

(3) Effects in increase in the selling price by 20%

Other factors remaining constant, the price of the products increased by 20% (i.e.  from Rs. 10 to Rs. 12). Therefore, obviously profit will be increased as follows:

           

These results (a, h, and c) are illustrated in the following chart:

                      

 

Q. 39. From the given data, Calculate Break-even point sales.

          

 

Q. 40. From the following data, calculate B.E.P. and P.V.R.

            

 

 

Q. 41. From the following, calculate the Cash Break-even Point.

 

Q. 42. Sales are Rs 150,000 producing a profit of Rs. 4,000 in period 1. Sales are Rs. 1,90,000 producing a profit of Rs. 12,000 in period II. Determine the BEP.

Difference in profit = Rs. 8,000

Difference in sales = Rs. 40,000

Since the change in the sale must have led to the change in the profit, P/V ratio:

Rs. 8,000 x 100 = 20%

Rs. 40,000

At BEP, Profit = Nil

If Rs. 20 is to be reduced from profit, sales must be reduced by Rs. 100. To reduce profit by Rs. 4,000 reduction in sale:

(100 x Rs. 4,000/20 = 20,000

B.E.P. = Rs. 1,30,000 (i.e. sales producing profit of Rs. 4,000 less reduction in sales of Rs, 20,000 to wipe out the profit)

Alternatively

Total contribution on Rs. 1,50,000 @ 20%                 Rs. 30,000

Profit                                                         Rs. 4,000

Fixed expenses                                         Rs. 26,000

                  

 

Q. 43. From the following figures ascertain the break-even sales.

    

  

Total cost equals sales, hence, there is neither profit nor loss.

 

Q44. The sales of company are @ Rs. 200 per unit         Rs. 20,00,000

Variable cost                                                         Rs. 12,00,000

Fixed cost                                                         Rs. 6,00,000

The capacity of the Factory                                 15,000 units

Determine the BEP. How much profit is the company making?

 

 (* Total number of units is 10,000 since sale at Rs. 200 per units is Rs. 20,00,000. Therefore variable cost per unit is Rs. 12,00,000 ÷ 10,000 = Rs. 120)

Profit being earned

At break-even point, the contribution is just equal to fixed costs, any sales above the Bill’ also provide the profit contribution. But as fixed costs are all met already such contributions become completely profit. The sales above BEP are known as margin of safety 1 he contribution from margin of safety sales is profit As P/V ratio is (contnbution/ sales) x 100 and as profit is the contribution from these sales above BEP (i.e.), margin of safety, the following formula also is true.

                           

Margin of Safety

Thus, in the above illustration margin of safety sales = 2,500 units x Rs. 200 = 5,00,000.

Profit = Rs. 2,00,000

                                  

 

Q. 45. From the following information calculate:

(1) P.V. ratio                                 (ii) Break even point

(iii) Margin of Safety

Total sales                                 Rs. 3,60,000

Fixed cost                                 Rs. 1,00,000

Selling price                                 Rs. 100/Unit

Variable cost (per unit) = Rs. 50

(iv) if the selling price is reduced to Rs. 90 by how much is the margin of safety reduced ?

 

Q. 1. Name the Different Methods of Capital Budgeting.

 

Ans. There are several methods by which the profitability of an investment can be measured. They can be classified as

1. Non-discounted cash flow methods.

2. Discounted cash flow methods.

Non-discounted cash flow methods are following

(i) Average rate of return (ARR) or accounting rate of return.

(ii) Average additional return on investment.

(iii) Payback method.

Discounted cash flow methods are following

(i) Net present value method.

(ii) Internal rate of return method.

(iii) Profitability index.

 

Q. 2. Describe Average Rate of Return (ARR).

 

Ans. The average rate of return or the accounting rate of return represents the ratio of the average annual net income to the ratio of the average net income to the average or original investment over the life of the project expressed as a percentage This is not based upon cash flow but upon the estimated accounting income It can be calculated by using the following formula :

          

Merits of Average Rate of Return:

1. It is simple and easy to understand and makes use of readily available accounting information.

2. It takes into account the total earnings from the project during its entire economic life.

3. It gives due weight to the profitability of the project.

4. It gives reliable results when it is intended to measure the current performance of a firm.

Demerits of Average Rate of Return:

1. It ignores time value of the money which is very crucial in business decisions, it gives equal weight to current and distinct decisions.

2. It is based upon accounting income rather than cash flows.

3. it doesn’t take into consideration the impact of various factors on the overall profits of the firms.

4. It does not determine the fair rate of return on investments.

Average Additional Return on Investment

This method expresses the ratio of the average additional profits after taxes to the average investment in the projects. Average rate of additional profit is calculated as follows:

            

where,

(i) The average annual profits represents the difference between the average annual profits resulting from the sale of output produced by the new machine and those produced by the old machine which is proposed to be replaced.

(ii) The average investment is taken as half of the depreciable cost of the proposed plant plus residual value, if any.

 

Q. 3. Describe Net Present Value Method.

 

Ans. Net Present Value Method : The net present value method, also known as excess present value or net gain method, in a discounted cash flow technique in which all cash inflows are discounted to their present value using the required rate of return and from the summation the initial cost of the project is substracted. If the net present value of the expected cash inflows is positive, i.e. it exceeds the initial cost of the project, the project should be accepted, if negative it should be rejected.

Mathematically the method can be expressed as follows :

                                          

Where,

r — represents values of the net cash inflows

C, C2, ,,, C — represents stream of net cash inflows after tax but before depreciation r is the required rate of return 1,2, n are number of years.

Merits of Net Present Value Method

1. It recognises the time value of money.

2. It considers all cash flows over the entire life of the project.

3. It aims at maximizing the welfare of the owners of the organization.

Demerits

1. It is difficult to use.

2. It assumes that discount rate which is usually the firms cost of capital is known.

3. It may not give satisfactory answer when projects involving different amount of investment are compared.

 

Q. 4. Describe Internal Rate of Return.

 

Ans. This method is popularly known as time adjusted rate of return or discounted rate of return. The internal rate of return is discount or interest rate that equates the present value of expected future receipts to the initial cost of investment. This set the maximum rate of interest which could be paid for the capital employed over the life of an investment without any loss on the project. The internal rate of return can be symbolically expressed as follows :

                          

Where,

A1, A2, A represent expected future receipts at lime 1, 2 and so on.

r is internal rate of return which has to be interpolated A0 is initial outlay at time 0.

According to IRR method, a project is accepted if its internal rate of return is higher than or equal to the minimum required rate of return (i.e. r k) and the project is rejected if r > k.

 

Q. 5. Explain the Merits of Internal Rate of Return Method.

 

Ans. 1. Like the NPV method, it considers the time value of money.

2. It considers cash flow over the entire life.

3. it has psychological appeal to the users.

Demerits :

1. It is difficult to understand and use in practice.

2. It may yield results inconsistent with NPV method if the projects differ in their expected lives or cash outlays.

3. It may not give unique answers in all situations.

 

Q. 6. What is Profitability Index?

 

Ans. Profitability Index:

The profitability index, also known as benefit. Cost ratio of a capital expenditure is the present value of expected net cash over the initial cost. The index expresses the percentage relationship between cash inflows and the amount of the investment is shown below:

                          

The higher the profitability index, the more desirable is the investment. The project is accepted when B/C ratio is greater than one and rejected when it is less than one.

For any project having no alternative projects, the net present value method and profitability index give the same accept reject signals. But, if we have to select an investment opportunity from competing proposals, the net present value method should be preferred because it gives us

the expected contribution of the project in absolute terms. In such cases, the profitability index is not recommended because it expresses only relative profitability,

 

Q. 7. Define Present Worth Method.

 

Ans. Present Worth Method on

The prsent worth of Investment Alternative j can be represented as:

The present worth method is the most popular measure of merit available. When it is used in next chapters to compare alternatives, the one having the greatest present worth is the alternative recommended.

 

Q. 8. Describe Payback Method.

 

Ans. Also known ‘pay off’‘pay out’ recoupment period method, this method gives the number of years in which the total investment in a particular pays back itself. This is based on the assumption that every capital expenditure pays itself back over a number of years. Investment generates income and when the total earnings (or net cash inflows) from such investment equals the total outlay (cash out flows), that period is the pay back period of the capital investment. An investment project is accepted if it pays back within a specified or predetermined period of time. While there is comparison between two or more projects, the one with the shortest pay back will be acceptable because of smallest risk of obsolescence and greater liquidity.

The pay back period is calculated by dividing the cost of fixed as set or the value which is sought to be recovered by the relevant annual cash inflows by saving or additional earnings after tax but before depreciation per year. The formula is

                           

This formula is applicable if the savings or net cash inflow occurs at an even rate. But if the annual cash inflows are uneven, then the calculation of pay back takes a cumulative form. Suppose the cost of the investment i.e. Rs. 50,000 and the annual savings in cost of additional earnings are Rs. 10,000 in the first year Rs. 14,000 in second year. Rs. 16,000 in the third year and Rs. 20,000 in the fourth year so on. In the first three years Rs. 40,000

(Rs. 10,000 + Rs. 16,000) of the original investment will be recovered and the balance of the investment Rs. 10,000 (Rs. 50,000 — Rs. 40,000) will be recovered in the first half of the fourth year. Thus pay backperiod in this case will be 3.5 years.

Merits of Payback Period:

1. It is easy to understand, compute and communicate to others.

2. It gives importance to the speedy recovery of the initial investment in capital assets.

3. It is an adequate measure for firms with very profitable internal investment opportunities, whose source of funds and limited by internal low availability and external high costs.

Demerits:

1. It treats each asset individually in isolation with the others which is improper.

2. This method is delicate and rigid. A slight change in the division of labour will affect the earnings and consequently decisions.

3. It overplays the importance of liquidity as a goal of capital expenditure decisions.

4. It restricts capital wastage and economic life by restricting considerations on the project gross earnings.

5. It ignores the earnings beyond the pay back period while in many cases are substantial.

 

Q. 9. What are the Different Methods of Measuring Investment Worth Decisions.

 

Ans. 1. Present worth method (PW).

2. Annual worth method (AW).

3. Future worth method (FW).

4. Interest rate of return method (IRR).

5. External rate of return method (ERR).

6. Saving / investment ratio method (SIR).

7. Payback period method (PBP).

8. Capitalized worth method (CW).

Each of the above measures of merit of measures of effectiveness has been used

numerous times in evaluating real-worth investments. They may be described briefly as

follows

1. Present worth method coverts all cash flows to a single sum equivalent at time

zero using i = MARR.

2. Annual worth method converts all cash flows to an equivalent uniform annual series of cash flows over the planning horizon using i = MARR.

3. Future worth method converts all cash flows to a single sum equivalent at the end of the planning horizon using i MARR.

4. Interest rate of return method determine the interest rate that yield a future worth (or present worth of annual worth) of zero, implicitly assuming reinvestment of recovered funds at the IRR.

5. External rate of return method determines the interest rate that yield a future worth of zero, explicitly assuming reinvestment of recovered funds at the MARR.

6. Savings / investment ratio method determines the ratio, of the present worth of savings to the present worth of the investment.

7. Payback period method determines how long at a zero interest rate it will take to recover the initial investment.

8. Capitalized worth method determines the single sum at time zero that is equivalent at i = MARR to a cash flow pattern that continues indefinitely.

With the exception of the payback period and capitalized worth method all of the measures listed are equivalent method of measuring investment worth, Hence, applying each of the first six measure of merit to the same investment alternative will yield the same recommendation.

Since the present worth, annual worth, future worth, interest rate of return, external rate of return, and savings / investment ratio method are equivalent, why more than one of the method exist ? The primary reason for having different, but equivalent measures of effectiveness for economic alternatives appears to be the difference in preferences among managers. Some individuals (and firms) prefer to express the net economic worth of an investment alternative as a single sum amount; hence, either the present worth method or the future worth method is used. Other individuals prefer to see the net economic worth spread out uniformly over the planning horizon, so the annual worth method is used by them. Yet another group of individuals wishes to express the net economic worth as a rate of percentage; consequently, one of the rate-of- return methods would be preferred. Finally, some individuals prefer to see the net economic worth expressed as a percentage of the investment required; the savings/ investment ratio is one method of providing such information.

Since many organizations have established procedures for performing economic analyses, it seems worthwhile to consider in this chapter and more popular measures of merit that are used. Among those listed, it appears that the present worth, rate-of-return, and payback period method sare currently the most popular However, the worth method U.S. Postal Service and a number of governmental agencies have ‘adopted some version of the savings / investment (or benefit / cost) ratio method for purposes of comparing investment alternatives; hence it is popular in some sectors.

 

Q. 10. Explain the Relationship of Economy Studies and Accounting.

 

Ans. Engineering economy studies are made for the purpose of determining whether capital should be invested in a ‘project or whether it should be utilized in a different manner than it presently is being used. Economy studies always deal, at least for one of the alternatives being considered with something that currently is not being done.’ Economy’ studies thus provide information upon which investment and managerial decisions about future operations can be based. Thus the engineering economic analyst be termed an alternatives fortune-teller.

After a decision to invest capital in a project has been made and capital has been invested, those who supply and manage the capital want to know the financial results. Therefore, procedures are established so that financial events relating to the investment can be recorded and summarized and financial productivity determined . At the same time, though the use of proper financial information, controls can be established and utilized to aid in guiding the venture toward the desired financial goals. General accounting arid cost accounting are the procedures that provide

these necessary services in a business organization. Accounting studies thus are concerned with past a and current financial-events. Thus the accountant might be termed a financial historian.

The accountant is some what like a data recorder in a scientific experiment. Such a recorder reads the pertinent gauges and meters and records all the essential data during t course of an experiment. Form these it is possible to determine the result of the experiment and to prepare a report. Similarly, the accountant records all significant financial events connected with an investment, and from these data he or she can determine what the results have been and can prepare financial reports. Just as an engineering can, by taking cognizance of what is happening during the course of an experiment and making suitable corrections, gain more information and better, results from the experiment, managers must also relay on accounting reports to make corrective decisions in order to improve the current and future financial performance of the business. Accounting is generally a source,of much of the past financial data that are needed in making estimates of future fiTiancial conditions. Accounting is also a prime source of data for post-mortem, or after-the-face, analysis that might be made regarding, how well an investment project has turned out compared to the results that were predicted in the economy study.

A proper understanding of the origins and meaning of accounting data is needed in order to properly use or not use that data in making projections into the future and in comparing actual versus predicted results.

 

Q. 11. What is the Criteria of Project Evaluation ?

 

Ans. 1. Carefully estimate expected future cash flows.

2. Select a discount rate consistent with the risk of those future cash flows.

3. Compute a “base-case” NPV.

4. Identify risks and uncertainties. Run a sensitivity analysis. Identify “key value drivers”.

Identify break-even assumptions.

Estimate scenario values.

Bound the range of value.

5 Identify qualitative issues

Flexibility

Quality

Know-how

Learning

6. Final Decision.

 

Q. 12 What is Modified IRR (MIRM)?

 

Ans. The MIRR is similar to the IRR, but is theoretically superior in that it overcomes

two weaknesses of the IRR. The MIRR correctly assumes reinvestment at the project’s

cost of capital and avoids the problem of multiple IRRs. However, please note that the

MIRR is not used as widely as the IRR in practice.

There are three basic steps of the MIRR:

(1) Estimate all cash flows in IRR.

(2) Calculate the future value of all cash inflows at the last year of the project’s life.

(3) Determine the discount rate that causes the future value of all cash inflows determined in step 2, to be equal to the firm’s investment at time zero. This discount rate is know as the MIRR.

 

Q. 13. NPV as IRR Methods.

 

Ans. Key differences between the most popular methods, the NPV ( NeT Present Value) method and IRR (Internal Rate of Return) method, include :

• NPV is calculated in terms of currency while IRR is expressed in terms of the percentage return a firm expects the capital project to return.

• Academic evidence suggests that the NPV method is preferred over other methods since it calculates additional wealth and the IRR method does not;

• The IRR method can be used to evaluate projects where there are changing cash flows (e.g., an initial outflow followed by in-flows and a later out-flow, such as may be required in the case of land reclamation by a mining firm);

• However, the IRR method does not have one significant advantage — managers tend to better understand the concept of returns stated in percentage and find it easy to compare to the required cost of capital; and finally,

• While both the NPV method and the IRR method are both DCE models and can even reach similar conclusions about a single project, the use of the IRR method can lead to the belief that a smaller project with a shorter life and earlier cash inflows, is preferable to a large project that will generate more cash.

• Applying NPV using different discount rates will result in, different recommendations. The IRR method always gives the same recommendation.

 

Q. 14. When are the NPV and IRR Reliable?

 

Ans. Generally speaking, you can use and relay on the both the NPV and IRR if two conditions are met. First, if projects are compared using the NPV, a discount rate that fairly reflects the risk of each project should be chosen. There is no problem if two projects are discounted at two different rates because one project is riskier than the other. Remember that the result of the NPV is as reliable as the discount rate is chosen.

If the discount rate is unrealistic, the decision to accept or reject the project is baseless and unreliable. Second, if the IRR method is used, the project must not be accepted only because its the IRR is very high. Management must ask whether such an impressive IRR is possible to maintain. In other words, management should look past records, and existing and future business, to see whether an opportunit9 to reinvest cash flow at such a high IRR really exists. If the firm is convinced that such an IRR is realistic, the project is acceptable. Otherwise, the project must be reevaluated by the NPV method, using a more realistic discount rate.

 

Q. 15. Define Marginal Utility.

 

Ans. It is defined as the change in the total utility resulting form a one unit change in the consumption of commodity per unit of time.

When man is purchasing a commodity, he is consciously or weighting in his mind the price he has to pay and the utility of each unit he buys.

He will continue purchasing till ‘the marginal utility equals the price. Here is a fundamental proposition of the theory of customer demand. A consumer will exchange money for units of any commodity A. Up to the point where the last (marginal) unit of A which he buys has for him a marginal significance in terms of money just equal to its money price.

 

Q. 16. What is Time Value of Money?

 

Ans. The idea that money available at the present time is worth more than the same amount in the future, due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. Also referred to as “present discounted value”.

Everyone knows that money deposited in a savings account will earn interest. Because of this universal fact, we would prefer to receive money today rather than the same amount in the future.

For example, assuming a 5% interest rate, $ 100 invested today will be worth $ 105 in one year ($ 100 multiplied by 1.05). Conversely, $ 100 received one year from now is only worth $ 95.24 today ($ 100 divided by 1.05), assuming a 5% interest rate.

 

Q. 17. What are the Problems with using Internal Rate of Return (IRR).

 

Ans. As an investment decision tool, the calculated IRR should not be used to rate mutually exclusive projects, but only to decide, whether a single project is worth investing in.

NPV vs discount rate comparison for two mutually exclusive projects. Project ‘A’ has a higher NPV (for certain discount rates), even though its IRR (= x-axis intercept) is lower than for project ‘B’ (click to enlarge).

In cases where one project has a higher initial investment than a second mutually exclusive project, the first project may have a lower IRR (expected return), but a higher NPV (increase in shareholders’s wealth) and should thus be accepted over the second project (assuming no capital constraints).

IRR makes no assumptions about the reinvestment of the positive cash flow from a project. As a result, IRR should not be used to compare projects of different duration and with a different overall pattern of cash flows. Modified internal Rate of Return (MIRR) provides a better indication of a project’s efficiency in contributing to the firm’s discounted cash flow.

In the case of positive cash flows followed by negative ones (+ + -—) the IRR is a rate for lending / owing money, so the lowest IRR is best. This applies for example when a customer makes a deposit before a specific machine is built.

In a series of cash flows like (— 10, 21, — 11), one initially invests money, so a high rate of return is best, but then receives more than one possesses, so then one owes money, so how a low rate of return is best. In this case, it is not even clear whether a high or a low IRR is better. There may even be multiple IRRs for a single project, like the example 0% as well as 10%. Examples of this type of project are strip mines and nuclear power plants, where there is usually a large cash outflow at the end of the project.

In general, the IRR can be calculated by solving a polynomial equation Sturn’s Theorem can be used to determine if that equation has a unique solution. In general, the IRR equation cannot be solved analytically but only interactively. A potential shortcoming of the IRR method is that it does not take into account that the intermediate positive cash flows possibly come at inconvenient moments. Their reinvestment may have a lower yield. In that case it may be more realistic to compute the IRR of the project including the reinvestments until e.g. the end date of the project. Accordingly, a measure called Modified Internal Rate of Return (MIRR) is used, which has an assumed reinvestment rate, usually equal to the project’s cost of capital.

Despite a strong academic preference for NPV, surveys indicate that executives prefer IRR over NPV. Apparently, managers find it easier to compute investment of different sizes in terms of percentage rates of return than by dollars of NPV. However, NPV remains the “more accurate” reflection of value to the business. IRR, as a measure of investment efficiency may give better insights in capital constrained situations.

 

Q. 18. Net Present Value— NPV.

 

Ans. The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.

NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield.

Formula :

                   

NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive It should be accepted However if NP’ is negative the product should probably be rejected because ash flows will also be negative.

For example, if a retail clothing business wants to purchase an existing store, it would first estimate the future cash flows that store would generate, and then discount those cash flows into one lump-sum present value amount say $565,000. If the owner of the store was willing to sell his business for less than $565,000, the purchasing company would likely accept the offer as it presents a positive NPV investment. Conversely, if the owner would not sell for less than $565,000 the purchaser would not buy the store, as the investment would present a negative NP\ at the time and would, therefore, reduce the overall value of the clothing company

 

Q.19. Describe Management Buy-out.

 

Ans. Essentially, a management buy-out (MBO) is the purchase of a business by its existing management, usually in cooperation with outside financiers. Buy-outs vary in size, scope and complexity but the key feature is that the managers acquire an equity interest in their business. Sometimes a controlling stake, for a relatively modest personal investment. The existing owners normally sell most or usually all of their investment to the managers and their co-investors. Often the group of managers involved establish a new holding company, which then effectively purchases the shares of the target company.

The typical steps in a management buy-out process are :

Agreement in the management team as to who will become the managing director.

Appointment of financial consultants;

Assessment of suitability of the buy-out;

Approval to purchase the MBO;

Evaluation of the seller’s asking price.

Formulation of business plan (s).

Selection of equity advisors and obtaining written offers;

Selection of legal consultants;

Selection of lead investor;

Negotiation of best equity deal;

Negotiation of purchase of the business;

Selection of auditors.

Implementation of a due diligence test;

Obtaining finance and other equity investment.

 

Q. 20. What are the Sources and Uses of Cash?

 

Ans. The major sources of cash are 45 under:

Cash from Operation

Issue of Equity Share Capital foi cash

Issue of Preference Share Capital for cash

Raising long term loans for cash

Sale of Investments

Sale of Fixed Assets

Premium on Issue of Shares / Debentures etc.

The major uses of cash are as under:

Redemption of Preference Share Capital for cash

Redemption of Debentures / Repayment of Long-term Loans

Purchase of Investment.

Purchase of Fixed Assets

Premium on Redemption of Preference Share / Debentures

Dividend Paid

Taxes Paid etc.

 

Q. 21. Differentiate between a Cash Flow Statement and a Funds Flow Statement.

 

Ans. Difference between Funds Flow Statement and Cash Flow Statement:

         

 

Q. 22. What do you mean by Cash Flow Statement?

 

Ans. A Cash Flow Statement is similar to the Funds Flow Statement, but while preparing funds flow statement all the current assets and current liabilities are taken into consideration. But in a cash flow statement only those sources of funds are taken which provide cash and only the uses of cash are taken into consideration, even liquid asset like Debtors and Bills Receivables are ignored.

A Cash Flow Statement is a statement, which summarises the resources of cash available to finance the activities of a business enterprise and the uses for which such resources have been used during a particular period of time. Any transaction, which increases the amount of cash, is a source of cash and any transaction, which decreases the amount of cash, is an application of cash.

 

Q. 23. What are the Objectives of Cash Flow Statement?

 

Ans. A Cash Flow Statement provides very useful help to financial management of a business enterprise. It summarises the sources from where the cash may be obtained and the specific uses to which the cash may be applied during a particular period of time.

A Cash Flow Statement has the following uses Helpful in short-term financial planning. Cash Flow Statement provides useful information to a business enterprise to make decision for its short-term financial planning.

Helpful in preparing Cash Budget. A Cash Budget is an estimate of cash receipts and disbursement for a future period of time. Cash Flow Statement provides help to the management to prepare Cash Budget. A comparison of cash budget and cash flow statement reveals the extent to which the sources of the business were generated and used as per the plans of the business.

Helps to understand liquidity. Liquidity means ability of a business enterprise to pay off its liabilities when due. Cash Flow Statement helps to know about the sources where from the cash will be available to pay off the liabilities.

Prediction of sickness. With the help of preparing cash from operation a business enterprise may come to know about cash losses in operation. It helps to predict this type of sickness.

Dividend decisions Dividend is paid within 42 days, when company declares it. Cash Flow Statement helps the management to know about the sources of cash to pay off dividend.

 

Q. 24. What is meant by Accounting Ratios ? How are they useful?

 

Ans. A relationship between various accounting figures, which are connected with each other, expressed in mathematical terms, is called accounting ratios.

According to Kennedy and Macmillan, “The relationship of one item to another expressed in simple mathematical form is known as ratio.”

Robert Anthony defines a ratio as, “simply one number expressed in terms of another.”

Accounting ratios are very useful as they briefly summarise the result of detailed and complicated computations. Absolute figures are useful but they do not convey much meaning. In terms of accounting ratios, comparison of these related figures makes them meaningful. For example, profit shown by two business concern is Rs. 50,000 and Rs. 1,00,000. It is difficult to say which business concern is more efficient unless figures of capital investment or sales are also available.

Analysis and interpretation of various accounting ratio gives a better understanding of the financial condition and performance of a business cocern.

 

Q. 25. What do you mean by Ratio Analysis ? What are the advantages of such analysis ? Also point out the limitations of Ratio Analysis.

 

Ans. Ratio analysis is one of the techniques of financial analysis to evaluate the financial condition and performance of a business concern. Simply, ratio means the comparison of one figure to other relevant figure or figures.

According to Myers, “Ratio analysis of financial statements is a study of relationship among various financial factors in a business as disclosed by a single set of statements and a study of trend of these factors as shown in a series of statements.”

Advantages and Uses of Ratio Analysis:

There are various groups of people who are interested in analysis of financial position of a company. They use the ratio analysis to workout a particular financial characteristic of the company in which they are interested. Ratio analysis helps the various groups in the following manner:

1. To workout the profitability. According ratio help to measure the profitability of the business by calculating the various profitability ratios. It helps the management to know about the earning capacity of the business concern. In this way, profitability ratios show the actual performance of the business.

 

2. To workout the solvency. With the help of solvency ratios, solvency of the company can be measured. These ratios show the relationship between the liabilities and assets. In case external liabilities are more than that of the assets of the company, it shows the unsound position of the business. In this case the business has to make it possible to repay its loans.

3. Helpful in analysis of financial statement. Ratio analysis help the outsiders just like creditors, shareholders, debenture-holders, bankers to know about the profitability and ability of the company to pay them interest and dividend etc.

4. Helpful in comparative analysis of the performance. With the help of ratio analysis a company may have comparative study of its performance to the previous years. In this way company comes to know about its weak point and be able to improve them.

5. To simplify the accounting information. Accounting ratios are very useful as they briefly summarise the result of detailed and complicated computations.

6. To workout the operating efficiency. Ratio analysis helps to workout the operating efficiency of the company with the help of various turnover ratios. All turnover ratios are worked out to evaluate the performance of the business in utilising the resources.

7. To workout short-term financial position. Ratio analysis helps to workout the short-term financial position of the company with the help of liquidity ratios. In case short-term financial position is not healthy efforts are made to improve it.

8. Helpful for forecasting purposes. Accounting ratios indicate the trend of the business. The trend is useful for estimating future. With the help of previous years ratios, estimates for future can be made. In this way these ratios provide the basis for preparing budgets and also determine future line of action.

Limitations of Ratio Analysis

In spite of many advantages, there are certain limitations of the ratio analysis techniques and they should be kept in mind while using them in interpreting financial statements. The following are the main limitations of accounting ratios:

1. Limited Comparability. Different firms apply different accounting policies. Therefore the ratio of one firm can not always be compared with the ratio of other firm. Some firms may value the closing stock on LIFO basis while some other firms may value of FIFO basis. Similarly there may be difference in providing depreciation of fixed assets or certain of provision for doubtful debts etc.

2. False Results. Accounting ratios are based on data drawn from accounting records. In case that data is correct, then only the ratios will be correct. For example, valuation of stock is based on very high price, the profits of the concern will be inflated and it will indicate a wrong financial position. The data therefore must be absolutely correct.

3. Effect of Price Level Changes. Price level changes often make the comparison of figures difficult over a period of time. Changes in price affects the cost of production, sales and also the value of assets. Therefore, it is necessary to make proper adjustment for price-level changes before any comparison.

4. Qualitative factors are ignored. Ratio analysis is a technique of quantitative analysis and thus, ignores qualitative factors, which may be important in decision making. For example, average collection period may be equal to standard credit period, but some debtors may be in the list of doubtful debts, which is not disclosed by ratio analysis.

5. Effect of window-dressing. In order to cover up their bad financial position some companies resort to window dressing. They may record the accounting data according to the convenience to show the financial position of the company in a better way.

6. Costly Technique. Ratio analysis is a costly technique and can be used by big business houses. Small business units are not able to afford it.

7. Misleading Results. In the absence of absolute data, the result may be misleading. For example, the gross profit of two firms is 25%. Whereas the profit earned by one is just Rs. 5,000 and sales are Rs. 20,000 and profit earned by the other one is Rs. 10,00,000 and sales are Rs. 40,00,000. Even the profitability of the two firms is same but the magnitude of their business is quite different.

8. Absence of standard university accepted terminology. There are no standard ratios, which are universally accepted for comparison purposes. As such, the significance of ratio analysis technique is reduced.

 

Q. 26. Classify the Various Profitability Ratios. Also explain the Meaning, Method of calculation and objective of these ratios.

 

Ans. Classification of various profitability ratios:

(a) Gross Profit Ratio

(b) Net Profit Ratio

(c) Operating Net Profit Ratio

(d) Operating Ratio

(e) Return on Investment or Return on Capital Employed

(f) Return on Equity

(g) Earning Per Share

Meaning, Objective and Method of Calculation

1. Gross Profit Ratio. Gross Profit Ratio shows the relationship between Gross Profit of the concern and its Net Sales. Gross Profit Ratio can be calculated in the following manner:

   

Objective and Significance. Gross Profit Ratio provides guidelines to the concern whether it is earning sufficient profit to cover administration and marketing expenses and is able to cover its fixed expenses. The gross profit ratio of current year is compared to previous years ratios or it is compared with the ratios of the other concerns. The minor change in the ratio from year to year may be ignored but in case there is big change, it must he investigated. This investigation will be helpful to know about any departure from the standard mark-up and would indicate losses on account of theft, damage, bad stock system, had sales policies and other such reasons.

However it is desirable that this ratio must be high and steady because any fall in it would put the management in difficulty in the realisation of fixed expenses of the business.

1. Net Profit Ratio. Net Profit Ratio shows the relationship between Net Profile of the concern and its Net Sales. Net Profit Ratio can be calculated in the following manner:

                                                    

Where Net Profit — Gross Profit — Selling and Distribution Expenses — Office and Administration Expenses — Financial Expenses - Non Operating Expenses + Non Operating Incomes.

And Net Sales = Total Sales — Sales Return

Objective and Significance. In order to work out overall efficiency of the concern Net Profit ratio is calculated. This ratio is helpful to determine the operational ability of the cocern. While comparing the ratio to previous years. Ratios, the increment shows the efficiency of the concern.

(c) Operating Profit Ratio. Operating Profit means profit earned by the concern from its business operation and not from the other sources. While calculating the net profit of the concern all incomes either they are not part of the business operation like rent from tenants, interest on investment etc. are added and all non-operating expenses are deducted. So, while calculating

operating profit these all are ignored and the concern comes to know about its business income from its business operations.

Operating Profit Ratio shows the relationship between Operating Profit and Net Sales. Operating Profit Ratio can be calculated in the following manner :

                           

Where Operating Profit = Gross Profit + Operating Expenses

Or Operating Profit = Net Profit + Non-Operating Expenses — Non Operating Income And Net Sales = Total Sales — Sales Return

Objective and Significance. Operating Profit Ratio indicates the earning capacity of the concern on the basis of its business operations and not from earning from the other sources. It shows whether the business is able to stand in the market or not.

 

(d) Operating Ratio. Operating Ratio indicates the operating cost to the net sales of the business. Operating cost means cost of goods sold plus Operating Expenses.

                                   

where Operating Cost Cost of goods sold + Operating Expenses

Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses – Closing Stock

Operating Expenses Selling and Distribution Expenses, Office and Administration

Expenses, Repair and Maintenance,

Objective and Significance. Operating Ratio is calculated in order to calculate the operating efficiency of the cocnern. As this ratio indicates about the percentage of operating cost to the net sales, so it is better for a concern to have

this ratio in less percentage. The less percentage of cost means higher margin to earn profit.

(e) Return on Investment or Return on Capital Employed. This ratio shows the relationship between the profit earned before interest and tax and the capital employed to earn such profit.

 

Where Capital Employed Share Capital (Equity + Preference) + Reserves and Surplus + Long-term Loans — Fictious Assets

Or

Capital Employed = Fixed Assets + Current Assets —. Current Liabilities

Objective and Significance. Return on capital employed measures the profit, which a firm earns on investing a unit of capital. The profit being the net result of all operations, the return on capital expresses all efficiencies and inefficiencies of a business. This ratio has a great importance to the shareholders and investors and also to management. To shareholders it indicates how much their capital is earning and to the management as to how efficiently it has been working. This ratio influences the market price of the shares. The higher the ratio, the better it is.

(f) Return on Equity. Return on equity is also known as return on shareholders investment. The ratio establishes relationship between profit available to equity shareholders with equity shareholders funds.

   

Where Equity Shareholders Fudns = Equity Share Captial + Reserves and Surplus

Fictions Assets.

Objective and Significance. Return on Equity judges the profitability from the paint of view of equity shareholders. This ratio has great interest to equity shareholders. The return on equity measures the profitability of equity funds invested in the firm. The Investors favour the company with higher ROE.

(g) Earning Per Share. Earning per share is calculated by dividing the net profit (after interest, tax and preference dividend) by the number of equity shares.

                    

Objective and Significance. Earning per share helps in determining the market price of the equity share of the company. It also helps to know whether the company is able to use its equity share

capital effectively with compare to other companies. It also tells about the capacity of the company to pay dividends to its equity shareholders.

 

Q. 27. A used car dealer tells you that if you put $1.500 down on a particular car your payments will be $190.93 per month for 4 years at a nominal interest rate of 18%.Assuming monthly compounding, what is the present prince you are paying for the car?

 

Solution :

A = 190.93 per period; i = 18/12 0.15, n 4 x 12 = 48

P = 1,500 + 190.93 (P/A i% 48)

   = $8.000.

 

Q. 28. A Homeowner has just bought a house with a 20 years, 9%, $ 70,000 mortgage on which he is paying $629.81 per month.

(a) If He sells the house after ten years, how much must he give the bank to completely pay off the mortgae at the time of the 120th payment?

(b) How much of the first $379.33 payment on the loan is interest?

 

Solution:

(a) P = 629.81 + 679.81 (P/A%, 120) = $49.718.46

(b) $70,000 x 0.0075 = $525

 

Q. 29. Assume you borrowed $50,000 at an interest rate of 1 percent per month, to be repaid in uniform monthly payments for 30 years. In the 163rd payment, how much of it would be interest, and how much of it would be principal?

 

Solution. In general, the interest paid on a loan at time it is determined by multiplying the effective interest rate times the outstanding principal just after the preceding payment at time t-1.

To find the interest paid at time t = 163. (call it 1163) first find the outstanding principal at time t = 162 (call it P162).

This can be done by computing the future worth at time t = 162 of the amount borrowed minus the future worth of 162 payments. Alternatively, compute the present worth, at time 162 of the 198 payments remaining.

The uniform payments are 50,000 (A/P, 1%, 360) = $514.31. Thus

P162 = 50,000 (F/P. .01, 162) — 514.31 (F/A, 1%, 162) = 514.31 (P/A. 1% 198) = $44,259.78

The interest is 1163 = 0.01(44,259.78) = $442.59 and the principal in the payment is $ 514.31 — 442.59 = $71.72.

 

Q. 30. A person borrows $5,000 at an interest rate of 18%, compounded monthly.

Monthly payments of $180.76 are agreed upon.

(a) What is the length of the loan?

(Hint: It is an integral number of years.)

(b) What is the total amount that would be required at the end of the sixth month to payoff the entire loan balance ?

 

Solution:

 

Q. 31. What is the relationship between a future value and a present value?

 

Ans. A future value equals a present value plus the interest that can be earned by having ownership of the money; it is the amount that the present value will grow to over some stated period of time. Conversely, a present value equals the future value minus the interest that comes from ownership of the money; it is today’s value of a future amount to be received at some specified time in the future.

 

Q. 32. York company needs a new milling machine. The company is considering two machines. Machine A and machine B. Machine A costs $15,000 and will reduce operating cost by $5M00 per year. Machine B costs only $12,000 but will also reduce operating costs by $5,000 per year.

 

Required :

Which machine should be purchased according to payback method ?

       

According to payback calculations, York company should purchase machine B, since it has a shorter payback period than machine A.

 

Q. 33. An engineer is considering buying a life insurance policy for his family, lie currently owes about $77,500 in different loans, and would like his family to have an annual available income of $35,000 indefinitely (that is, the annual interest should amount to $35,000 so that the original capital does not decrease).

(a) He feels he can safely assume that the family will be able to get a 4% interest rate on that capital. How much life insurance should be buy?

(b) If he now assumes that family can get a 7% interest rate, calculate again how much life insurance should he buy.

 

Solution. (a) If they get 4% interest rate :

               

 

Q. 34. The winner of a sweepstrakes prize is given the choice of one million dollars or the guaranteed amount of $80,000 a year for 20 years. if the value of money is taken at a 5% interest rate which choice is better for the winner ?

 

Solution.

Alternative 1: P = $1,000,000

Alternative 2 P = 80,000 KP/A, 5%, 20) 81 K (7.469) $ 996.960

Choose alternative I : take $1,000,000 now

 

Q. 35. Your company has been presented with an opportunity to invest in a project. The facts on the project are presented below :

   

 

Q. 36. A person is planning a new business. The initial outlay and cash flow pattern for the new business are as listed below. The expected life of the business is five years. Find the rate of return for the new business.

         

 

Solution.

Initial investment = Rs. 1,00,000

Annual equal revenue = Rs. 30,000

Life = 5 years

The cash flow diagram for this situation is illustrated in Fig. below

                   

                       

Therefore, the rate of return for the new business is 15.252%.

 

Q. 37. A company is trying to diversify its business in a new product line. The life of the project is 10 years with no salvage value at the end of its life. The initial outlay of the project is Rs. 20,00,000. The annual net profit is Rs. 3,50,000. Find the rate of return for the new business.

 

Solution.

Life of the product line (n) 10 years

Initial outlay Rs. 20,00,000

Annual net profit = Rs. 3,50,000

Scrap value after 10 years=0

The cash flow diagram for this situation is shown in Fig. 7.4.

                    

Therefore, the rate of return of the new product line is 11.74%.

 

Q. 38. A company is planning to expand its present business activity, It has two alternatives for the expansion programme and the corresponding cash flows are tabulated below. Each alternative has a life of five years and a negligible salvage value. The minimum attractive rate of return for the company is 12%. Suggest the best alternative to the company.

 

        

Solution:

         Alternative 1 

Initial outlay = Rs. 5,00,000

Annual revenue = Rs. 1,70,000

Life of alternative 1 = 5 years

The cash flow diagram for alternative 1 is illustrated in Fig. 7.9.

Alternative 2

Initial outlay= Rs. 8,00,000

Annual revenue = Rs. 2,70,000

Life = 2 years

The cash flow diagram for alternative 2 is depicted in Fig. below.

Since the rate of return of alternative 1 is greater than that of the alternative 2. Select alternative 1.

 

Q. 39. For the cash flow diagram shown in Fig. 3.1., compute the Rate of Return. The amount are in rupees.

            

 

Solution. For the positive cash flows of the problem,

At = Rs. 150, G = Rs. 150

The annual equivalent of the positive cash flows of the uniform gradient series is given by

                         

The formula for the present worth of the whole diagram

                    

   

Therefore, the rate of return for the cash flow diagram is :

                 

 

Q. 40. What is the TRR if the following Cash Flow Stream?

                          

 

Ans.

CF= Cash Flow

r = Internal rate of return

                         

After calculation the IRR is 1.3.

 

Q. 41. A company is considering a capital investment for which the initial outlay is $20,000. Net annual cash inflows (before taxes) are predicted to be $4,000 for 10 years. Straight-line depreciation is to be used, with an estimated salvage value of zero. Ignoring income taxes. Compute the items listed below.

1. Payback period

2. Accounting rate of return (ARR)

3. Net present value (NPV), assuming a cost of capital (before tax) of 12 percent

4. Internal rate of return (IRR).

 

Solution.

  

 

Q. 42. Consider an investment which has the following cash flows:

                                    

1. Compute the following:

(a) Payback period

(b) Net present value (NPV) at 14 percent cost of capital

(c) Internal rate of return (IRR)

2. Based on (b) and (c) in part 1, make a decision.

 

Solution : 1. (a) Payback period:

        

Now we are sure that the true IRR is somewhere between 14 percent and 30 percent.

Using interpolation:

 

Q. 43. Data realting to three investments are given below:

          

Rank the projects according to their attractiveness using the following:

(a) Payback period.

(b) IRR

(c) NPV at 14 percent cost of capital

 

Solution:

(a) Payback period:

(b) IRR ranking:

         

(c) NPV at 14% :

 

 

Q. 44. XYZ Corporation is considering five different investment opportunities. The company’s cost of capital is 12 percent. Data on these opportunities under consideration are given below:

        

1. Rank these fives projects in descending order of preference, according to

—NPV

— IRR

— Profitability index

2. Which ranking would you prefer?

3. Based on your answer in part 2, which projects would you select if $55,000 is the limit to be spent?

 

Solution:

2. The profitability index approach is generally considered the most dependable method of ranking projects competing for limiting funds. It is an index of relative attractiveness, measured in terms of how much you get out for each dollar invested.

3. Based on the answer in part 2. project (a) and (b) should be selected, where combined NPV would be $7,255 ($2,930 + 54,325) with the limited budget of $.55000.

 

Q. 45. After-tax cash flows for two mutually exclusive projects (with economic lives of four years each) are:

                         

The company’s cost of capital s 10 percent. Compute the. following:

1. The internal rate of return for each project.

2 1 hi net present value for each project

3. Which project should be selected ? Why?

 

Solution.

1. Project X:

         

Project Y:

            

1. ProjectX:

          

         

Q.1. Define the Flowing Terms.

 

Ans. Cost Accounting: Cost accounting is the process of classifying and recording of expenditure in a systematic manner, with the intention of ascertaining the cost of a cost centre for the controlling of the cost.

Financial Accounting: Financial Accounting is the process of the systematic recording of the business transactions in the various books of accounts maintained by the organization, based on generally accepted accounting principles.

Financial Statements: This includes a profitability statement showing the result of operations of the business activity and the balance sheet indicates the financial status of the statement at a given point of time in terms of its assets and liabilities.

Management Accounting : Management Accounting is the process of analysis and interpretation of financial data collected with the help of financial accounting and cost accounting with the ultimate intention of drawing certain conclusions thereof in order to assist the management in the process of decision-making.

 

Q. 2. What are the factors affecting Selling Price/Profit.

 

Ans. Seeling price of a product

=Total cost + Profit

— Once the total cost is known the selling price can be found after deciding the profit.

— Profit and hence the selling price will be determined on the basis of a number of factors, some of which are given below:

(1) Whether your’s is a monopolisitc product. More profit can be charged on such a product.

(2) How many competitor products are there in the market. High competition means reduced profit.

(3) Quality or performance-wise how does your product compare with other competitor products in the market. More profit can be taken on a quality product.

(4) What will be approximate sales volume of your product. If sales volume is high, even less profit per piece may be charged.

(5) Sales price of other competitor products in the market can help deciding sales price for your product.

(6)Are you prepared to sell your product on credit? If so, a higher profit rate can be charged.

(7) Whether the competitor products generally remain scarce in the market. It so, your product stands a better chance to sell even at a higher profit rate.

(8) Sales price or profit can also be decided on the criterion that how much efficient and convincing your sales team is.

 

Q. 3. Various Techniques of Costing

 

Ans. The techniques of costing are not the alternatives to the methods of costing.

These are the different ways of analysing and presenting costs for the purposes of controlling costs and making managerial decisions irrespective of the method of costing being used. Some of the popular techniques of costing are as follows:

     

 

Q. 4. Explain the Various Methods of Costing.

 

Ans. The methods of costing refer to the techniques and processes employed in the ascertainment of costs. Different industries follow different methods of costing because of the differences in the nature of their work. Basically there are two methods of costing — Job Costing for job industries and Process Costing for mass production industries. All other methods are variations of either job costing or process costing.

 

Q. 5. Differentiate Cost Ascertainment and Cost Estimation.

 

Ans.

 

 

Q. 6. What is Inventory Management?

 

Ans. Inventory Management refers to the maintenance of the goods from the point procurement of Raw Material to Final production and reaching the same to end user. This is done by the management by adopting effective management techniques such as LId, FIFI, HIFI, EOQ.

Advantages of Inventory Management:

1 Storage space can be minimized. 2 Transportation cost can be minimized. 3 Wastage can be minimized. 4. Cost of holding and maintenance can be avoided. 5. It facilitates to use Working capital for other heads.

 

Q. 7. What factors should be considered before the installation of Costing System?

 

Ans.

 

 

 

     

 

Q. 8. What are the requirements of Effective. Budgetary Control?

 

Ans. Requirements of Effective Budgetary Control

The requirements of a good system of budgtary control are discussed below?

(i) Quick Reporting. A good system of budgetary control requires the establishment of such procedures which will provide reports on the performance of various operations. The reports should reach the persons concerned with the implementation of budgets without any delay so that quick actions may be taken whenever necessary.

(ii) Detailed Organisation Structure. There should be detailed organisation structure with precisely defined authorities responsibilities and lines of communication so that every body in the organisation understand the significance of objectives.       

(iii) Frequent Comparison. There should be frequent comparison between budget estimates and operation results. Alford and Beauty are of the opinion that careful analysis of both operating results and budget estimates is the essence of budgetary control.

(iv) Definite Plan. There should be comprehensive planning in the enterprise. All the operations should be planned in clear terms. The administration of the budgets should also be properly planned. In must be predetermined who is to be held responsible for the implementation of budegets.

(v) Participation. The purpose of budgetary control is to achieve coordination of various functions of the business. Therefore, it is essential that participation upon the lowest level in the interprise is ensured to make the people committed to the budgets. Everybody should understand his role in achieving the budgeted targets.

(vi) Flexibility. Budgets should not be rigid, but flexible enough to allow alternation or remodelling in the light of any change in circumstances. Budgets are a means to an end. They must be flexible to achieve the desired objectives. A good system of budgetary control allows sufficient flexibility to the persons concerned with the implementation of the budgets.

(vii) Support of Top Management. A good system of budgetary control is supported by the top management. Top management should take the preparation of budgets and their implementation seriously in order to achieve the objectives of the enterprise.

 

Q. 9. Explain the difference between Financial Accounting and Cost Accounting.

 

Ans. Accounting information is vital for showing the Indebtedness of a business.

—Accounting uses words and figures to communicate the transactions which have been entered into.

—Both financial accounting and cost accounting are concerned with the recording of transactions so as to enable to calculate profit (or loss) for one or more transactions and to show the assets and liabilities owned or incurred by the business.

—Financial accounting is concerned with the external transactions and, therefore, record all dealings with the outside world. Any purchase or sale of goods and services, and fixed assets, whether for cash or on credit are covered.

— Cost accounting, on the other hand, deals with the internal affairs of a business. It attempts to show the results of the operations carried out and emphasizes throughout the measurement and achievement of efficiency.

Fixed assets, workers and materials are brought together with the object of transforming the resources employed and thereby obtaining a saleable product or service. Generally special

attention is paid to the control aspect of the quantities and series of the resources necessary

for the transformation.

 

Q. 10. Describe the benefits of Budgetary Control.

 

Ans. Benefits of Budgetary Control.

The benefits of budgetary control are us under:

1. Budgets provide standards against which actual performance can be measured

This helps in taking corrective action which is an important part of controlling.

2. Budgets are an important tool of coordination. In preparation of various budgets, knowledge, skill and experience of many executives are combined and the business plans are reduced to concrete numerical terms. This leads to proper coordination of the efforts of various departments of the enterprise.

3. Budgeting helps in reducing unproductive operations by minimising wastage of resources. Budgets are prepared after considerable thought and are directed towards certains aim and objectives.

4. Budgeting makes financial planning and control easy. The ultimate effect of budgeting is the thorough examination and scrutiny of the financial aspect of the business enterprise. This helps in optimum use of financial resources of the enterprise.

5. Budgeting is an important device for fixing the responsibility of various positions. The persons occupying various positions can be made of understand their responsibilities with the help of budgets.

 

Q.11. What are the limitations of Budgetary control?

 

Ans. Limitations of Budgetary Control:

Sometimes, the significance of budgetary control is not properly understood Either too much or too little emphasis is given to the budgetary control. This leads to certain dangers which are discussed below:

1. Too much emphasis on budgeting may bring about rigidity in the enterprise. It may deprive the managers of the flexibility they require in managing their departments.

2. Budgeted estimates are generally based on the price level at a particular period of time. These estimates may become useless when there is either inflation or depression in the market.

3 Sometimes, budgets are treated as an end the themselves. Some people may be extra-cautious to function within the boundaries of budget figures. rather than achieving the enterprise objective.

4. A budget which allows liberal expenditure may be used to hide inefficiency. For instance, a department may be unefficient even though its expenses are within the budget limits.

5. Budgetary control in itself does not prevent deviations from appearing. It neither ensures satisfactory results not control automatically. A deliberate effort has to be made in this direction.

 

Q. 12. Describe Budgetary Control.

 

Ans. Budgetary control is a system of management control in which all operations are planned ahead and the actual results compared with the planned ones. According to H.J. Wheldon, “By budgetary control, every item of actual cost is so controlled by vigilant supervision as to make if conform as nearly as possible to the predetermined standards. It has resulted in the elimination of waste and excess cost in every suitable instance where budgetary control has been properly instituted.

The Institute of Cost and Management Accountants, England has defined budgetary control as “The establishment of budgets relating to the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objectives of that policy or to provide a firm basis for its revision.” The definition gives the following essential elements :

(1) Establishment of budgets for each function and section of the enterprise.

(2) Continuous comparison of the actual performance with that of the budget so as to know the variations from budget and fixing the responsibility for failure to achieve the desired results as given in the budget.

(3) Taking suitable remedial measures to achieve the desired objective if there is a variation of the actual performance from the budgeted performance.

(4) Revision of budgets in the light of changed circumstances.

 

Q. 13 What are the Objectives of Budgetary Control ?

 

Ans. Objectives of Budgetary Control.

Budgetary control is aimed at the following objectives:

1. Planning. Budgets are the plans to be pursued during the definite period of time to attain objectives. Budgetary control will force the management at all levels to plan various activities

well in advance. Budgets are generally drawn on the basis of forecasts made about market forces, supply conditions and consumer's preferences. This helps in making and revising business policies.

2. Control. Budgetary control is an important instrument of managerial control in any enterprise. It helps in comparing the performance of various individuals and departments with the predetermined standards laid down in various budgets. It reports the significant variations from the budgets to the top management. Since separate budgets are prepared for each department. This helps in keeping down the cost of operation of different departments. It becomes easier to determine the weak points and the sources of waste of time, money and resources.

3. Coordination. Budgetary control involves the preparation of a master budget which helps in bringing effective coordination among different departments of a business enterprise. It forces the executives to make plans as a group. Delays involved in red tapism and procedural wrangles are set aside by discussing matters with one another.

4. Increase in Efficiency. Budgetary control lays down the standards of production, sales, costs and overheads taking into consideration various internal and external factors:

This compels and stimulates every department to attain maximum efficiency over the use of men, machines, materials, methods and money.

5. Financial Planning. Budgets are generally expressed in financial terms. They provide the estimates of expenditures and revenues. This helps the management to make plans about the working capital. Cash budget is also useful to convince the financial institutions that their loans will be paid back in time.

 

Q. 14. Role of Computers in Cost Estimating.

 

Ans. Computers play an integral role in cost estimation because estimating often involves comple x mathematical calculations and requires advanced mathematical techniques. For example, to undertake a parametric analysis (a process used to estimate costs per unit based on square footage or other specific requirements of a project), cost estimators use a computer database containing information on the costs and conditions of many other similar projects. Although computers cannot be used for the entire estimating process, they can relieve estimators of much of the drudgery associated with routine, repetitive, and time-consuming calculations New and improved cost estimating software has lead to more efficient computations, leaving estimators greater time to visit and analyze projects.

 

Q. 15. Types of Labour Cost.

 

Ans. Labour is an essential factor of production. It is a human resource and participates in the process of production. Labour cost is a significant element of cost of a product or service. For costing purposes. Labour may be classified into two broad categories (a) Direct Labour and, (b) Indirect Labour.

(a) Direct Labour

 

(b) Indirect Labour

 

Q.16. Differentiate Product and Period Costs.

 

Ans. -

 

Q. 17. What are the components of Total Cost?

 

Ans.

         

 

Q. 18. Define Cost Control. What are the characteristics of Cost Control?

 

Ans.

      

 

Q. 19. Describe Cost Accounting.

 

Ans. Cost accounting is an approach to evaluating the overall costs that are associated with conducting business. Generally based on standard accounting practices, cost accounting js one of the tools that managers utilize to determine what type and how much expenses is involved with maintaining the current business model. At the same time, the principles of cost accounting can also be utilized to project changes to these costs in the event that specific changes are implemented. When it comes to measuring how wisely company resources are being utilized, cost accounting helps to provide the data relevant to the current situation. By identifying production costs and further defining the cost of production by three or more successive business cycles, it is possible to note any trends that indicate a rise in production costs without any appreciable changes for increase in production of goods and services. By using this approach, it is possible to identify the reason for the change, the take steps to

 

contain the situation before bottom line profits are impacted to a greater degree. Product development and marketing strategies are also informed by the utilization of cost accounting. In terms of product development, it is possible to determine if a new product can be produced at a reasonable price, considering the cost of raw materials and the labour and equipment necessary to product a finished product. At the same time, marketing protocols can make use of cost accounting to project if the product will sell enough units to make production a viable option.

Cost accounting is helpful in making a number of business decisions. By weighing the actual costs versus the anticipated benefit, cost accounting can help a company to avoid launching a product with no real market, prevent the purchase of unnecessary goods and services, or alter the current operational model in a manner that will decrease efficiency. Whether utilized to evaluate the status of a department within the company or as a tool to project the feasibility of opening new locations or closing older ones, cost accounting can provide important data that may impact the final decision.

 

Q. 20. Describe the Work of Cost Estimates in Detail.

 

Ans. Accurately forecasting the scope, cost and duration of future projects is vital to the survival of any business. Cost estimators develop the cost information that business owners or managers need to make a bid for a contract or to decide on the profitability of a proposed new product or project. They also determine which endeavors are making a profit. Regardless of the industry in which they work, estimators compile and analyze data on all of the factors that can influence costs, such as materials, labor, location, duration of the project, and special machinery

requirements, including computer hardware and software. Job duties vary widely depending on the type and size of the project.

The methods for estimating costs can differ greatly by industry. On a construction project, for example, the estimating process begins with the decision to submit a bid. After reviewing various preliminary drawings and specifications, the estimator visits the site of the proposed project. The estimator needs to gather information on access to the site; the availability of electricity, water, and other services; and surface topography and drainage. The estimator usually records this information in a signed that is included in the final project estimate.

After the site visit, the estimator determines the quantity of materials and labour the firm will need to furnish. This process, called the quantity survey or “takeoff”, involves completing standard estimating forms, filling in dimensions, numbers of units, and other information. A cost estimator working for a general contractor, for example, estimates the costs of all of the items that the contractor must provide. Although subcontractors estimate their costs as part of their own bidding process, the general contractor’s cost estimator often analyzes bids mad by subcontractors. Also during the takeoff process, the estimator must make decisions concerning equipment needs, the sequence of operations, the size of the crew required and physical constraints at the site. Allowances for wasted materials, inclement weather, shipping delays, and other factors that may increase costs also must be incorporated in the estimate.

After completing the quantity surveys, the estimator prepares a cost summary for the entire project, including the costs of labour, equipment, materials, subcontracts, overhead, taxes, insurances, mark up and any other costs that may affect the project. The chief estimator then prepares the bid proposal for submission to the owner.

Construction cost estimators also may be employed by the project’s architect or owner to estimate costs or to track actual costs relative to bid specifications as the project develops. Estimators often specialize in large construction companies employing more than estimator. For example, one may estimate only electrical work and another may concentrate on excavation, concrete, and forms.

In manufacturing and other firms, cost estimators usually are assigned to the engineering, cost, or pricing department. The estimator’s goal is to accurately estimate the costs associated with making products. The job may begin when management requests an estimate of the costs associated with a major redesign of an existing product or the development of a new product or production process. When estimating the cost of developing a new product, for example, the estimator works with engineers, first reviewing blueprints or conceptual drawings to determine the machining operations, tools, gauges, and materials that would be required. The estimator then prepares a parts list and determines whether it is more efficient to produce or to purchase the parts. To do this, the estimator asks for price information from potential suppliers. The next step is to determine the cost of manufacturing each component of the product. Some high technology products requires a considerable amount of computer programming during the design phase. The cost of software development is one of the fastest growing and most difficult activities to estimate. As a result, some cost estimators now specialize in estimating only computer software development and related costs.

The cost estimator then prepares time-phase charts and learning curves. Time-phase charts indicate the time required for tool design and fabrication, tool “debugging” — finding and correcting all problems—manufacturing of parts, assembly, and testing. Learning curves graphically represents the rate at which the performance of workers producing parts for the new product improves with practice. These curves are commonly called “cost reduction” curves, because many problems—such as engineering changes, rework, shortages of parts, and lack of operator skills-diminish as the number of units produced increases, resulting in lower unit costs. Using all of this information, the estimator then calculates the standard labour hours necessary to produce a specified number of units. Standard labour hours are then converted to dollar values, to which are added factors for waste, overhead, and profit to yield the unit cost in dollars. The estimator then compares the cost of purchasing parts with the firm’s estimated cost of manufacturing them to determine which is cheaper.

 

Q. 21. What are the essentials of a good Costing System?

 

Ans.

 

Q. 22. Define Cost Unit.

 

Ans A cost unit is unit of product, service or times of which costs are ascertained or expressed It is basically a unit of measurement like number [per 1000 bricks], weight (per tonne of coal), length (per meter of cloth), volume (per litre of petrol), time (per kilowatt hours of power), area (per square foot of construction) Its selection depends on the nature and type of industry.

 

Q. 23. Define Semi-variable Cost.

 

Ans. Meaning of Semi-Variable Costs:

Semi-Variable costs are those costs of which one part remains fixed up to a given range and the other part varies with the change in the volume of production but not in the same proportion. For example, an expense may not change if output is up to 50% capacity but may increase by 2% for every 10% increase in output over 50% capacity but up to 70%.

Examples. Telephone expenses of which hire part is fixed and fee for calls is variable, depreciation, delivery can expenses.

 

Q. 24. Differentiate Direct and Indirect Cost.

 

Ans.

 

Q. 25. Explain the various Cost components.

 

Ans. Production Cost. Companies that manufacture a product face an expanded set of accounting issues In addition to the usual accounting matters associated with selling and administrative activities, a manufacturer must deal with accounting concerns related to acquiring raw materials and processing those raw materials into a finished product. Cost accounting for this manufacturing process entails consideration of three key cost components that are necessary to produce finished goods:

(1) Direct materials include the costs of all materials that are an integral part of a finished product and that have a physical presence that is readily traced to that finished product. Examples for a computer maker include the plastic housing of a computer, the face of the monitor screen, the circuit boards within the machine, and so forth. Minor materials such as solder, tiny strands of wire, and the like while important to the production process, are troublesome and not cost effective to trace to individual finished units. The cost of such items  is

termed “indirect materials.” These indirect materials are included with other components of manufacturing overhead, which is discussed below.

(2) Direct labour costs consist of gross wages paid to those who physically and directly work on the goods being produced. For example, wages paid to a welder in a bicycle factory who is actually fabricating the frames of bicycles would be included in direct labour. On the other hand, the wages paid to a welder who is building an assembly line that will be used to produce a new line of bicycles is not direct labour. In general, indirect labour pertains to wages of other factory employees (e.g. maintenance personnel, supervisors, guards, etc.) who do not work directly on a product, Indirect labour is rolled into manufacturing overhead,

(3) Manufacturing overhead includes all costs of manufacturing other than direct materials and direct labour Examples include indirect materials, indirect labour, and factory related depreciation, repair, insurance, maintenance, utilities, property taxes, and so forth. Factory overhead is also known as indirect manufacturing cost, burden, or other synonymous terms. Factory overhead is difficult to trace to specific finished units, but its cost is important and must be allocated to those units. Normally, this allocation is applied to ongoing production based on estimated allocation rates, with subsequent adjustment processes for ever-or-under-applied overhead.

Importantly, nonmanufacturing costs for selling and general/administrative purposes (SG and A) are not part of factory overhead. Selling costs relate to order procurement and fulfillment, and include advertising, commissions, warehousing and shipping. Administrative costs arise from general management of the business, including items like executive salaries, accounting departments, public and human relations, and the like.

By the way, you should know that accountants sometimes use a bit of jargon to describe certain “combinations” of direct materials, direct labour and manufacturing overhead:

Prime Cost = Direct Labour + Direct Material

Conversion Costs = Direct Labour + Manufacturing Overhead

Prime costs are the components that are direct in nature. Conversion costs are the components to change raw materials to finished goods.

 

Q. 26. What are different types of overhead expenses?

 

Ans. Overhead Expenses: 

Overhead expenses are those costs which are incurred by the manufacture but cannot be indentified and charged directly to any order or product.

Overhead expenses include all expenses incurred by the manufacturer on the product except the direct material cost, direct labour cost and direct chargeable expenses.

In most of the manufacturing firms the overhead expanses are more than the direct labour costs.

In some cases it may be 100% of direct labour cost.

In some other cases there may be range from 200% to 300% of direct labour cost.

The overhead expanses includes:

(1) Indirect material expenses

(2) Indirect labour expenses

(3) Other indirect expenses

1. Indirect material expenses:

Indirect materials are those materials which are consumed in the operations and processes in the factory but cannot be identified as a part of a product.

The expenditure incurred on such materials, which do not form a part of the final product but are consumed in the process of conversion of raw materials into the finished products are called indirect material expenses.

The indirect materials expenses include the cost of oil, grease, lubricants, coolants energy papers, cotton Waste etc.

2. Indirect labour expenses:

Indirect labour is one who is not actually employed in the manufacturing of the product but his services are used in some indirect manner.

The indirect labour includes supervisors inspectors, foremen, storekeepers, gatekeepers, repair and maintenance staff, crane drivers, sweepers, sales and administrative staff.

The salaries and wages paid to indirect labour in the entire year is indirect labour expenses and is calculated from the records and distributed on the product/products.

3. Other indirect expenses: -

All other expenses except direct and indirect materials, direct and indirect labour and direct expenses incurred on a product are called “other indirect expenses”.

These includes depreciation of plant and machinery, water and electricity charges, rent on factory building, licence fe insurance premium, stationary, legal expenses, audit fee, etc. These costs are calculated on year basis and charged to the product/products.

 

Q. 27. How will you calculate labour Cost?

 

Ans. 1. Percentage of direct labour cost:

This method is simple and popular. Gives accurate results where production is carried out by labour and wage rates are fairely uniform. Here labour is the main production element.

2. Percentage of direct labour hours:

This method is somewhat similar to the previous method. The difference in the two

methods is that in previous method, direct labour cost was considered whereas in this, basis is the total hours spent by the direct labour and not the wages paid to them.

Here overhead costs are determined by multiplying the operation time by an overhead rate.

In this method,

 

Q. 28. Explain the functions of. an Estimator.

 

Ans. A person who prepares estimates is called an Estimator.

The main functions of an estimator are to collect the information related to:

(i) Design and specification of different products,

(ii) Costs of raw material and machinery,

(iii) Details of tools, jigs and fixtures,

(iv) Manufacturing methods.

(v) Labour rates etc.

After obtaining the above information, the estimator estimates the cost of a product considering the following cost fctors:

(i) Design and development cost of the product.

(ii) Cost of raw material.

(iii) Cost of machinery.

(iv) Cost of tools, jigs fixtures etc.

(v) Labour cost.

(vi) Various overhead charges.

(vii) Transporting costs.

(viii) Profit.

 

Q. 29. What one the required qualification of an Estimator?

 

Ans.

(1) An estimator should be able to read and understand drawings and blueprints well.

(2) How should know about different production machines, processes, operation times etc., for manufacturing products under consideration.

(3) He should know about proper tools, jigs, fixtures, gauges etc.

(4) He must have knowledge about cuffing speed, feed and depth of cut required for different materials, welding and casting parameters required for them etc.

(5) He should posses good knowledge of measuration..

(6) He should be familiar with market price of raw materials required in the manufacture.

(7) He should possess knowledge about the wage rates of workers.

(8) He should have studied Time and Motion study and know about various allowances and standard time for a job.

(9) He should be a qualified technical V person.

(10) He should also know the cost accounting and the official accounting procedures.

 

Q. 30. What are the various factors of Estimating?

 

Ans. Estimating involves the knowledge of following factors for calculating the probable cost of the product:

(1) Design time

(2) Amount of material required

(3) Cost of material required,

(4) Production time required

(5) Labour charges,

(6) Cost of machinery, overheads and other expenses.

(7) Use of previous estimates of comparable parts etc.

(8) Possible future changes in unit prices for materials, direct labour, or expenses

   when the proposed product is ‘manufactured at a future date.

(9) Effect of volume of production on costing rates.

(10) Effect of changes in facilities (e.g. addition of new types of equipment and special buildings etc.) on costing rates.

 

Q. 31. Explain the objectives of estimating.

 

Ans. The main purpose or objectives of estimating are:

(i) to establish the selling price of a product,

(ii) to, ascertain whether a proposed product can be manufactured and marketed profitably,

(iii) to find whether parts of assemblies can be more cheaply fabricated or purchased from outside (make or buy decision),

(iv) to determine the most economical process, tooling or material for making a product,

(v) to establish a standard of performance at the start of a project,

(vi) for feasibility studies on possi be new products,

(vii) to assist in long-term financial planning,

(viii) to prepare production budget,

(ix) to help in responding to tender equines,

(x) to evaluate alternate designs of a product,

(xi) to set a standard estimate of costs.

(xii) To initiate programs of cost reduction that result in economies due to the use of new materials, which produce lower scrap losses and which create savings due to revisions in methods of tooling and processing, and

(xiii) To control actual operating costs by incorporating these estimates into the general

plan of cost accounting.

(xiv) To decided the most economical method of making the product.

(xv) To submit cost estimates with the competent authority for further action.

(xvi) to determine how much must be invested in equipment,

 

Q. 32. What is Costing?

 

Ans. Cost may be defined as the amount of expenditure (actual or notional) incurred on, or attributable to, a given thing. The word cost is rarely used independently; it is always related to a particular thing e.g., number of goods produced etc. .

— Costing (or cost accounting) is frequently looked upon as the operation of calculating the cost of an article (for sale) as a basis to fix its selling price.

— Costing may be defined as a systematic procedure for recording accurately every item of expenditure incurred on the manufacture of a product by different sections of any manufacturing concern.

Expenditures incurred on material, labour, machinery, production, inspection etc, are accurately recorded and summed up to find the factory cost of a product.

 

Q. 33. Explain the difference between Estimating and Costing.

 

Ans. (a) By Estimating is meant, calculating the factory cost of a product before it has been made and by costing, the reckoning of the actual cost of the product after it has been manufactured.

(b) Estimating tells, whether is it profitable to manufacture a product or not. Costing tells about the profitability of the product after a$ manufacture

(c) The process of estimating requires technical skills whereas costing is the job of accountants.

(d) Estimating gives us an idea about the expected or probable cost of a product whereas costing tells us the actual cost of a product.

— Both estimating and costing are extremely irnportant in any factory and cannot possibly be neglected.

 

Q. 34. Define Salvage Value.

 

Ans. Salvage value is the estimated value of an assets at the end of its useful life. This is also known as residual value or scrap value. It is the net cash inflow that occurs when the assets is liquefied at the end of its life. Salvage value can be negative if the residual assets requires special treatment to terminate—for example, used nuclear materials.

Salvage value depends upon various conditions of factors say : — type of industry - type of goods - type of usage - kind of situation or circumstance at that time of evaluation.

 

Q. 35. What is the importance of making Realistic Estimates ?

 

Ans. If the estimated cost of a product proves, later on, to be almost same as the actual cost of that product, it is a realistic estimate.

— The cost estimate may prove to be

(i) a realistic estimate

(ii) an over-estimate or

(iii) an under-estimate

— An over-estimate, later on, proves to be much more than the actual cost of that product.

— An under-estimate, later on, proves to be much lower than the actual cost of that product.

— Both over-estimate and under-estimate may prove to be dangerous and harmful for a concern. Assume, that on the basis of an estimate, the concern has to fill up a tender enquiry. The over-estimate means the concern will quote a higher rate and thus will not get the job or contract. In case of an under-estimate, the concern will get the contract but it will not be able to complete the work within that small quoted amount and hence will suffer heavy losses.

This emphasises the importance of making realistic estimates. Realistic estimates are very essential for the survival and growth of a concern.

 

Q. 36. Explain the objectives arid Advantages of Cost Accounting.

 

Ans. The objectives and advantages of costing or cost accounting are as follows:

(i) To determine the actual cost of each product manufactured.

(ii) To determine the selling price to be quoted to customers.

(iii) To form basis of managerial decisions that have to do with

(a) Make or Buy decision.

(b) Introducing a new product or to drop an existing one.

(c) Selling products in some more territories or to drop some present ones.

(iv) Cost control through accumulation and utilization of cost data.

(v) Budgeting (Planning, Coordination and control through budgets).

(vi) Standard costing.

(vii) Proper matching of costs with revenues.

(viii) Wages and overhead costs.

(ix) Establishing standards for measuring efficiency.

(x) To detect and avoid undesirable expenditures during manufacture.

(xi) To compare estimated costs with the actual ones.

(xii) To know the effect of design or material changes on the actual cost of the product.

(xiii) To determine the discount that can be given to dealers on catalogue price.

(xiv) To calculate the profit.

 

Q. 37. Explain the Estimation Procedure.

 

Ans. One the date and other technical information received from planning department. The estimating department starts to work out on estimates.

The data about the product include.

(1) Specifications and requirement of product.

(2) Type and quantities of materials.

(3) Blue prints of drawings.

(4) Methods and sequence of operations.

(5) Machines to be used.

(6) Scheduled time.

(7) Labour rates, etc.

Estimation procedure is carried out in following steps:

(1) Part list of the product is prepared.

(2) Decision is made about which components should be made in the factory and which components should be procured from the market or outside supplier.

(3) Weight of materials with various allowances is determined.

(4) Cost of material either at market price or at a forecast price is determined.

(5) Price of vendor items of boughtout parts from market is determined.

(6) Labour cost for each operation, including manufacturing, assembly and inspection is determined.

(7) Cost of necessary special tools or equipments is prepared.

(8) By adding labour cost into-the material cost, prime cost is calculated.

(9) Overhead expenses are determined which includes mainly factory overheads and other general overheads.

(10) Package and delivery charges including insurance charges sometimes are determined.

(11) From above data, total cost of product is calculated.

(12) Selling price of product is fixed after adding standard profit into the total cost.

(13) Market price or catalogue price is determined by considering discount allowed to the distributor.

(14) In co-ordination with control department delivery time of product is determined.

(15) In this last step, estimate is entered into the “Estimate form” and submitted to the management and sales department for dispatch of the quotation or tender.

 

Q. 38. A factory is producing 1000 bolts and nuts per hour on a machine. Its material cost is Rs. 375, labour cost Rs. 245 and the direct expense is Rs. 83. The factory on-cost is 15% of the total labour cost and office on-cost is 30% of the total factory cost. If the selling price of each bolt and nut is Rs. 1.30, calculate whether the management is going in loss or gain and by what amount.

 

Solution.

           

          

Hence the management is going in loss by 9 np or Re. 0.09 per bolt and nut.

 

Q. 39. A cast iron foundry employs thirty persons. It consumes material worth Rs. 25,000, pays workers at the rate of Re. 1 per hour and incurs total overhead of Rs. 10,000. In a particular month (25 days), workers had an overtime of 150 hours and were paid at double their normal rate. Find (i) the total cost; and (ii) the man hour rate of overheads. Assume an eight hour working day.

 

Solution.

   

 

Q. 40. Two molders can cast twenty-five gears in a day. Each gear weighs 3 kg and the gear material costs Rs. 12.50 per kg. If overhead expenses are 150% of direct labour cost and molders are paid at the rate of Ks. 70 per day, calculate the cost of producing one gear.

 

Solution.

       

 

Q. 41. An article can be made either by hand or in large quantity by mass production. In the former case, time taken is 3 hours and overheads are 25% of labour cost, while in the later case time taken for 10 pieces is 8 hours but overheads are 150% of labour cost. Material cost is Rs. 1.50 per piece and labour charges are Rs. 0.80 per hour. Compare the total cost in both the case.                                

 

Solution.

       

 

 

 

 

Q. 42. What are the Essentials of a Sound Costing System?

 

Ans. No doubt the requirement of different unit of business are different. But some essentials of sound costing system are listed below

1. The system and should readily give the necessary information without delay.

2. The system should be elastic easy adoption to changing conditions.

3. It should be economic conside ring its utility and uses.

4. It should provide reliable data in a simple and easily understandable form to enable any difference between actual and standard cost to be satisfactorily measured and explained.

5. The system should be such where fullest cooperation of all the department executives is assured.

6. All information and orders including sanctions and approvals should be communicated in writing and specially drafted schedules for accounts and printed forms should be used to suit the circumstances of the business.

 

Q. 43. Explain the use of Accounting costs in Economy Studies.

 

Ans. When we recognise that accounting cost are linked to a definite set of conditions, and they are the results of certain arbitrary decisions concerning overhead cost allocation, it is apparent that they should not be used without modification in cases where the conditions are different that they should not be used without modification in cases where the conditions are different those for which they determined. Economy studies invariably deal with situations that now are not being done. Thus ordinary accounting costs normally cannot be used with-out modification, in economy studies. However, if understand how the accounting costs were determined, we should be able to break them down into their component elements and then, often, we find that cost elements will supply much of the cost information that is needed for an economy study. Thus an understanding of the basic objectives and procedures of cost accounting will enable the economy-study analyst to make best use of available cost information and to avoid needless work and serious mistakes.

One should not assume that the figures contained in accounting reports are absolutely correct and indicative, even though they have been prepared with the utmost care by highly professional accounts. This is because accounting procedure often must include certain assumptions that are based on subjective judgement. For example, the years of life on which depreciation expense for a particular asset is based has it be determined or assumed and the estimate may turn out to have caused unrealistic depreciation expenses and book values in accounting reports. Also, there are many accepted practices in accounting that may provided unrealistic information for management control purposes. For example, the net book value of an assets is generally declared in the balance sheet at the original first cost price minus any accumulated depreciation, even though it may be recognised that the value of the asset at a particular time is far above or below this reported book value.

 

Q. 44. What are the Functions of Accounting?

 

Ans. Functions of Accouting

The principal functions of accounting are as follows

1. Accounting keeps a systematic and permanent record of all financial transactions of a business.

2. It helps to ascertain the net results of a business for any period.

3. It keeps a record of assets and liabilities of a business in such way to find out in financial position at any point of time.

4. It protects the property of the business.

5. It keeps a track of all changes in the value of assets and liabilities.

6. It ensures proper control on all expenses with. a view to minimize them.

7. It communicates the results of the business to the various categories of persons such as owners, investors, creditors and Governments.

 

Q. 45. What are the Different Branches of Accounting?

 

Ans. Branches of Accounting:

Accounting may be classified into three categories viz;

(1) Financial Accounting

(2) Management Accounting and

(3) Cost Accounting.

Financial Accounting:

Financial Accounting is concerned with the recording of transactions for a business enterprise or other economic unit and the periodic preparation of various reports from such records. The reports may be for general purposes or special purposes. The reports provide useful information for managers,owners, creditors, Governmental agencies and the general public. The reports viz; the profit and Loss Account and Balance Sheet show the manner in which operations of the business have been conducted during a specified period.

Management Accounting:

Management Accounting employs both historical and estimated data in assisting management in daily operations and in planning future operations. It deals with specific problems that confront enterprise managers at various organizational levels.

According to the institute of Cost and Management Accounting, London, “Management Accounting is the application of professional information in such a way as to assist the management is the formation of policies and in the planning and control of the operations of the undertakings.”

Cost Accounting:

Cost Accounting emphasizes the determination and the control of costs. It is concerned primarily with the cost of manufacturing processes and of manufactured products. It is also giving importance of distribution costs.

 

Q. 46. Explain Benefits of a Good Costing Mechanism.

 

Ans. Advantage of good system of costing may be summarized as follows:

It helps to determine the true cost of each unit or the process of out.

It would reveal the relative profit position of different activities, and thus management gets an opportunity to review them, and arrive at a suitable conclusion pertaining to business policy.

It help in prompt preparation of cost estimates, and fixing of selling prices in accept dance with changing market conditions and uncertainty.

The disclosure of unprofitable or excessively costly operations may lead to the development of altogether the new ones.

Costing would depict the reasons for any increase or decrease. In profit when compared with financial accounts. It provides a definite collateral check upon financial records and accounts.

It provides means of continuous contrast of the estimated material cost, wages and overhead expenses, products or components with the corresponding budgeted on estimated data. Since wages material control is pre-requisite in cost accounting, some control over these is ensured.

Management will be adequately informed about the unabsorbed overhead expenditure that arises when the plant is not fully used.

Even it would enable management to compare the two or more alternative course of actions. For instance, is it more profitable to manufacture a component or to buy it from an ancillary unit which specializes in it.

It can also be used to measure the relative efficiency machines or group of mechanics and employees.

In cases where running agreements and contractors provide for the adjustment of price in the light of changes in cost structure, the cost records can prove helpful in explaining this change and in determining the new prices:

Cost records maintained at a uniform level can be exchanged with other business concerns to benefit the trader of a particular item, mutually.

Lastly while costing is generally looked upon as a feature of manufacturing units, its application may also be in fields like wholesales and retail trades, in road transport undertaking, and in farming.

 

Q. 47. What are the Functions of Financial Management?

 

Ans. Functions of the Financial Management. Financial manager is concerned with the following aspects:

(1) Indentifying the present strengths and weaknesses of an organisation and the scope for improvement, by conducting the financial analysis.

(2) Planning the financial strategies. This involves the consideration of methods and levels of funds raising, profitability and the financing of expansion plan of the organisation

(3) Arranging the funds when required, in the form needed in the most economical way.

(4) Conducting financial appraisal of the possible courses of action. The appraisals are needed in respect of possible take overs and mergers, analysis of capital projects, or alternative methods of funding.

(5) Advicing about capital structure.

(6) Consideration of an appropriate level for drawings by dividends to, the owner’s shareholders.

(7) Ensuring that assets are controlled and used in an efficient manner.

(8) Cash management. Preparation of detailed cash budgets and/or forecast funds flow statement so that future problems can be foreseen and remedial measures taken in advance. These take care of both shortage and excess of cash. Finance managers must find ways of raising more funds needed, or investing excess funds for an appropriate length of time.

 

Q. 48. What are Different Methods of Financing?

 

Ans. Method of Financing. The method of raising finance is decided with reference to the period for which the funds are required. Basically, there are two methods of raising capital for any business concern: (i) raising of owned capital, and (ii) raising of borrowed capital. The owned capital for long and medium term comes primarily from shares and internal resources, while borrowings may be made from debenture issue, public deposits, and from financial institutions etc.

Following chart indicates the different methods of raising finance for a company.

 

Q. 49. Describe Marginal Costing.

 

Ans. Marginal Costing, as one of the tools of management accounting, helps management in making certain decisions. It provides management with information regarding the behaviour of costs and the incidence of such costs on the profitability of an undertaking.

Marginal costing is not a separate system of costing; it is only a technique used by accountants to aid management decisions. As Brown and Howard rightly observed, marginal costing is probably the most controversial subject in the whole sphere of management accounting. Controversy has arisen not only over the usefulness of marginal costing but even about what the phrase means. Terminology differs from country to country. For instance, the name Marginal Costing is widely used in the U.K. and Europe.

On the other hand, the phrase ‘Direct Costing’ is preferred in the U.S.A. This technique of costing is also known-as ‘Variable Costing’, ‘Differential Costing’, or ‘Out of pocket Costing’.

What marginal cost means:

We can give two possible interpretations for the phrase marginal cost. They are

1. At a given volume output, marginal -cost is the addition to the total cost arising out of the production of cuie more unit. Here ‘one unit’ means a single unit or a single batch or some convenient multiple. It is, in this sense the words “Incremental costs” or “Differential cost” are Used by the Economists. According to them, marginal cost means the amount by which the total cost varies as a direct result of the change in the volume of production by one unit.

2. When it is used in the plural (as marginal costs), we mean the total of all variable costs (i.e,, all costs that vary directly with the volume of output). For all accounting purpose we use only this figure. Whenever the out is changed, the total costs vary accordingly; this variation arising directly from the change in the output will be taken as the marginal costs.

 

Q. 50. Explain the features of Marginal Costing.

 

Ans. Marginal Costing, although considered only as a special technique of costing - (and not a separate system), has got certain special features for its own, which can give us many advantages when they are used along with other costing methods

Given below is a brief account of the special features of marginal costing method.

1. The most important feature of this method is the Separation of fixed costs and variable costs. In the orthodox system of costing, all costs, (both fixed and variable) are absorbed in the product costs - (known as “Absorption Costing” or “Total costs Costing” On the other hand, under the technique of marginal costing only the variable costs (marginal costs) are charged to the products. Thus the marginal costs alone are considered to be the costs of product under marginal costing system.

2. In the usual method of costing, (absorption costing), stock are valued on the basis of total costs incurred on their production. But in the marginal costing system, valuation of stock-in-trade (both finished and semi finished) is made only on the basis of their marginal costs.

3. Like the cost determination, calculation of profit, it also done in a special manner in marginal costing method First the marginal cost of production will be deducted from the sales, the remaining proceeds are known as “Contribution’ The Contributions of all the products are brought into a pool from which the total of fixed costs will be deducted. If there is any surplus after meeting the fixed costs, it forms the profit.

Here also is a marked difference between the orthodox system and marginal system in the calculation of profits that is in both the systems profit is calculated after deducting both fixed and variable costs from the sales; while in the absorption costing both the costs (fixed and variable) are deducted directly from the sales, in the marginal costing first contribution is found out by

charging only variable costs to the sale proceeds. Then, fixed costs are absorbed in the total of contributions of all the products. Thus, fixed costs are not apportioned to the individual products under marginal costing. This is the basic and salient principle of marginal costing.

4.The profitability of each department of product will be determined by its contribution. From the sum total of these contributions, total fixed costs will be deducted to arrive at the profit.

 

Q. 51. What are the General Principles of Cost Accounting?

 

Ans. 1. Cost-cause relationship. The cost must be related to its causes for the purpose of recovering costs or to distribute the burden of costs on the units. For instance, a foreman supervises several units and therefore it is wrong to treat his salary as the cost of a single unit.

2. Cost to be charged after it has been incurred. The cost of an individual unit should be ascertained by including only those costs which have been actually incurred. Costs which are yet to be incurred should not be included. For instance, selling cost should not be included when a product is still in the factory. But it can be included when the product is sold.

3. Too much importance to historical costing to be ignored. Accountants are conservative in nature and they attach too much importance to historical costing while calculating cost. This conventional approach must be ignored as otherwise the appraisal of profitability of a project may be affected. As observed by W.M. Harper, “A cost statement should as far as possible give the fact with no known bias. If a contingency needs to be taken into consideration it should be shown distinctly and separately.”

4. Abnormal cost to be excluded. The cost which are not related to normal operations of the enterprise are abnormal costs. For instance any cost incurred as a result of negligence or accident is an abnormal cost. The inclusion of such cost will distort the cst figute and mislead the management regarding the operations of the enterprise under normal conditions. Therefore, abnormal costs muii be excluded to get the correct picture.

5. Past costs not to be included in future period. Past costs which have not been charged should not be included in future period because future results will be distorted.

6. Double Entry Principles to be applied whenever necessary. Cost sheets and cost statements are greatly used for cost ascertainment and cost control. Double entry principles should be applied to cost ledger and cost control accounts.

 

Q. 52. What are the Steps for Installing a Costing System?

 

Ans. The following steps are generally followed for installing a costing system

1. Study the existing organisation. The existing organisation must be studied in order to know the nature of business, authority and responsibility of officials, factory layout, wage payment method, the amount of overheads etc.

2. Decide the system of cost accounting. The manufacturing process and the ancillary services must be studied in order to fix the suitable system of cost accounting.

3. Determine the cost rates. Factory conditions must be studied and costs must be classified into direct and indirect costs. Indirect costs must be classified into production, selling, administration etc. A complete cost accounting code must be prepared.

4. Introduce the system. Before the system is implemented, the implications of the system must be explained to the staff and their co-operation must be obtained. The benefits that will be reaped by the employees and the organisation must be explained.

The system should be introduced gradually without disturbing much the existing routine.

5. Organise the cost office. The cost office should be nearer to the factory so that delays can be avoided. The staff strength m the cost office depends on the volume of work. The cost staff must have free access to the factory. The costing department must present the result quickly and accurately. The duties of the cost office include the maintenance of stores accounts, labour accounting, cost accounts and cost control.

6. Cost office and Other departments. The cost office must function independently and the Cost Accountant must report directly to the General Manager or Managing Director. The costing system should be so designed as to serve the needs of the entire business.

 

Q. 53. Explain the Functions of Management Accounting. -

 

Ans. The functions of Management Accounting may be said to include all activities connected with collecting, processing, interpreting and presenting information to management for arriving at appropriate business decisions. They may be described as follows

1. Modification of Data. Accounting data required for decision - making supplied by management accounting through a process of classification and combination which enables to retain similarities of detials without eliminating the dissimilarities.

2. Analysis and Interpretation of Data. The data becomes more meaningful with the analysis and interpretation. For example, when Profit and Loss Account and Balance Sheet data are analysed by means of comparative statements, ratios and percentages, cash-flow statements and fund-flow statements, it will open new directions for its use by management.

3. Facilitating Management Control. Management Accounting enables all accounting efforts to be directed towards control-of the destiny of an enterprise. This is made possible through budgetary control and standard costing which are an integral part of Management Accounting.

4. Formulation of Business Budgets. One of the primary functions of management is planning. It is done by Management Accounting through the process of budgeting.

5. Use of Qualitative information. Management Accounting draws upon sources, other than accounting, for such information as is not capable of being readily convertible into monetary terms-statistical complications, engineering records and minutes of meeting are a few such sources of information.

6. Satisfaction of informational Needs of Management. It serves top, middle and lower managerial needs to subserve their respective needs.

 

Q. 54. What is differences between Financial Accounting and Cost Accounting.

 

Ans. The main differences between financial accounting and cost accounting are given below:

         

         

 

Q. 55. What are the limitations of Cost Accounting?

 

Ans. Limitations of Cost Accounting Cost accounting is not an exact science. As such, it has the following limitations.

1. Not an exact science. Cost Accounting is not an exact science as it involves the use of judgement on several occasions.

2. Cost and Purpose. It is a well known fact that the cost varies with the purpose. The cost data collected for one purpose may not be suitable for another purpose.

3. Decisions based on lion-cost factors. Cost accounting provides vast data and helps in decision making. But it should be remembered that not all decisions are made on cost basis. Sometimes, non cost factors influence decision making to large extent. Cost accounting helps in decision making to some extent only

4. Assumptions which may become incorrect. Cost accounting techniques are based on certain assumption which may prove to be incorrect For example, under marginal costing it is assumed that cost is capable of being divided easily into fixed cost and variable cost. Similarly, under standard costing, the management’s opinion is on the basis of efficiency of operations What is considered to be efficient by one management may not be considered as efficient by another management.

5 Discretionary allocation of joint or common cost Common costs are allocated arbitrarily. There is no uniform basis for allocation of common costs.

6 Difference of opinion regarding items to be included in cost. There is a lot of difference of opinion among Cost Accountants regarding items to be included in cost.

For example, interest on capital is included in cost by some while others oppose such an inclusion.

7 Difference in allocation of overhead In the absence of complete information, it is not possible to allocate direct labour and material costs.

8. Lack of uniformity. Cost accounting does not lend itself to any uniform procedures Historical cost accounting procedures have their own limitations. With the available detailed cost accounting procedures, it is doubtful whether two equally competent accountants will be able to arrive at the same result for the same data.

 

Q. 56. Explain the Importance of Cost Accounting.

 

Ans. Cost Accounting is regarded as a tool of management. It helps the management in the efficient performance of managerial functions like planning, organising, controlling, budgeting, and decision making. Thus cost accounting is an integral part of the management process.

Cost accounting renders the following useful services to the management. Classification and subdivision of costs. Cost data are collected and classified for the purpose of providing valuable information to the management.

2 Control over material, labour and overhead Cost accounting provides effective control over material, labour and overhead costs Material Control techniques enable management to maintain ideal stock position thereby avoiding excessive investment

Machineries and labour can be effectively employed thus avoiding idle time. The classification of overheads into controllable and uncontrollable items helps to control overhead costs effectively.

3. Decision making. When the management has to decide on the introduction of a new product or the selection of the most profitable product mix or the coverage of additional market etc., cost accounting helps a lot in arriving at a wise decision.

4. Budgeting. Budgets enable the management to ensure eficiency. Actual results can be compared with budgets and corrective action can be taken to improve efficiency.

5. Standards to measure efficiency. Cost accounting provides standards to measure efficiency. Actual results can be compared with standards to determine the level of efficiency.

6. Maximum output at minimum cost. As the resources are limited, attempts should be made to achieve maximum output at minimum cost. Cost accounting provides cost data regarding materials, labour etc. and thus helps in the best use of limited resources.

7. Cost audit. Cost audit helps to prevent errors and frauds. It also helps to improve cost accounting methods and techniques.

8. Control. The desired level of output must be achieved at the least possible cost.

This is possible only if there is effective control.. Cost accounting provides valuable data for planning and control. .

9. Price fixation. Cost accounting helps the management in fixing the reasonable price for the product under different circumstances.

10. Expansion policy. Management takes decisions on exception of business based on estimates given by cost accountant.

 

Q. 57. Explain the Advantages of Management Accounting.

 

Ans. Management Accounting is still very .much in a state of evolution. However, the following advantages are claimed for it:

1. The main contribution of management accounting is the elimination of intuitive management. With the help of Management Accounting, the business activities are regulated systematically by means of efficient planning.

2. It enables the business to get the maximum return on capital by helping it in planning, distribution and controlling activities. .

3. It helps the management to improve its ser ices..to its customers by resorting to a continuous method of comparing the results with the standards.

4. It helps in improving the relations between the management and labour by avoiding unreasonable standard of work which is the main cause of labour unrest.

 

Q. 58. Explain the uses of the Funds Flow Statement.

 

Ans. What is the necessity of preparing such a statement? We know, funds or working capital is like the blood at any business. The availability of the current amount of funds and its proper use in a business can hardly be empasized. Funds Flow Statement is one of the tools for managing

favourably this working capital. This statement reveals the comparative position of working capital on the two balance sheets dates. As a top management report, it gives the reasons for the basic causes of the changes in net working capital. It also reflects changes in capital structure and asset expansion. From this report the management can recommend the ways and means by which the position of the working capital can be improved. Thus the statement is able to present that information which is either available or not readily apparent from an analyse of other financial statements. That is why, Parry Mason has expressed his  view, that the Funds Flow.

Statement shall be treated as a major financial statement and it should be presented in all Annual Reports of the corporations .

To make the above discussion more precise, we can quote Hector R. Antony. According to him, the main purposes of reporting Funds Flow Statement to share holders are:

1. To help them understand the changes in assets and asset sources which are not readily evident in the Profit and Loss Account or’Balance sheet.

2. To point out the financial strength and weakness of the business.

3. To reveal how the flow of funds have been managed.

 

Q. 59. What are Desirable conditions for a costing system?

 

Ans. While installing a costing system, the following conditions should be observed.

1. Design must be suitable to business. The costing system must be designed to suit the particular business. The system should be adopted to the organisation of the business.

No attempt should be made to alter the plain of business in order to adopt a costing system because it may not produce satisfactory results,

2. Technical aspects. All the technical aspects of the business should be studied carefully. Attempts should be made to get the support and willing co-operation of the workers.

3. Determination of objectives. All the activities of a business are directed towards the achievement of objectives. The costing system also should be so adopted as the help in the attainment of business objectives.

4. Co-ordination. The assistance and participation of staff is absolutely essential to make any system successful. Costing system is not an exception to this rule. Before introducing the hosting system, the staff should be consulted and their objections should be overcome.

5. Records and forms. Complete details relating to recOrds to be maintained should be prepared. The forms to be used by workers must be standardised and they should be kept to the minimum. The forms must be so designed as to ensure the minimum of clerical work. Each original entry in the form must be supported by an examiner’s signature to ensure reliability.

6. Supply of cost data. Arrangement should be made to provide promptly the required cost data to the different levels of management.

7. Examination of the accounting system. The cost system and financial accounts should be interlocked in one integral accounting system and there must be perfect co-ordination between them. The existing accounting system should be examined in all its dimensions especially with reference to the suitability of personnel and adequacy of records.

8. Timing and supervision. The time of installation decides the success of the system. There must be effective supervision after installation of the system.

 

Q. 60. What are the limitations of Management Accounting?

 

Ans. Comparatively, management accounting is anew discipline. It is still very much in a state of evolution. The limitations are:

1. It derives its information from financial accounting, cost accounting and other records. Therefore, strength and weakness àf Management Accounting depends upon the strength and weakness of basic records.

2. It is one thing to record, interpret and evaluate an objective historical event converted into money figures, while it is something quite different to perform the -same function in respect of past possibilities, future opportunities and unquantifiable situation.

3. Management accounting is only a tool of management.

 

Q. 61. Name various Tools and Techniques of Management Accounting.

 

Ans. Management Accounting employs tools and techniques in or to discharge its duty helping the management in planning co-ordination, control and appraisal of activities. They are as follows:

1. Analysis of Financial statements.

2. Ratio Analysis.

3. Cash Flow and Funds Flow Analysis.

4. Statistical and graphical Techniques.

5. Costing Techniques

6. Standard Costing and Variance Analysis

7. Budgetary Control .

8. Total and Marginal Cost Analysis including Break Even charts and Profit Volume

Analysis.

9. Inventory management

10. Financial Planning and Control.

 

Q. 62. Explain the difference between Financial accounting and management accounting.

 

Ans. Financial Accounting gives the story of how a business has fared financially during a given period of trading or how its affairs stand at a particular point of time. The first information is conveyed by the Profit and Loss Account and the second by the Balance Sheet. Each of this information is of great importance to the top management.

Each supplies to them valuable information regarding the final result of the trading operations of the business but neither of the two pieces tells them as to how the business has fared at the state of every operation or as to why or where any operation has failed to achieve its object. It does not tell them as to what should be the future policy of the management in order to achieve the target set or to produce even better results. The

Financial Accounting, thus cannot cope with the varied business problems. In other words, to overcome the defects of Financial Accounting which is said to be static in Management Accounting has been used.

Management Accounting is a dynamic process. The data furnished by the financial Accounting is to be rearranged for the busy management of to-day’s large scale business organisation It is different from the Financial accounting The difference between the two is based partly on the use of accounting data, partly on the degree of details supplied, partly on methodology through which the data and accumulated and partly on the emphasis to which data are supplied.

The distinction between the Financial Accounting and Management Accounting may be summarised as follows:

1. The essential difference between Financial Accounting and Management Accounting lies in their objectives. The Primary object of Financial Accounting is to make periodical reports to shareholders, creditors, debenture holders and the government. The primary objective of Management Accounting is to provide information for internal management.

2. Financial Accounting is concerned with assessing the result of a business as a whole, whereas Management Accounting is concerned with assessing the activities of different sections or divisions or departments Financial Statements like Balance Sheet and Profit and Loss Account report on the overall status and performance of the enterprise but most Management Accounting reports are concerned with departments, prothicts, type of inventories, sales or other sub-divisions of business entity.

3. Financial Accounting is concerned almost exclusively with historical records whereas Management Accounting is concerned with the future plans and policies. Financial Accounting focuses largely on past events that have occurred in the business. On the other hand, Management Accounting collects data useful in planning, organising and controlling the business. For this, it takes into consideration both past and future events to a significant extent and extent to the provision of information for use in improving results in future.

4. Financial Accounting makes use of data which is quantitative, monetary and objective. On the other hand, management accounting also uses data which is descriptive, statistical and subjective.

5. In Management Accounting, there is more emphasis on furnishing information quickly than in the case of Financial Accounting.

6. In Management Accounting, there is less emphasis if on precision: approximate figures which are promptly available are considered to be more valuable than very precise data received too.

7. Financial Accounting places great emphasis on those qualitities in information which can command universal confidence like objectivity, validity, absoluteness etc., whereas Management Accounting emphasises those characteristics which enhance the value of information in its variety of uses like flexibility, comparability etc.

8. In Financial Accounting, records are maintained in the form of personal, property and nominal accounts. In Management Accounting, costs and revenues are mostly reported by responsibility centres or profit centres. -

9. The generally accepted accounting principles and conventions govern the financial accounts and statements. These accounting principles and conventions are not binding on Management Accounting. Information outside the debit-credit structure is often as valuable as others.

10. Financial Accounting reports, made for outsiders do not specify any alternative courses and comparative financial implication of those alternatives. Management Accounting reports, made

 

Q. 63. Explain the difference between Management Accounting and Cost Accounting.

 

Ans In a broad sense cost is the vital factor determining business decisions and one of the earliest applications of accounting information to the problems of internal managerial control was in costing. Costs Accounting will tell the Management as to how the business has fared at each stage of operation. But, Cost Accounting will not tell them anything about the future policy to be adopted.

The aim of Management Accounting is not to collect information as such but to utilise the information already collected-, in order to help the management to formulate their future policy and to make important policy decisions. Thus, management Accounting is a system of accounting which is concerned with internal reporting of factual information to management for -

(a) planning and controlling current operations;

(b) decision making on special matters; and

(c) formulating long-range plans.

It also refers to the methods and techniques which assist management in achieving the organisational objectives

Cost Accounting involves cost finding, cost reconciliation, cost control and cost reduction Management Accounting draws heavily on cost data and other information derived from cost records. In fact, Cost Accounting is a necessary adjunct of Management.

Accounting In one way, Management Accounting is an expansion of Cost Accounting like Cost Accounting, Management Accounting involves reporting at frequent intervals rather than at the

end of a year or half-year. It is concerned with units and segments of activity rather than business as a whole. It reports not only historical data but also estimates for the future.

Q. 1. Define Human Resource Management.

 

Ans. The management, who deals with Atiministrative activities associated with Ji timan resources planning, recruitment, selecting, orientation, training, appraisal, motivation, remuneration, etc. is called HRM.

It is a model of personnel management that forces on the individual rather than taking a collective approach. Responsibility for human resource management is often devolved to line management. It is characterized by an emphasis on strategic integration, employee commitment, workforce flexibility, and quality of goods and services.

 

Q. 2. Define HRMS.

 

Ans. A Human Resources -Management System (HRMS) is a software application that combines many human resources functions, including benefits administration, payroll, recruiting and training, and performance analysis and review into one package.

 

Q. 3. What are the various objectives of human Resource Management?

 

 Ans. Objectives are benchmarks against which actions of an HRM department are evaluated. The following is one listing of these objectives.

Societal objective. To be socially responsible to the needs and challenges of society while minimizing the negative impact of such demand upon the organisation. The failure o organisations to use their resources for society’s benefit may result in restrictions. For example, societies may pass laws that limit human resource decisions.

Organizational objective. To recognize that HRM exists to contribute to organizational effectiveness. HRM is not an end in itself; it is only a means ‘to assist the organisation with its primary objectives. Simply stated, the department exists to serve the rest of the organisation.

Functional objective. To maintain the department’s contribution at a level appropriate to the organization’s needs. Resources are wasted when HRM is more or less sophisticated than the organisation demands. A department’s level of service must be appropriate for the organisation it serves.

Personal objective. To assist employees in achieving their personal goals, at least

insofar as these goals enhance the individual’s contribution to the organisation. Personal

objective of employees must be met if workers are to be maintained, retained and motivated. Otherwise, employee performance and satisfaction may decline, and employees may leave the organisation.

 

Q. 4. Define HRA.

 

Ans. Human resource accounting (HRA)

Human resource accounting (HRA) is defined as the process of identifying, quantifying, accounting and forecasting the value of human resources in order to facilitate effective FIRM. People in organisation differ from other assets — unlike capital items and materials they cannot be owned by an organization.

 

Q. 5. What is Teleworking?

 

Ans. An important variation in working patterns has been the growth in teleworking

and/or homeworking. There are five main types of teleworking:

1. multi-site : alternation between working on an employer’s premises and working elsewhere, usually at home but also in a telecottage or telecentre.

2. tele-homeworking : work based at home, usually for a single employer and involving low-skilled work performed by people who are tied to their homes..

3. freelance: work for a variety of different clients.

4. mobile: work carried out using communication technologies such as mobile phones, fax machines, PC connections via the Internet often by professional, commercial, technical and managerial staff who work ‘on the road’

5. Reloaded back-functions (call centres) : specialist centres carrying out activities such as data entry, airline bookings telephone banking, telephone sales and helpline services.

 

Q 6 Describe HRM activities and objectives

 

Ans. Efficient and effective Human Resource management is a challenge to all HR professionals. Staffing, training and helping to manage people so that the organisation is likely to increase the performance level is imperative to work in a productive manner. Normally, human resource functions are trackmg data points on each employee. These might include experiences capabilities, skills, data, personal histories and payroll records. In the most general sense businesses carry out different activities dealing with managing their approaches to employee benefits and compensation, as well as employee records and personnel policies.

Among the core HR activities there are payroll, time and labour management, benefit administration and HR management. These activities correlate with the HR objectives which are largely the responsibility of Human Resources.

The foremost objectives of Personnel services are an efficient and effective personnel ,and payroll system responsive to staff needs together with the flexible remuneration system. These objectives can be attained by implementation of different modules, such as budgets and commencements module, applicant tracking module, occupational health and safety module, etc.

None the less important HR objective is the industrial relations services implying establishing effective relationship between the employer and the staff. Complete and comprehensive policy framework should be established for risk management, safety and health issues. Staff should be well informed about safety and health issues in the workplace. What is required to gain this objective is the staff’s participation in a wide range of training and awareness programs in the area of safety and health. Staff development objective can be realized through different skills development courses designed to encourage further skills development necessary to carry out their responsibilities.

Some organisations consider equity and diversity services as their objective and provide information about the procedures for sexual harassment, racial harassment and equity grievances, thus making the staff well aware of the policies. The initiatives include awaranes programs in relation to equity and diversity. In the long run it leads to an increase in the number of staff who have attended the training sessions and know the issues.

Human Resource services provision is closely connected with strategic policies, planning and coordination of an orgaii4ltion. A wide range of human resource strategies aimed at more flexible planning can include improved links between performance and remuneration, improved performance measurement procedures for all staff, improved recruitment and retention strategies, and encouragement of skills development. One more objective results in consultancy support provided on the basis of improved information about both the employer and HR staff needs and working requirements.

     HR objectives stimulate the development of people to be their best in order to meet the needs of an organization A successful performance management system including department, team and individual business objective, personal development plans,performance appraisal, career planning, etc, aims at enhancing the personnel’s

commitment to developing the bus mess long-term and can gwe challenges which will enhance the staff personal growth Moreover, if an organization can assess the workforce changes needed by business, implement the necessary optimization and measure the results using up-to-date technology system, it will get data having a critical role in monitoring and controlling overall performance

 

Q. 7. What are the various stages of evolution of HRM.

 

Ans. Evolution of the Concept of HRM

The various stages or phases in the tansition or evolution of Personnel Management  into Human Resource Management are shown below:

(a) The Commodity Concept: Labour was regarded as a commodity or a tool to be bought or sold.

(b) The Factor of Production Concept : Labour is like any other factor of production,

viz, money, materials, land, etc.

(c) The Goodwill Concept Welfare measures like safety, first aid, lunch room, rest room will have a positive impact on worker’s productivity

(d) The Paternalistic Concept Management must assume a fatherly or protective attitude towards employee It means satisfying the various needs of employees as parents meet the requirements of their child

(e) The Humanitarian Concept To improve productivity, physical, social and psychological needs of workers must be fulfilled and met.

(t) The Human Resource Concept Employees are the most valuable assets in the organization

(g) The Emerging Concept : Employees should be accepted as partners of the organization They should belong to the organization as they are running their own organization  

 

Q 8 What is the Scope of HRM

 

Ans The main aim of HRM is Competztwe advantage through people It involves the

following points

(a) Change in Thinking Process Achieving competitive success through people involves fundamentally changing the thinking of the concerns, that how they think about the workforce consisting of people and the management employment relationship

(b) Co-operation with Employees It means achieving success by working with people, not by replacing them or limiting the scope çf their activities

(c) Strategic Viewpoint it involves seeing the workforce as a source of strategic advantage, not just a cost to be minimized

 

Q 9 Differentiate personnel management and Human Resource Management

 

Ans The sole purpose of personnel management was to attain corxtpetitive advantage and best results for the organization The individuals interests, desires and aspirations were submerged into the organization objectives and goals

Where as, HRM projects the ‘development of individual in accordance with his interests, desires & aspirations. So that the individuals would be motivated to make their best contribution towards the accomplishment of goals.

While personnel function was designed to respond to the organization objectives like profit of maximization, HRM visualized human elements of enterprise as important resources.

The term human resources at the macro level spell the total sum of all the components(like skill & creative ability) possessed by all the people, where as the term personnel even at the macro level is limited to only employees of all organization.

One must not be under impression that HRM has replaced traditional personnel management rather we can say that HRM has absorbed the personnel function in its refined form.

HRD is an integral part of Human Resource Management.

Due to the amalgamation of Personnel function in its refined way with HRM, it became necessary for every organization to develop skills, talents, potentialities, capabilities & attitude of company work to meet the emerging challenges. Hence HRD policies have been adopted. HRD strategies are supposed to bring forth necessary changes in skills capabilities & attitude of people who are required to cope with the emerging changes. Thus HRD has become an integral part of Human Resource Management.

 

Q. 10. HRM planning.

 

Ans. Planning is very important to our everyday activities. Several definitions have been given by different writers what planning is all about and its importance to achieving our objectives. It is amazing that this important part of HR is mostly ignored in HR in most organizations because those at the top do not know the value of HR planning. Organizations that do not plan for the future have less opportunities to survive the competitions ahead. The six steps of HR planning that is : Forecasting; inventory, audit, HR Resource Plan; Actioning of Plan; Monitoring and Control.

Quoting Monday et (1996) they define it as a systematic analysis of HR needs in order to ensure that correct number of employees with the necessary skills are available when they are required.

When we prepare our planning programme, Practitioners should bear in mind that their staff members have their objective they need to achieve. This is the reason why employees seek employment. Neglecting these needs would result in poor motivation that may lead to unnecessary poor performance and even Industrial actions.

The following flow chart shows the relationship among that variables that ultimately determine the HR plans an organization will develop.

 

Q. 11. Explain the concept of development of a HRM strategy.

 

Ans. Faced with rapid change organizations need to develop a more focused and coherent approach to managing people. In just the same way a business requires a marketing or

information technology strategy it also requires a human resource or people strategy In developing such a strategy two critical questions must be addressed.

1. What kinds of people do you need to manage and run your business to meet your strategic business objectives?

2. What people programs and initiatives must be designed and implemented to attract, develop and retain staff to compete effectively?

In order to answer these questions four key dimensions of an organization must be addressed. These are

1. Culture the beliefs, values, norms and management style of the organization2. Organization : the structure, job roles and reporting lines of the organization                      

People : the skill levels, staff potential and mangemént capability

3. Human resources systems the people focused mechanisms which deliver the strategy - employee selection, communications, training, rewards, career development, etc.

 Frequently in managing the people element of their business senior managers will only focus on one or two dimensions and neglect to deal with the others. Typically, companies reorganize their structures to free managers from bureaucracy and drive for more entrepreneurial flair but then fail to adjust their training or reward systems.

  When the desired entrepreneurial behaviour does not emerge managers frequently look confused at the apparent failure of the changes to deliver results. The fact is that seldom can you focus on only one area. What is required is a strategic perspective aimed at identifying the relationship between all four dimensions.

If you require an organization’ which really values quality and service you not only

have to retrain staff, you must also review the organization, reward, appraisal and

communications systems

The pay and reward system is a classic problem in this area Frequently organizations have payment systems which are designed around the volume of output produced. if you then seek to develop a company which emphasizes the product’s quality you must change the pay systems. Otherwise you have a contradiction between what the chief executive is saying about quality and what your payment system is encouraging staff to do.

 

Q. 12. Describe the Steps in developing HRM strategy.

Ans. Step 1 : Get the ‘big picture’ -

Understand your business strategy

• Highlight the key drivlig forces of your business. What are they? e.g. technology,

distribution competition, the markets.

• What are the implications of the dnving forces for the people side of your busmess?

• What is the fundamental people contribution to bottom line business performance? Step 2 : Develop a Mission Statement or Statement of Intent That relates to the people side of the business.

Do not be put off by negative reactions to the words or references to idealistic statements - it is the actual process of thinking through the issues in a formal and explicit manner that is important.

What do your people contribute?

Step 3 Conduct a SWOT analysis of the organization

Focus on the internal strengths and weaknesses of the people side of the business

 • Consider the current skill and capability issues

Vigorously research the external business and market environment High light the

opportunities and threats relating to the people side of the business

• What impact will/might they have on business performance

• Consider skill shortages

• The impact of new technology on staffing levels

From this analysis you then need to review the capability of your personnel

department Complete a SWOT analysis of the department-consider in detail the

department’s current areas of operation, the service levels and competences of your

personnel staff.

Step 4 : Conduct a detailed human resources analysis

Concentrate on the organization’s COPS (culture, orgafliZatiQn, people, HR systems)

• Consider Where you are now ? Where do you want to be?

• What gaps exists between the reality of where you are now and where you want to

Be exhaust your analysis of the four dimensions.

Step 5 : Determine critical people Issues

Go back to the business strategy and examine it against your SWOT and COPS Analysis

• Identify the critical people issues namely those people issues that you must address

Those which have a key impact on the delivery of your business strategy

• Prioritize the critical people issues. What will happen if you fail to address them?

Remember you are trying to identify where you should be focusing your efforts and

resources.

Step 6: Develop consequences and solutions

For each critical issue highlight the options for managerial action generate, elaborate and create - don’t go for the obvious. This is an important step as frequently people. jump for the known rather than challenge existing assumptions about the way things have been done in the past. Think about the consequences of taking various couises of action.

Consider the mix of HR systems needed to address the issues. Do you need to improve communications, training or pay?

What are the implications for the business and the personnel function?

Once you have worked through the process it should then be possible to translate the

action plan into broad objectives. These will need to be broken down into the specialist HR Systems areas of:

• employee training and development

• management development

• organization development.

• performance appraisar

• employee reward

• employee selection and recruitment

• manpower planning

• communication

Develop your action plan around the critical issues Set targets and dates for the

accomplishment of the key objectives.

Step 7: Implementation and evaluation of the action plans

The ultimate purpose of developing a human resource strategy is to ensure that the

objectives set are mutually supportive so that the reward and payment systems are integrated with employee training and career development plans.

There is very little value or benefit in training people only to then frustrate them

through a failure to provide ample career and development opportunities.

 

Q. 13. Name the various functions of Human resource management.

 

Ans. The various functions are

1. Ans. Selection

2. Training and Development

3. Performance Evaluation and Management

4. Promotions

5. Redundancy

6. Industrial and Employee Relations

7. Record keeping of all personal data.

8 Compensation, pensions, bonuses etc m liaison with Payroll

9 Confidential advice to internal ‘customers’ m relation to problems at work &

10. Career development

 

Q. 14. Define Human Resources.

 

Ans. Human resource is a term with which many organizations describe the combination of traditionally administrative personnel functions with performance, Employee Relations and resource planning The field draws upon concepts developed in Industrial/Organizational Psychology. Human resources has at leat two related

interpretations depending on context. The original usage derives from political economy and economics where it was traditionally called labour, one of four factors of production The more common usage within corporations and businesses refers to the individuals within the firm, and to the portion of the firm’s organization that deals with hiring,firing, training, and other personnel issues.

 

Q. 15. Importance of HR planning.

 

Ans. Planning is not as easy as one might think because it requires a concerted effort

to come out with a programme that would easy your work. Commencing is complicated but once you start and finish it you have a smile because everything moves smoothly Planning is a process that have to be commenced from somewhere and completed for a purpose. It involves gathering information that would enable managers and supervisors make sound decisions. The information obtained is also utilized to make better actions for achieving the objectives of the Organization. There are many factors that you have to look into when deciding for an HR Planning Programme.

HR Planning involves gathering of information, making objectives, and making

decisions to enable the organization achieve its objectives. Surprisingly, this aspect of HR is one of the most neglected in the HR field. When HR Planning is applied properly in the field of HR Management, it would assist to address the following questions:

1. How many staff does the Organization have?

2. What type of employees as far as skills and abilities does the Company have?

3. How should the Organization best utilize the available resources ?

4. How can the Company keep its employees?

HR planning makes the organization move and succeed in the 2[St Century that we/ are in. Human Resources practitioners who prepare the HR Planning programme would assist the Organization to manage its staff strategically The programme assist to direct the actions of HR department. The programme does not assist the Organization only but it will also facilitate the career planning of the employees and assist them to achieve the objectives as well. This augment motivation and the Organization would become a good place to work. HR Planning forms an important part of Management information system.

HR have an enormous task keeping pace with all the changes and ensuring that the Right people are available to the Organization at the right time. It is changes to the Composition of the workforce that force managers to pay attention to HR planning  The changes in composition of workforce not only influence the appointment to staff, but also the methods of selection, training, compensation and motivation. It  ecomes very critical when Organizations merge, plants are relocated, and activities  re scaled down due to financial problems.

 

Q. 16. Describe the steps required for HR planning,

 

Ans. Various  steps in HR planning

Forecasting

HR Planning requires that we gather data on the Organizational goals objectives, One should understand where the Organization wants to go and how it wants to get to that point. The needs of the employees are derived from the corporate objectives of the Organization. They stern from shorter and medium term objectives and their conversion into action budgets (eg) establishing a new branch in New Delhi by January 2006 and staff it with a Branch Manager (6,000 USD, Secretary 1,550 USD, and two clerical staff 800 USD per month. Therefore, the HR Plan should

have a mechanism to express planned Company strategies into planned results and budgets so that these can be converted in terms of numbers and skills required.

Inventory

After knowing what human resources are required in the Organization, the next step is to take stock of the current employees in the Organization. The HR inventory should not only relate to data concerning numbers, ages, and locations, but also an analysis of individuals and skills. Skills inventory provides valid information on professional and technical skills and other qualifications provided in the firm. It reveals what skills are immediately available when compared to the forecasted HR requirements.

Audit

We do not live in a static World and our HR resources can transform dramatically. HR inventory calls for collection of data the HR audit requires systematic examination and analysis of this data. The Audit looks at what had occurred in the past and at present in terms of labour turn over, age and sex groupings, training costs and absence. Based on this information, one can then be able-to predict what will happen to HR in the future in the Organization.

HR Resource Plan

Here we look at career Planning and HR plans. People are the greatest asserts in any Organization. The Organization is at liberty to develop its staff at full pace in the way ideally suited to their individual capacities. The main reason is that the Organization’s objectives should be aligned as near as possible, or matched, in order to give optimum scope for the developing potential of its employees. There fore  areer planning may also be referred to as HR Planning or succession planning.

The questions that should concern us are:

(a)Are we making use of the available talent we have in the Organization, and have we an enough provision for the future?

(b)Are employees satisfied with our care of their growth in terms of advancing their Career?

Assignment of individuals to planned future posts enable the administration to  ensure that these individuals may be suitably prepared in advance.

Actioning of Plan

There are three fundamentals necessary for this first step.

(1) Know where you are going.

(2) There must be acceptance and backing from top management for the planning.

(3) There must be knowledge of the available resources (i.e.) financial, physical and human (Management and technical).

Once in action, the HR Plans become Corporate plans. Having been made and concurred with top management, the plans become a part of the company’s long-range plan. Failure to achieve the HR Plans due to cost, or lack of knowledge, may be a serious constraints on the long-range plan. Below is an illustration of how HR Plan is linked to corporate Plan.

The link between HR Plan and Strategic Management

 

 

Monitoring and Control.

This is the last stage of HR planning in the Organization. Once the programme has been accepted and implementation launched, it has to be controlled. HR department has to make a follow up to see what is happening in terms of the available resources. The idea is to make sure that we make use of all the available talents that are at our disposal failure of which we continue to struggle to get to the top.

 

Q. 17. What is the bad impact of poor HR Planning.

 

Ans. Poor HR planning and lack of it in the Organization may result in, huge costs and financial loses. It may result in staff posts taking long to be filled. This augment costs and hampers effective work performance because employees are requested to work unnecessary overtime and may not put more effort due to fatigue, If given more work this may stretch them beyond their

limit and may cause unnecessary disruptions to the production Of the Organization. Employees are put on. a disadvantage because their live programmes are disrupted and they are not given the chance to plan for their career development.

The most important reason why HR Planning should be managed and implemented is the costs involved. Because costs forms an important part of the Organizations budget. workforce Planning enable the Organization to provide HR provision costs. When there is staff shortage, the organization should not just appoint discriminately, because of tl costs implications of the other options, such as training and transferring of staff, have to be considered.

 

Q. 18. Describe the functions of HRM in detail.

Ans. Function 1 : Manpower planning

The penalties for not being correctly staffed are costly.

• Understaffing loses the business economies of scale and specialization, orders. customers and profits.

• Overstaffing is wasteful and expensive, if sustained, and it is costly to eliminate because of modem legislation in respect of redundancy payments, consultation. minimum periods of notice, etc. Very importantly, overstaffing reduces the competitive efficiency of the business.

Planning staff levels: requires that an assessment of present and future needs of tl organization be compared with present resources and future predicted resources Appropriate steps then be planned to bring demand and supply into balance.

Thus the first step is to take a ‘satellite picture’ of the existing workforce profile (numbers, skills, ages, flexibility, gender, experience, forecast capabilities,  character, potential, etc. of existing employees) and then to adjust this for 1, 3 and 10 years ahead by amendments for normal turnover, planned staff movements, retirements,tc, in line with the business plan for the corresponding time frames.

The result should be a series of crude supply situations as would be the outcome of

present planning if left unmodified. (This, clearly, requires a great deal of information accretion, classification and statistical analysis as a subsidiary aspect of personnel management)

-.What future demands will be is only influenced in part by the forecast of the personnel manager, whose main task may well be to scrutinize and modify the crude predictions of other managers. Future staffing needs will derive from

  Sales and production forecasts

• The effects of technological change on task needs

• Variations in the efficiency productivity, flexibility of labor as a result of training,

work study, organizational change, new motivations, etc.

• Changes in employment practices (e.g. use of subcontractors or agency staffs, hiving-off tasks, buying in, stibstitution, etc.)

Variations, which respói?1 to new legislation; e.g. payroll taxes or their abolition,new health and safety requirements.

• Changes in Government policies (investment incentives, regional or trade granetc.)

What should emerge from this blue sky gazing’ is a thought out’ and logical staffing

demand schedule for varying dates in the future which can then be compared with the crude supply schedules. The comparisons will then indicate what steps must be taken to achieve a balance. -

That, in turn, will involve the further planning of such recruitment, training, retraining, labor reductions (early retirement/redundancy) or changes in workforce utilization as will bring supply and demand into equilibrium, not just as a one-off but as a continuing workforce planning exercise the inputs to which will need constant varying to reflect ‘actual’ as against predicted experience on the supply side and changes in production actually achieved as against forecast n the demand side.

Function 2: Recruitment and selection of employees

Recruitment of staff should be preceded by

An. analysis of the job to be done (i.e. an analytical study of the tasks to be performed to determine their essential factors) written into a job description so that the selectors know what physical and mental charateristics applicants must possess, what qualities and attitudes are desirable and what characteristics are a decided disadvantage;

• In the case of replacement staff a critical questioning of the need to recruit at

all (replacement should rarely be an automatic process).

• Effectively, selection is ‘buying’ an employee (the price being the wage or salary multiplied by probable years of service) hence bad buys can be very expensive. For that reason some firms (and some firms for particular jobs) use external expert consultants for recruitment and selection.

• Equally some small organizations exist to ‘head hunt’, i.e. to attract staff with high reputations from existing employs to the recruiting employer However the ‘cost’ of poor selection is such that, even for the mundane day-to-day jobs,

those who recruit and select should be well trained to judge the suitability of

applicants.

The main sources of recruitment are :

• Internal promotion and internal introductions (at times desirable for morale

purposes)

• Careers officers (and careers masters at schools)

• University appointment boards

• Agencies for the unemployed .

• Advertising (often via agents for specialist posts) or the use of othçr local

media (e.g. commercial radio)

Where the organization does its own printed advertising it is useful if it has some

identifying logo as its trade mark for rapid attraction and it must take care not to offend the sex, race, etc. antidiscrimination legislation either directly or indirectly. The form on which the applicant is to apply (personal appearance, letter of application, completion of a form) will vary according to the posts vacant and-numbers to be recruited.

It is very desirable in many jobs that claim about experience and statements about

qualifications, are thoroughly checked and that applicants unfailingly complete a health questionnaire (the latter is not necessarily injurious to the applicants chance of being appointed as firms are required to employ a percentage of disabled people).

Before letters of appointment are sent any doubts about medical fitness or capacity

(in employments where hygiene considerations are dominant) should be resolved by

requiring by requiring applicants to attend a medical examination. This is especially so where, as for example in the case of apprentices, the recruitment is for a contractual period or involves the firm in training costs.

Interviewing can be carried out by indviduals (e.g. supervisor or departmental

manager),by panels of interviewers or in the form of sequential interviews by different experts and can vary from a five minute chat’ to a process of several days. Ultimately personal skills in judgement are probably the most important, but techniques to aid judgement include selection testing for:

• Aptitudes (particularly useful for school leavers)

• Attainments -

• General intelligence

(All of these need skilled testing and assessment.) In more senior posts other

techniques are : -

• Leaderless groups

• Command exercises

Group problem solving

(These are some common techniques — professional selection organizations often use Other techniques to aid in selection.)

Training in interviewing and in appraising candidates is clearly essential to good

recruitment.Largely the former consists of teaching interviewers how to draw ou4- the interviewee and the latter how to xratex the candidates. For consistency (and as an aid to checking that) rating often consists of scoring candidates for experience, knowledge, physical/ mental capabilities, intellectual levels, motivation, prospective potential, leadership abilities etc. (according to the needs of the post). Application of the normal curve of distribution to scoring eliminates freak judgements

Functions 3: Employee motivation

To retain good staff and to encourage them to give of their best while at work requires attention to the financial and psychological and even physiological rewards offered by the organization as a continuous exercise.

Basic financial rewards and conditions of service (e.g. working hours per week) are determined externally (by national bargaining or government minimum wage legislation) in many occupations but as much as 50 per cent of the gross pay of manual workers is often the result of local negotiations and details (e.g. which particular hours shall be worked) of conditions of services are often more important than the basics. Hence there is scope for financial and other motivations to be used at local levels.

As staffing needs will vary with the productivity of the workforce (and the industrial

peace achieved) so good personnel policies are desirable. The latter can depend upon other factors (like nvironment, welfare, employee benefits, etc.) but utiless the wage packet is accepted as ‘fair and just’ there will be no motivation.

Hence while the technicalities of payment and other systems may be the concern of

others, the outcome of them is a matter of great concern to human resource management.

Increasingly the influence of behavioral science discoveries are becoming important

not merely because of the widely-acknowledged limitations of money as a motivator, but because of the changing mix and nature of tasks (e.g. more service and professional jobs and far fewer unskilled and repetitive production jobs).

The former demand better-educated, mobile and multi-skilled employees much more likely to be influenced by things like job satisfaction, involvement, participation, etc. than the economically dependent employees of yesteryear.

Hence human resource management must act as a source of information about and

a source of inspiration for the application of the findings of behavioral science. It may be a matter of drawing the attention of senior mangers to what is being achieved elsewhere and the gradual education of middle managers to new points of view on job design, work organization and worker autonomy.

Function 4: Employee evaluation

An organization needs constantly to take stock of its workforce and to assess its

Performance in existing jobs for three reasons:

• To improve organizational performance via improving the performance of

Individual contributors (should be an automatic process in the case of good

managers, but (about annually) two key questions should be posed:

• What has been done to improve the performance of a person last year ?

• and what can be done to improve his or her performance in the year to come?)

• To identify potential, i.e. to recognize existing talent and to use that to fill vacancies higher in the organization or to transfer individuals into jobs where better use can be made of theirabi1ities or developing skills.

• To provide an equitable method of linking payment to performance where there

are no numerical criteria (often this salary performance review takes place about

three months later and is kept quite separate from 1. and 2. but is based on the

same assessment).

On-the-spot managers and supervisors, not HR staffs, carry out evaluations. The personnel role is usually that of:

 

1. Advising top management of the principles and objectives of an evaluation system and designing it for particular organizations and environments.

1. Developing systems appropriately in consultation with managers, supervisors and staff representatives. Securing the involvement and cooperation of appraisers and those to be appraised.

2. Assistance in the setting of objective standards of evaluation/ assessment, for example

3. Defining targets for achievement;

4. Explaining how to quantify and agree objectives;

5. Introducing self-assessment;

6. Eliminating complexity and duplication.

7. Publicizing the purposes of the exercise and explaining to staff how the system will be used.

Organizing and establishing the necessary training of managers and supervisors whp will carry out the actual evaluations/ appraisals. Not only training in principles and procedures but also in the human relations skills necessary. (Lack of confidence in their own ability to handle situations of poor performance is the main weakness of assessors.)

Monitoring the scheme — ensuring it does not fall into disuse, following up on training/ job exchanges etc. recommendations, reminding managers of their responsibilities.

Full-scale periodic reviews should be a standard feature of schemes since resistance to evaluation/appraisal schems is common and the temptation to water down or render schemes ineffectual is ever present (managers resent the time taken if nothing else).

Basically an evaluation  -appraisal scheme is a formalization of what is done in a more casual manner anyway (e.g. if there is a vacancy, discussion about internal moves and internal attempts to put square pegs into ‘squarer holes’ are both the results of casual evaluation). Most managers

approve merit payment and that too calls for evaluation. Made a standard routine task, it aids the development of talent, warns the inefficient or uncaring and can be an effective form of motivation.

 

Q. 19. What are HRM Policies ?

 

Ans. Whatever the size of the organization and however the HRM function is structured and located, there will be a need to communicate to employees their terms and conditions of employment. These employment guidelines are usually reflected in the HRM policies. The HRM policies are general statements that serve to guide decision making. As guides rather than as hard and fast rules, policies are somewhat flexible, requiring interpretation and judgment in their use. Some potential policy statements that affect HRM would be:

the provision of a safe place for employees to work

the encouragement of all employees to achieve as much of their human potential as possible.

the provision of remuneration that will encourage a high level of productivity

ensuring that current employees are considered first for any vacancy that might occur. the provision for voluntary and involuntary redundancy.

 

Q. 2O Describe the functions and activities of HRM.

 

Ans. In order to achieve the objectives of an organisation, the HRM section or department must carry out a number of functions. The key functions of HRM can be summarized as the acquisition, maintenance, development and termination of employees.

 

Management Information System

Acquisition. This is the ‘getting’ phase of HRM. It includes estimating both the future demand and supply for human resources and integrating these resources into a total human resource strategy. In other words, the objectives and future directions of the organisation must be known before any reliable forecasts of people needs can be made. The acquiring process includes recruiting, selection and the socialization or induction of new employees.

Maintenance. This is the ‘keeping’ function and involves providing benefits, services and working conditions that are needed if inviduals are to remain committed to the workplace.

Development. This encompasses the whole domain of training and development, which has become a major area of concern and expense for organisations. Developing also includes the concept of organisational change and development and how these processes impact upon employees.

Termination. This is the ‘saying goodbye’ activity and is sometimes known as the separation phase of employment It involves such issues as retirement, redundancy, resignation and dismissal. These issues have become of major importance in organizations in recent years. Moreover, here have been many legislative developments in Australia that have had a major impact on the arrangements for terminating the employment contract. (The Howard government is proposing further reforms to industrial relations in Australia in 2005 which will make it easier for employers to terminate employees by reducing their protection against ‘unfiar dismissal’. -

The HRM functions are broad sweeping. Within each of these functions there are a number of activities that human resource specialists must carry out if these functions

are to be fulfilled. Human resources activities are those actions taken to provide and maintain an appropriate workforce for the organisation.

The five most common activities of HRM personnel in organizations are identified as: planning for human resource needs staffing identified personnel need

Performance management and remuneration for employees

 Improving employees and the work environment

Establishing and maintaining effective working relationships.

 

 Q. 21. Define HRD.

 

Ans. Human Resource Development is the framework for helping employees develop their personal and organizational skills, knowledge and abilities. Human Resource Development includes such opportunities as employee training, employee career development, performance management and development, coaching, succession planning, key employee identification and organization development.

 

Q. 22. What is the Importance of HRM in changing scenario of Indian Business

 

Ans. India is today one of the six fastest growing economies of the world. The country ranked fourth in terms Purchasing Power Parity (PPP) in 2001. The business and regulatory environment is evolving and moving towards constant improvement. A highly talented, skilled and English-speaking human resource base forms its backbone. The Indian economy has transformed into a vibrant, rapidly growing consumer market, comprising over 300 million strong middle class with increasing purchasing power. India provides a large market for consumer goods on the one hand and imports capital goods and technology to modernize its manufacturing base on the other. The resource management is important in India is the east population. However,with the right amount of resources and technology. Management should only be as necessary as any other foreign industry. India has a serious lack of both. Royal families and natural resource speculators have manipulated the countries economic affairs to work entirely in their favour. Therefore the even spacing of wealth and assets have been dramatically reduced. Effective management whether it

be sector organization or human reourcingis vital in order to keep Indian industries intact let alone progress. People are our greatest asset’ is a mantra that companies have been chanting for years. But only a few companies have started putting Human Resources Management (HRM) systems in place that support this philosophy. There are a number of challenges in the Indian If industry which require the serious attention of HR managers to ‘find the right candidate’ and build a ‘conducive work environment’ which will be beneficial for the employees, as well as the organisation. The IT industry is already under stress on account of persistent problems such as attrition, confidentiality, and loyalty. Other problems are managing people, motivation to adopt new technology changes, recruitment and training, performance management, development, and compensation management. With these challenges, it is. timely for organisations to rethink the ways they manage their people. Managing HR in the knowledge based industry is a significant challenge for HR managers as it involves a multi task responsibility. In the present scenario, HR managers perform a variety of responsibilities. Earlier their role was confined to administrative functions like managing manpower requirements and maintaining rolls for the organisation. Now it is more strategic as per the demands of the industry.

Human resource management (HRM) is emerging as a vital component to.the growth potentials of any economy. The business conglomerations world wide and in India is considering better human resource generative patterns to cater to its needs structure. Billions of dollars are spent by companies in training, recrutiment and performance maintenance to utilize the vast potential of personnel. HRM has evolved from mere recruitment styles to more complex methodologies overlapping many dimensions spanning from personality types of personnel to instructional research methods.

In contemporary context, for organizations to excel and run successfully, collaboration with its ‘People’ coniponent is indispensable. Each change1 as it unfolds creates the need for HR practitioners to take a fresh look at then i, considerate attention and therafter leadership initiative to help the organizations seize competitive advantage. Indian business organizations are facing many challenges to be more innovative and customer driven; to renew and revitalize an organization; and to maximize return on investments, etc. These are challenges having several implications for HRM in terms of increased scope and significance in the contemporary situation..

Thus the people management though had a revolutionary trend upto industrial relations approach, has been enjoying a transformation and evolutionary trend thereafter thus moving from ad-hoc people based decisions to the present rational and metric based decisions supported by metric based policies and practices. The nature of employment has also been phenomenally changing in an evolutionary manner from fixed hours to flexible hours, full time with extended hours to part-time and limited hours, time based to peformance assigned based payment methods and working from an office location to working from home and virtual locations and localised management control to global and virtual place of work demanding a complete re-look into the managing the work engagement pattern and work place.

The globalisation has enhanced the technology, business and global economics,

phenomenal mergers and acquistions with sequential consolidation of the business

activities, improved competitive edge and business standards, the, speed of business

execution with global product and services. The market compulsions, global quality

standards have phenomenally made a demand on HRM to change its structure, approach, functioning with a greater result orientation. Thus, HRM today is moving from just people driven to business driven approach. HR strategically with a business sense to be part of the mainstream of the organisation are expected to facilitate the following needs.

* Accelerated turn-out rate in managing people to adapt, contribute and to align

with organisation to facilitate apt and healthy competition.

* Managing growth, business process skills, facilitative growth and policies and

practices that facilitates growth and merger and acquisitions, virtual campus,

virtual money, company identity, networking competence across countries, people

branding etc.

* Promoting various forms of employment that are unconventional to meet various

forms employment needs from local to national and further to international

locations making it a global employment of larger. magnitude.

* Managing heterogeneous work groups, business complexities, anticipative

compensation and benefit practices, better coordination of resources and projects

across geographies, managing cross-functional needs with diagnostic and

facilitation skills under geographical dispersed conditions, to match the speed of

the activity and business with specific service level agreements for sustenance and growth of critical/niche process.

Analysing its external environment, influences and trends (over which it has no

control) Formulating plans to implement necessary changes.

These four categories are important stages in the strategic planning process. Soft HRP is concerned with the formulation of the mission, goals objectives and strategy of the organisation and how variables such as growth, product, life cycle, competitive advantage and HR development will impact on its human resources.

Hard HRP concerns the determination of the type of activities the HR department will need to carry out in order to ascertain the appropriate level of human resources; whether its current level is sufficient; whether there is a deficiency in one department over another, etc. Again according to Torrington and Hall, hard HRP activities include:

Forecasting: the number of employees that will be required in the future to support the demand for the organisation’s products and services. This forecasting also includes assessment of the internal and external supply of human resources.

Analysis : of how current employees are being utilised throughout the organisation and how this impacts on demand

Monitoring and review : reconciling HR plans with actual practice and facilitating amendments to plans as necessary.

 

Q. 23. Explain the Role of Human Resource Planning.

 

Ans . The prime role of HRP is to ensure that an organisation has the right quantity and quality of employees doing the right thing in the right place at the right time and at the right cost to the organisation.

 In achieving this, HRP has a number of more specific roles, as follows lo determine and facilitate the levels and types of recruitment that may be required To assess current levels and attributes of staffing and determine whether reductions are necessary (redundancy)

To assess whether redeployment can be used as an alternative to downsizing

To identify the need for training and development

To assess current employment costs in relation to other organisational costs (wage costs account for over 60% of an organisation’s expenses)

 

Q. 24. Describe the process of Human Resource planning.

 

Ans .I he process of HR planning is complex, but m its simplest from it centres around two main activities: Demand — forecasting the demand for staff within the various corporate functions. It entails analysing the information and determining the numbers and attributes (knowledge skills and atitudes) of staff that will be needed at any given time

Supply — ensuring that the forecast level of demand can be met these activities must be proactive rather than reactive, which means that they must be planned. This requires extensive information about the nature of employment and employees within the organisation and of the labour market outside of it failing to establish a correct balance between the supply of, and demand for, labour in an

Organisation can lead to

Shortage of staff or of skills: if a business employs fewer staff than it requires, it is unlikely to be able to meet its production and sales targets, machinery and stock will be unused, and its trading profit is likely to be reduced

Surplus of staff a business which finds itself employing mon staff than it needs

will incur wage and salary costs which cannot be funded from employing such staff on productive forms of activity

These and other problems occur regularly in business, as employers have to adjust their trading plans in accordance with continual changes in market place conditions. HRP cannot protect an organisation from the need to adjust its personnel policies in response to changes in the market place. It can, however, provide for a more orderly adjustment, by attempting to identify in advance the trends in demand and supply of staff which indicate whether future needs should be met by recruitment and training of new staff — or, alternatively by reducing the size of the workforce. The importance of HRP is that it provides the means of ensuring that personnel policies and their objectives are properly integrated into the business policies, goals and objectives.

 

Q.25. What are different stages of Human Resource planning.

 

Ans .Four stages involved in the process of HRP:

Analysis of Existing Resources

A profile of the workforce, based on certain characteristics which are relevant for planning purposes — supplemented, in some instances, by analysis of certain issues, such as absenteeism or overtime working.

HR Demand Forecasting

An analysis of the staffing requirements nccessary for the organisation to succeed in achieving its business objectives, taking into account the requirements of the corporate plan.

HR Supply Forecasting

A forecast of anticipated changes in the supply of labour - this takes account of anticipated losses from the existing workforce and the external supply of suitable staff from sources outside -the organisation.

HR Plan

By bringing together information obtained from the first three stages, an analysis of the action required to bridge the gap between the demand forecast and the supply forecast is ma4e. This action may determine the activities to be undertaken under several personnel policies.

 

Q. 26. What is HR Demand and Supply Forecasting.

 

Ans.The HR demand forecast is an estimate of the numbers of staff required in order to carry out the level of business or service which is anticipated. The basis of this should be a corporate forecast, from which the manpower needs can be derived.

The HR forecast takes account of forecasts about the general economy, and those of the specific businuss or organisation, to arrive at the conclusion of whether to increase or decrease staff, and exactly what type of staff will be needed. This process is summarised in Figure.

The, supply of labour will depend on the availability of suitable staff who can be

recruited from outside the organisation and the potential for developing existing

employees to meet new requirements.

 

Q. 27. What are the Basic Elements of Human Resource Practices.

 

Ans. Planning and Appraisal. How an. organization sets goals, plans performance provides ongoing coaching, and evaluates performance of employees (individual and/or teams).

Indiviaul and Team Development. How an organization identifies the needs for

employee skill development, education and growth and how they meet those needs.

Career Planning. How an organization strives to help employees to learn their

strengths and to match these strengths, aptitudes, preferences and abilities to future work.

Hiring. I-Tow an organization defines and fills positions and roles with qualified

people from within and/or outside the organization; how an organization orients these new employees.

Career Pathing. How an organization (for key positions and roles) determines the logical progression of jobs, roles, assignments, and development to provide a sufficient pool of qualified candidates and icumbents.

Succession Planning. How an organization systematically identifies key roles and positions, determines performance requirements and targets a group of people to fill these positions and roles in the future.

Job Design. How an organization determines the best methods for accomplishing a work product or result. The two major types are the individual job and the team.

Classification. The systematic process for evaluating the size and appropriate salary ranges for different jobs and roles in an organization. Compensation WRecognitio Other Rewards. How an organization pays and rewards employees (individuals and/or teams), through salary, bonuses, benefits and/or non-financial rewards.

 

Q. 28. Explain the features of Human Resource Management (HRM).

 

Ans. Human Resources Management is the planning, organizing, directing and

controlling the operative functions of procurement, development, compensation and maintenance of human resource of an organization’s goals or objectives.

It is responsible for getting the best people, training them and providing mechanism to ensure that these employees maintain their productive affiliations with the organizations.

1. Scope/Goals of Human Resource Management

Human Resource Management is concerned with the Teople’ dimensions of the organizations. The organizational objectives can be pest attained by acquiring human resource, develop their skills, motivate them for high performance and ensure that they continue to maintain their commitment and loyalty towards the organization.

The scope of Human Resource Management is vast. It covers all the activities in the working life of an employee. The activities that come under the purview of Human Resource Management are

(a) Human Resource Planning: This element involves determining the organizations human resource needs, strategies and philosophies. It involves analysis of the internal and external factors like skills needed, number of vacanices, trends in the labour market etc.

(b) Recruitment and Selection: Recruitment is concerned with developing a pool o1 candidates in line with the human resource plan.

Selection is the process of matching people and their career needs and capabilities with the jobs and career paths. It ends with the ultimate hiring of a candidate.

(c) Training and Development: This involves identification of individual potentialities and helping in the development of key competencies through planned learning process The competencies are to be developed to enable individuals to perform current as well as future jobs.

(d) Organizational Development : This element assures healthy inter and intra-unit relationships. It helps work groups in initiating and managing change.

(e) Career Development: It is assuring an alignment of the management It is a

process of achieving an optional match of individual and organizational needs

if) Job Design This elemetl defines the tasks, authority and systems of a job It also ensures integration of individual jobs across the unit.

(g) Performance Management System : The performance management systems ensure linkages between individual and organizational goals. It aims at ensuring that every individuals efforts and actions support the goals of the organization

(h) Compensation and Benefits: This element focuses on a fiar, consistent and

equitable compensation and benefits to the work force.

(i) Employee Assistance The focus of this element is to provide problem solving

counseling to individual employees. The purpose is to help employees in overcoming personal and job-related problems.

(J)Labour Relations : This variable assures healthy union-organization relationship.It aims at creating an environment of industrial peace and harmony

(k) HR Research and Information Systems and Audit: This element ensures a reliable and proof HR information base. It not only evaluates personnel policies and programmes but also highlights the need and areas of change.

 

Q. 29. What are the Limitations of HR planning?

 

Ans. (a) it is very difficult to ascertain the future manpower requirements of an

organization, as the future is always uncertain. As such the predictions are bound to go wrong.

(b) Human Resource Planning is more relevant in countries that face scarcity of human resource In a country like India, Human Resource Planning is of little assistance since manpower. is available in abundance. Also the legal compulsions render Human Resource Planning redundant.

(c) Human Resource Planning is a time-consuming and costly process. The recruitment and selection process is time-consuming and requires the services of experts. This can all add to the cost.

(d) Human Resource Planning is beneficial in organizations that adopt a professional  approach and at the same time are conscious about the changing environment. Traditional business houses often adopt a very indifferent approach towards environmental changes.This limits the scope of Human Resource Planning. .

(e) Human Resource Planning are beneficial where adequate skilled manpower is

available. In cases where skilled manpower is not easily available, Human Resource Planning serves no. purpose. .. .

(F) Human Resource Planning is also made difficult in organizations that have a very high labour turnover In such organizations Estimating the manpower requirments is a Herculean task While prediciting the retirement is easier, it is difficult to determine voluntary quits, prolonged illness and death This restricts the scope of Human Resource Planning.

 

Q. 30. Write a short note on.

 

Ans. Human Resource Development in India

HR holds a key position in any scheme of development because the development process is the sum total of our productive efforts, guided, managed and executed through our human resource. India has realized the importance of HRD and vigorous efforts are on to break the shackles of all economic and social constrain through the application of the HRD concept and practices.

Today, HR is the only factor that can facilitate effective use of science and technology. If India needs to develop, she has to attain the goal of molding HR in the right persprive.

HRD helps in incorporating high levels of skills and knowledge. This not only leads to improvement of the quality of the product but also reduction of cost production.

HRD approach will assist in evolving policies which will be useful in generating job satisfaction, career deyelopment opportunities and in alleviating the sense of frustrations among the human beings. Many organisations in India have started implementing HRD programmes. The objectives of HRD cannot be achieved without an effective HRM system.

 

Q. 31. Explain the Factor affecting Human Resource Planning.

  

Ans. Human Resource planing is a dynamic is a dynamic and on-going process. This is because organization operates in unstable and unpredictable environment. HRP needs constant updating to effectively meet the changing strategies and objectives The process of updating is not very simple, since HRP is influenced by many factors. These are:

(a) Type of Organization :The type of organization determines the production process and number and type of staff needed Manufacturing organizations have a more complex structure compared to service organization It goes without saying that the HRP differs according to the nature of the organization

(b) Strategy of Organization : The human resource needs of an organization depend on the strategic plan adopted by it. For example, growth of the business calls for hiring of additional labour, while mergers will need a plan for layoffs.

(c) Environmental Uncertainties : Organizations operate under changing political, social and economic conditions. The environmental changes demand carefully formulated HR policies The HR manager has to evolve suitable mechanism to deal with uncertainties through career development, succession planning, retirement schemes etc.

(d) Time period : Human Resource Planning also depend on the time period, and according short-term or long-term plans are adopted. The time span is based on the degree of environmental uncertainties For example, an organization operating in an unstable environment must adopt short-term plans, while an organization operating under failry stable environment can adopt long-term plans

(e) Information :The type and quality of information used in making forecasts is an important factor influencing Human Resource Planning In the absence of a well source developed information mechanism Human Resource Planning is just impossible Accurate and timely human resource information system helps in getting better quality personnel.

(t) Nature of jobs being filled Job: vacancies are very common and arise due to

promotions, retirements, termination of services growth, expansion, etc HRP is required to ensure that suitable candidates are recruited

(g) Off-loading :This implies giving part of the organizations work to outside parties If an organization prefers off-loading to recruitment of more people, Human Resource Planning is not required.

 

Q. 32. Explain the Need and importance of Human Resource Planning.

 

Ans .Human Resource planning translate the organization objectives and plans into the number of workers needed to meet these objectives. In the absence of HRP, estimation of an organization human resource need is reduced, to more guesswork.

The need and in’ ort’nce of ‘Human RLsurce Planning’ is as follows

(a) Future manpower requirements : Human Resource planning help in determining the future manpower requirements. In the absence of proper planning, an organization may face problems related to overstaffing and under-staffing. This can be avoided through HRP.

(b) Adjusting to change :, Factors like competition, technology, government policies, etc. generate changes in job contents, skill requirments,  number and type of personnel, etc. Such changes can be effectively tackled through HRP. ‘

(c) Creating talented personnel : The present day’s job are becoming more complex and therefore demand exceptional intellectual skills. While the existing staff becomes redundant, the HR manager has to attract and retain qualified and skilled personnel. He is also required to deal with issues such as career development, succession planning, etc. HRP is an answer to all such questions.

(d) Protection of weaker sections : An HR manager has to ensure that sufficient representation is given to candidates from weaker sections, physically handicapped and socially and politically oppressed citizens. A proper and realistic human resource plain  is needed to ensure equal employment and promotional appointments to such groups.

(e) Execution of personnel functions: HRP provides valuable and timely information for desiging and execution of personnel functions like recruitment, selection, transfers, promotions, layoffs, training and development and performance appraisal.

(F) Human assets : Every organization makes heavy investment in its human resource. This calls for effective use of the available skills and abilities. In the light of this increasing investment in huamn resource, HRP becomes indispensable.

(g) Breaking the resistance to change: It is a known fact the employees resist change. The resistance is due to family attachments, fear of failure to cope with new jobs, new environment, etc. The organization can no longer move its employees anywhere and any time it wants. The only way out of this problem is planning.

(h) Reduction in personnel costs :HRP helps the organization to anticipate imbalances in HR. This, in turn, facilitates reduction in personnel costs.

(t) Managerial development: HRP faciliates planning for future needs. This helps in better planning of assignments to develop managers and to ensure that the organization has a steady supply of experienced and skilled employees.

(j) International strategies : Global operations are becoming very common.

International expansion strategies are not possible without HRP. -it facilitates the process of meeting staffing needs.

Q. 1. Describe Depreciation.

 

Ans. To reduction in value and efficiency of the plant, machines of any fixed asset because of wear and tear, due to passage of time, use and climatic conditions is known as depreciation.

Depreciation may also be defined as a method for spreading the cost of a fixed asset over the life or expected years of use, of the assets. Most of the fixed assets are worn out while in use over a period of time. This wear and tear is unavoidable but it can be minimized to some extent by proper care and maintenance the efficiency of these assets also reduces with the passage of time and at one time it becomes uneconomical to be used further and requires replacement. The amount of money charged for replacement is depreciation.

Some money must be set aside yearly from the profits earned by the equipment itself, so that when the unit becomes uneconomical, it can be replaced by new one.

For this purpose, the initial cost of the machine or equipment + installation charges + repair charges-scrap value is charged over the economical life of the machine of equipment.

 

Q. 2. What are the causes of Depreciation?

 

Ans. Causes of Depreciation. -They are:

(a) Physical causes.

(b) Custom or usage.

(c) Abnormal occurrences.

(d) Technological developments and changes.

(a) Physical causes

(i) Normal physical wear and tear, due to friction, pull, impact, fatigue, twisting, etc.

(ii) Lack of maintenance and timely repairs of fixed assets.

(iii) Action of chemical elements on the component- pars.

(iv) Passage of time.

(b) Custom or usage -

With some types of fixed assets, e.g., cars and other vehicles, there are customs which have been established on the rate of wear and tear normally expected every year. There is definitely a correlation between the price of a second-hand car and the likely extent of depreciation.

(c) Abnormal occurrences, such as:

(i) Accidents

(ii) Defects m materials

(iii) Excessive wear and tear -

(iv) Contingent occurrence e.g., appearance of hairline cracks in a pressure vessel adequately tested.

(d) Technological developments and changes

(i) New equipments which supersede the existing ones, start coming in the market e.g., calculators have superseded the slide-rules to a major extent.

(ii) Change in manufacturing methods which necessitates the use of another type of equipment.

(iii) Improved and automated machine tools which render the use of existing ones uneconomical (obsolescence).

(iv) Inadequacy of the existing equipment perform the necessary function such increased output, more precision and better quality.

 

Q. 3. Name the various depreciation methods.

 

Ans. The following methods may be employed for calculating depreciation.

(a) Straight line method.

(b) Reducing balance method.

(c) Production based methods.

(i) per unit; and

(ii) per hour.

(d) Repair provision method.

(e) Annuity method.

(1) Sinking fund method.

(g) Endowment policy method.

(h) Revaluation method.

(1) Sum of the digits method.

 

Q. 4. Describe the various methods of Depreciation.

 

Ans. 1. Straight line method.

*This method is also called fixed installments method..

*In this method every year a fixed amount is kept aside as depreciation charges

during the economical life of the equipment or machinery.

*The amount of depreciation i.e. initial cost of machine + erection and installation charges — scrap .value is distributed over the useful life of the machine in equal periodic installement.

Let                         C = Initial cost of the machine in rupees

S Scrap value in rupees

N = Estimated life of the machine in years

2. Diminishing balance method

*The machine or equipment depreciate fast in the early years and later on slowly.

Therefore, according to this method the depreciation fund is more during the early years, when repair and renewals are not costly.

This method is also called reducing balance method or percentage on book value method.

The book value of the machine goes on decreasing as its existence continues. Hence in this method, a certain percentage of the current book value is taken as depreciation.

Let                         X = Fixed % for calculating yearly depreciation.

C = Initial cost

S = Scrap value

N = Estimated life in years

3. Sinking fund method:

In this method, a depreciation fund equal to the actual loss in the value of the asset is estimated for each year.

*This amount is invested elsewhere other than in the business itself and the interest will be earned on the fund

‘Therefore, the sinking fund investment will grow year by year with the amount of annual depreciation plus the interest earned on the part investment.

Let                         D = Rate of depreciation per year

R = Rate of interest on invested fund

S = Scrap value

N = No. of years/of life of the asset

(i) Sum of the Digits Method. The method provides for depreciation by means of differing periodic rates calculated as follows : “If N is the estimated life of a machine, the rate is calculated for each period as a fraction in which the denominator is always the sum of the series 1, 2, 3, 4 N and the numerator for the first period is N, for the second N—i, for the third N—2 and so on”.

The effect of this method is to charge depreciation at a decreasing rate each year

Advantages:

(1) It is a method of quick depreciation for motor vehicles,

(ii) It realistically takes account of the immediate drop in value of a new vehicle, even recently purchased.

(iii) It makes the decision to sell the repurchase before the estimated time, easier.

(g) Endowment (Insurance) Policy Method. The method involves charging depreciation and their investing it in the form of an endowment policy. Each year the sum charged is paid as a premium to an insurance company. At the end of the life of the asset the sum payable should be equal to the original cost.

The method is similar in effect to the sinking fund method. cash is taken out of the business to pay the insurance premiums and is made available again at the end of the period for the purchase of another asset, when the policy matures.

(h) Revaluation Method. Revaluation method provides for depreciation by means of periodic charges, each of which is equal to the difference between the values assigned to the asset at the beginning and end of each year, for example:

“If the value of a machine on April 1, 1974 is Rs. 7,000 and on march 31, 1975 it is revaluated as Rs. 6,000, then the  depreciation for this period is Rs. 7,000 - Rs. 6,000= Rs. 1000”.

(e) Annuity Method. It considers original cost and interest on the written down value of the fixed assets.

It assumes that the purchase of .a fixed asset is an investment on which interest is earned.

Therefore, the investment for the purpose of the method is the written down value plus interest earned to date.

The annuity method is generally used for the redemption of leases over a fairly long period, since money invested for a lengthy period in a capital asset should be deemed to be earning interest.

The mathematical relation used to calculate rate of depreciation, R.O.D. is:

                                  

Where  C, S and N are same as in equation (7)  and is fixed rate of interest (in fractions) determined before hand and charged throughout the life of the asset.

Advantages:

Money invested in fixed asset is not idle, rather it is earning certain rate of interest.

Disadvantages:

In most cases the interest a such never materialises.

With plant, machinery and similar fixed assets the changes which take place as sales, renewals and additions tend to make the annuity method difficult to apply.

(iii) Production Method. Involving a uniform charge per unit of output, the method is commonly used in extractive industries. For example the usefulness of mine head installations is closely linked to size of the ore deposit. Depletion, the specific term for the amortization of natural resource costs, is normally computed in this manner.

In cases where physical deterioration or exhaustion is the probable limiting factor on economic usefulness, the life forecast necessarily depends upon an estimate of the assets, total service capacity. However, if absolescence is the limiting factor, a life estimate can be made without

projecting service capacity and estimating the latter requires an additional forecast of the demand for assets services over the expected life-span. Therefore, this further complication has inhibited adoption of the production method in those industries where obsolescence is an important consideration.

 

Example 5.1. An industrial plant with initial value of Rs. 400,000 has the salvage value of Rs. 40,000 at the end of 10 years but is sold for Rs. 250,000 at the end of 5 years What is the profit or loss if sinking fund depreciation method at 10% compounded interest (annually) was adopted.

 

Solution.

A : per sinking fund method (Page 68)

Annual rate of depreciation,

 

Example 5.2. A boiler was purchased in Rs. 45,000 on 1st January 2946, the erection and installation cost was Rs. 7,000. The boiler was replaced by a new one on 31st Dec. 1965. If the scrap value was estimated as Rs. 15,000 what should be the rate of depreciation and the

depreciation fund on 15th June 1955. (b) If after 12 years of running, some boiler tubes are replaced and the replacement cost is Rs. 1,500 what will be the new rate of depreciation.

 

Solution.

                 

 

Example 5.3. A shaper was purchased for Rs. 30,000. Its useful life was estimated as 10 years and the salvage value as Rs. 6000. Using the diminishing balance method, calculate the depreciation factor. Also find the depreciation fund at the end of two years.

 

Solution.

                 

       

 

Example 5.4 Estimate the rate of depreciation from the following data, using sinking fund method.

Cost of the machine = Rs. 50,000

Scrap value = Rs. 5,000

Rate of interest = 8% compound

Useful life of machine = 5 years

 

Solution.

         

 

Example 5.5. Calculate the annual rate of depretiation from the following data, using the sinking fund method.

Cost of asset = Rs. 6,000

Scrap value = Rs. 3,000

Interest at the rate of 4% (compound)

Useful life period 3 years

 

Solution.

Using equation (13)

 

Example 5.6. A lathe is purchased for Rs. 8,000 and the assumed life is 10 years and scrap value is Rs. 2,000. If the depreciation is charged by diminishing balance method, calculate

the percentage by which value of lathe is reducing every year and depreciation funds after 2 years.

 

Solution. According to Reducing or Diminishing Balance method

                 

 

Example 5.7. (a) What are depreciation charges?

(b)A machine is costing Rs. 11,000 and is expected to run for 10 years at the end of which its scrap value is likely to be Rs. 1,000. Machine is expected to run 2,000 hours / year on the average. Estimate the depreciation charge per hour of the machine.                                                                                                                

Solution.

         

 

Example 5.8. A car was purchased for Rs. 32,000. Its life was estimated as ten years and the scrap value as Rs. 8,000. Using the Reducing balance method.

(a) Calculate the depreciation rate (%)

(b) Estimate the depreciation fund of the end of two years.

 

Solution. (a) Using equation (66.2) S = Rs. 8,000; C= Rs. 32,000 and N = 10

         

 

Example 5.9. The cost of a machine is Rs.6,000 and its scrap value after 4 years is Rs 3,000 Assuming an interest rate of 4% per year find depreciation rate per year

 

Solution. Given         C = Rs. 6,000

 S = Rs. 3,000

 N=4years

 I = 4% = 0.04

 

Example 5.10. A machine costing Rs. 2,00,000 has a residual value of Rs. 1,00,000 after 10 years of service. The estimated rate of production is 8 units per hour. Using the production unit method calculate the rate of depreciation. Assume a 50 week year and 46 hours week.

 

Solution.

 

Example 5.11. A machine costing Rs. 15,000 has a scrap value of Rs. 5,000 at the end of 10 years of its serviceable life. If the machine runs for 2,100 hours per day, calculate the depreciation rate per hour of the machine and the total annual depreciation.

 

Solution.

         

 

Example 5.12. A machine costing Rs. 2,00,000 has a scrap value of Rs. 10,000 after 1.0 years of service. The estimated rate of production is 12 units per hour. Using the productive unit method calculate the rate of depreciation and also depreciation per year. Assume 50 week per year and 48 working hours per week.

 

Solution.

         

 

Example 5.13. Suppose the cost of machine, when purchased was 24,000 and it was expected to past for 10 years. The Junk value after 10 years would be Rs. 4,000/-. Find out depreciation by straight line method.

 

Solution.

      

Q. 1. Describe Replacement Analysis.

 

Ans. Replacement analysis is one of the most important and most common types of Iternative comparisons encountered in practice. In replacement analysis, one of the feasible alternatives involves maintaining the status quo; the analysis, one of the feasible alternatives involves maintaining status quo; the remaining alternatives provide replacement options that are available. In some organizations, replacement analysis are performed routinely in an effort to ensure that the best equipment and facilities are in use, compared to their possible successors.

The reasons for considering replacement are numerous. Firstly, the current asset (defender) may have number of deficiencies including high set-up cost; excessive maintenance, declining production efficiency energy consumption, and physical impairment. For example, when you are confronted with a car that is expensive to operate and maintain, or one soon to need a major overhaul, you being to consider replacing the car.

Secondly, potential replacement assets (challengers) may take advantage of new technology and be easily set up, maintained at low cost, high in output, energy efficient and possessing increased capabilities, perhaps at a vastly reduced cost. For example, some new generation computer-controlled manufacturing equipment has rendered many old machines economically obsolete. Also, we can relate to the phenomenal accomplishments with which calculators and personal computers have resulted in increased capabilities, vastly lower prices, and economic obsolescence for equipment only a few years old.

Finally, the environment affects replacement decisions. Consumer demand preferences change, and present equipment may be unable to adapt to the new designs dictated by consumers. Demand levels may also cause equipment capacity to be relatively high or low, resulting in inefficiency or inability to perform. Rental firms specializing in equipment, automobiles, furniture, and so forth, may affect ownership decisions by offering lease options. Also, outside

contractors may be able to perform some tasks cheaper and better than in house facilities. All of the above considerations and more may affect the decision to keep or replace an asset.

Two approaches are commonly used in replacement analysis. One is the cash flow approach in which actual cash flows associated with keeping, purchasing, or leasing an - asset are used directly. The other is the outsider viewpoint approach in which the cash flow profiles by an objective outsider are used. Which approach is used in a replacement analysis is strictly a matter of preference. Both are-mathematically equivalent and yield consistent decisions.

 

Q. 2. What is the need of replacement studies?

 

Ans. (i) Physical Impairment : The existing equipment is completely or partially worn out and will no longer function satisfactorily without expensive repairs.

(ii) Inadequacy : The equipment does not have sufficient capacity to meet the present demands.

(iii) Obsolescence : Lessening in the demand for the services rendered by the

equipment or by the availability of more efficient tool or un-economic maintenance are the few reasons.

(iv) Rental Possibilities : It is possible to rent identical or comparable equipment thus freeing capital for them and more profitable use.

(v) Rapid Technological Changes : Recognition and handling of replacement problems have paid off quite well in many companies. Some of the advantages are:

(a) Maintenance costs would be reduced.

(b) Production costs would be reduced and would keep the company competitive.

(c) Losses, scraps, rework would be reduced.

(d) Modernization would be introduced which will help to take-off’ productivity and returns,

(e) Delays off down-time costs would be reduced.

(f) Enthusiam and morale of workers would be increased resulting into increased human efficiency, better human relations.

It is clear from these points that replacement should be based on economy, since it is an economic venture which must yield considerable profits. Replacement also add modernization which is essential for growth. Some other reasons which have already been discussed above may include inadequacy, excessive maintenance, decline of efficiency, obsolescence etc.

There are three basic ingredients to the successful handling of replacement problems.

(i)There must be clearly stated policies to guide the persons handling the replacement problems.

(ii)The replacement problems must be recongnised in the organisation structure by specific assignment of responsibility.

(iii)A systematic procedure must be established and used in solving specific problems.

 

Q. 3. What is MAPI formula?

 

Ans. MAPI formula for replacement were developed by the Machinery and Allied Products Institute of Washington D.C. to enlightended thinking on the subject of equipment replacement. These formulae were developed in Dynamic Equipment Policy by eorge Terborgh, Director of Research of MAPI.

MAPI formulae are used to determine whether equipment should be replaced based on capital costs, interest, operating costs, and costs associated with physical impairment and onsolescence.

Terborgh introduced some new terms such as:

Defender — present asset whose replacement is under consideration.

Challenger — asset under consideration as a replacement for another asset, usually the present defender.

 

Q. 4. Write a short note on replacement policies.

 

Ans. There are general guidelines carry out actual replacement studies, Such policies should cover the followmg points :

 (i) The general outlook on operational effectiveness of the existing assets These will of course vary but depend on the effectiveness and competitiveness of our production machinery and the policy must give enough opportunity to keep close to machinery developments, so that the replacements may be profitable.

(ii) The policy may include the aspect of finance condition and the interest rates.

(iii) The policy should also cover the aspect of regular checks on the possibility of replacing each asset.

(iv) The policy should also identify the types of persons who can carry out such studies in the organisation. Good replacement tsudies from team work. The persons may be drawn from maintenance deptt industrial engg. deptt., production deptt. accounting deptt. etc.

There would not be any basic change between the studies carried out in small scale industry or medium industry.

 

Q. 5. Write a short note on economic life of an asset.

 

Ans. The economic life is the number of years of use that minimizes an asset’s equivalent annual cost. Theoretically, at the end of an asset’s economic life, it is replaced with another asset having the same cost data as the initial asset. This replacement is repeated over and over again. In this way, the costs over period of time are minimized. Also, in comparing assets on the basis of costs, the used in the comparison should be based on each asset’s respective economic life.

The economic life occurs, with yearly increasing operation and maintenance costs, because the total equivalent annual cost consists of an increasing and a decreasing cost component. That is, the equivalent annual amounts of the yearly operations and maintenance costs increase as the years of use increase. At the same, the equivalent annual cost of the capital recovery and return decreases as the number of years of use increases. The economic life can determined using either a conventional or revenue requirement approach.

 

Q. 6. What is the use of accounting data in economic ? Explain.

 

Ans. Since accounting data are the basis for many engineering economy studies, caution should be exercised in their use. An understanding of the relevance of accounting data is essential for us proper utilization. Two examples of the pertinence of cost accounting data are presented in the action.

Cost data must be applicable. It is common to that a reduction in labour costs will result in a proportionate decrease in overhead costs, particularly if overhead is allocated on a labour cost basis. In one instance a company was manufacturing an oil field specialty.

An analysis revealed per item costs as follows:

Direct labour…………… $ 4.18

Direct material…………. 1.84

Factory overhead $4.18* 2.30…….9.62

Factor cost per item……………… $15.63

The factory cost of $15.36 was slightly less than the price of the item in question. The first suggestion was to cease making the article. But after further analysis it became clear that the overhead of $9 61 would not be incurred if the item was discontinued. The overhead rate used was based on heavy equipment required for most of the work in the department and on early earnings of workmen who averaged $585 per hour. For the job in position only a light drill press and hand tools were used Little work reduction in cost would have resulted from not using them in the manufacture the articles.

 

Q 7 What is pattern of maintenance costs in Replacement analysis ?

 

Ans. The maintenance cost means scattered maintenance cost i.e. it may vary in any Way. Therefore, it is very difficult to have any definite relationship between maintenance cost and capital cost.

Sometimes, the maintenance costs are approximately constant in succeeding year, so constant maintenance cost will never justify replacement. However, if no interest or salvage value is involved, then an equation for average cost of a year of service can be written as:

where:         CA = average annual cost of capital recovery and maintenance

P = initial cost of asset

mc = constant yearly maintenance cost

n  = number of years of life

Obviously, CA will never reach to minimum unless interest and salvage values are involved.

Constantly increasing maintenance cost means there is a rising trend in maintenance cost so there will be a minimum average total cost at some point in the life of the asset it interest is assumed to be zero the average annual cost for an asset with increasing maintenance cost may be expressed as :

C = average annual cost

P = initial cost of asset

Q = annual constant portion of operating cost of asset (maintenance cost is a part of operating cost)

m’ = amount by which maintenance costs increase each year

n = life of the asset in year

To get minimum annual cost, differentiate C with respect to n and equate it to zero,

                                   

 

Q. 8. Describe various theories of profit.

 

Ans: Various theories of profit have been put forth by different economists to explain the profits. The important among these are :

(1) Risks and Uncertainty theory

(2) Dynamic Approach to the Profit Theory

(3) Residual Or Rent theory of Profits.

1. Risk and Uncertainty Theory. This theory was introduced by Howley and according to him net profit is the residual income of the owner after making payments for all factors or production and is the reward for the risk taken by him. It concludes that profits are due to the risk taken by the owner. The owner has to bear the risk of losing capital, there are certain risks which can not be issued. They are known as uninsurable risks. We cannot predict when fashion will change or when new invention will come or when will war outbreak etc. There are unforeseeable changes and hence in value risks

which cannot be insured payments made for these uninsurable risks are called ‘profits’.

2. Dynamic Theory of Profits. Mr. J.B. Clark introduced this theory. According to Clark, the pure profit in a dynamic society is the residual income of the owner after making all payments including rent, wages interest and salary of management. Such pure profit in the form of residual earning result only in a dynamic society where the changes in population, changes in the stock of capital, changes in tastes of fashions, changes in production techniques and changes in management principles, occur dynamically. In a static society since there are no such changes, no pure profit may result. Thus pure profit is a sign of progress. Thus to increase profit an owner may produce a new commodity, popularise it and earn large profit and soon competition sets in the profit decline. Thus in maintaining pure profits high continuous progress is essential.

3. Rent Theory of Profit. This theory was introduced by Walker, who considered profit as a form of rent. He says that owner earns profit in the same way as land earns rent.

Marshall has criticized theory for the following reasons :

(a) Whereas rent on land is in the form of surplus earnings, profit is not.

(b) Land may produce zero or positive, zero or negative rent whereas net profit may be positive, zero or negative.

 

Q. 9. Write a short note on Annuity.

 

Ans. Annuity : An annuity is a series of equal payments occurring at equal periods of time. It may also be said as “Equal payment or uniform payment series.” In certain business dealings, equal payments are made at the end of equal periods of time and all such accumulated payments are allowed to earn compound interest. Periods of time may be of any length say a year and a month etc. But periods should be of equal length. Interest is expressed in yearly terms but the actual interest is paid at the end of each equal period. Hire purchase payments, instalment buying, L.I.C. premium payments etc. are done by this method.

Features. These have the following common features:

(i) These involve series of payments.

(ii) All payments are of equal amount.

(iii) Payments occur at equal time intervals.

(iv) All payments are made at the end of periods.

(v) Compound interest is earned on all accumulated payments.

 

Q. 10. What are the advantages of cash flow analysis?

 

Ans. Advantages of cash flow analysis.

1. It is useful in evaluating current cash position and financial policies, from this, the management will know how much cash is needed, how much can be generated internally and how much it should arrange from outside. Thus, it is especially useful in preparing cash budgets.

2. The comparison of original forecast with actual result may highlight trends of movement that might otherwise go undetected.

3. As it gives the amount of cash inflows of operation the management may consider the possibility of retiring long-term loans, replacement of plant facilities etc.

4. It enables to answer the queri6s relating to a situation when the business has made a profit and yet runs out of money or when it has suffered a loss and still has plenty of money at bank.

Though the cash flow statement cannot replace the usual financial statements, it serves as a very useful supplementary statement. It provides a barometer for measuring any change in the speed with which cash is flowing through the different parts of the business and its impact on the profitability of the business.

 

Q. 11. Describe Economic evaluation criterion of the project.

 

Ans. No project can be taken granted economical viable project, unless it is not evaluated under the constraints. Sometimes a project becomes nonviable since it could not take-off on due-date. Change in starting date may change all the previous cost estimates and implementation schedule of the project Therefore, for declaring a project economically viable, the following three sets of information must be examined:

(i) Computed estimates of the net capital outlay required for the proposed project and the future estimate of cash-flows as anticipated.

(ii) Availabilty of accurate cost estimates to the proposed project from the proper sources.

(iii) A correct planning and time-schedule for the execution of the proposed project so that long-term economic benefits to the promoters are maximised.

On the basis of above set of information, a methodology has got to be developed for evaluating the profitability of the new investment. For this, a suitable criterion is to be found out on the basis of two basic principles :

(i) If other things being equal, bigger benefits are always preferable than smaller ones.

(ii) If other things being equal, early benefits are better than later benefits.

Methods to Assess Economic Viability of Proposed Project :

(i) Non-discounted cash flow method - pay back period.

(ii) Discounted cash flow methods:

(a) Net present value (NPV).

(b) Benefits-cost ratio (BCR).

(c) Interval rate of Return (IRR).

Details of these methods can be taken from any book on Economics or Financial-management.

Satisfies and computer techniques which permit the quantitative handling of economic problems, the role of engineers in decision making has increased very much. We therefore, conclude that ‘Engineering Economics deals with cost and other data pertaining to the functions carried out by engineers in engineering process. The study of engineering process takes birth when a want is felt and includes the following steps:

1. An analysis of the want. .

2. Providing suitable solution ant its valuation.

3. Launching of the project and making of arrangement for finance.

4 Organization of project

5 Designing of the project and construction of the plant

6 Supervision and operation of production

7. Distribution of the product.

From this point of view, management may be considered as the art and science of directing and coordinating efficiently all the above functions.

 

Q. 12. Describe the significance of Economics to Engineer.

 

Ans. Engineering and Technology are closely connected with economic science. In economics, we study the way in which we make optimum use of scarce resources. An engineer’s and an architect’s problem is also very much the same. An engineer (or an architect) tries to construct or manufacture goods of a maximum utility with a given cost or a desired product at minimum cost. At various places in the engineering process the engineer is called upon to take decisions. These decisions have to be made on the basis of economic feasibility. At each point he is faced with the question of cost. The law of equi-marginal utility can help an engineer to substitute one factor of production for another in such a way that he incures minimum cost in production.

Besides, a problem is mostly such that it may be solved in more than one way with different results. One result may be superior to another in quality and technical excellence or may be more economical to obtain. The engineer has to choose the best way.

Thus, engineering problems2 are nothing but choice involving problems; and choice- making is entirely an economic problem. -

Sometimes engineers and architects have to work as a factory manager or as an executive engineer, in which capacity they have a deep interest in the problem of labour and personnel management. They, must then be fully aware about the labour laws. A knowledge of accounting and costing : auditing, depreciation; management, and the market condition is also very useful. Needless to say, one must also have an insight into

(i) social and psychological problem, pertaining to the production and (ii) the factory management of the personnel. Management Science is assuming more and importance for engineers and architects.

At present our country faces an acute food problem which is threatening a major castastroph in the future. As a matter of fact, the condition of agriculture is unsatisfactory. The problem is serious mainly due to fact that science and technology have not come to the rescue of agriculture. Agriculture is completely at the mercy of Nature. The fate of agriculture and hence, of the country can be changed if irrigation engineers give us a network of small and medium irrigation works all over the country. It has been observed that after the completion of many big irrigation and power projects, the farmer is not getting water and power either because it is too costly or because there are no distributaries. All these are problems which only the engineers can solve. Mechanical

Engineers can also be useful in devising cheap and simple mechanical devices or appliances which our farmers can handle easily. In USA each farmer has a small workshop to repair his tools and implements : he also has adequate knowledge. Such a provision will be useful to our country. Electrical and Chemical Engineers can help agriculture by providing adequate and cheap electrically and fertilizer.

Thus agricultural engineering can help in increasing productivity by inventing better methods of production, better tools and equipments, insecticides and pesticides.

Engineers can play an important role in searching substitutes for making the country self-sufficient in the matter of power, steel and fertilizers. This will save much foreign exchange which we pay to foreign countries.

 

Q 13 What do you understand by economic life of a project ? Also discuss challenger and defender.

 

Ans. Economic life can be less than absolute physical life for reasons of technological obsolesence, physical deterioration, or product life cycle.

Terbordg dramatically described the replacement problem as a battle between the current machine, which he called the ‘defender’, and a new and better machine which he called the ‘challenger’. In his analysis economic lives of both the challenger and defender are estimated and then the time adjusted costs of the challenger are compared to the time adjusted costs of defender. If the time adjusted costs of the challenger is lower than the time adjusted cost of the defender, replacement is indicated.

The problem however, is that the economic life of the challenger is difficult to estimate. The optimal length of time a investment is maintained, its economic life, depends upon not only the newest products available today, but those available tomorrow and so on into the future. If the economic life of an investment is unknown, how then can its cost be calculated ?

While this issue of economic life was raised with production machinery in mind it is very relevant, at least as a starting point, for information systems investment.

In an environment with no technological progress, one in which the hardware, and software available next year are no better than those of this year, economic life ii simply that life when the sum of the discounted capital and operating costs are at a minimum, the average capital costs of an is investment falls the longer the system is in operation. The only incentive to replace is that some operating costs, such its program maintenance or software support may increase over time and that these costs may be reduced through replacement.

To make the economic life problem more manageable. Terborg made the assumption that, “present challenger will accumulate operating inferiority at a constant rate over it’s life.” This suggests that the pace of information technology is constant, which we know is not true.

From this assumption, it is possible to determine the economic life of an investment. The Uniform Annual Equivalent, UAE, is the uniform amount whose value is equal to the time adjusted costs, both investment outlays and obsolescence, incurred every year over the life of an investment,

 

Q. 14. Useful Applications of Life-Cycle Cost Analysis.

 

Ans. Life-Cycle Cost Analysis (LCCA) has applications for many areas of interest to

State and local transportation agencies. Common applications of LCCA include the following :

Designing, selecting and documenting the most affordable means of accomplishing a specified project or objective For instance, if a bridge must be replaced, LCCA can be used to select the replacement option that would cost the least over the expected life of the bridge.

Evaluating payment preservation strategies-the costs of each strategy can be evaluated relative to the expected effects it will have on delaying the costs of expensive rehabilitations or reconstructions.

Among other requirements, the VE- team must consider the lowest life-cycle cost means of accomplishing a project.

Project planning and implementation, especially the use and timing of work zones. LCCA allows the analyst to balance higher agency and/or contractor costs associated with off-peak work hours against reduced traveler delay costs associated with fewer work zones during peak periods.

 

Q. 15. Discounted Cash Flow Method.

 

Ans: A valuation method used to estimate the attractiveness of an investment opportunity. Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one.

Calculated as :

                                   

There are many variations when it comes to what you can use for your cash flows and discount rate in a DCF analysis. Despite the complexity of the calculations involved, the purpose of DCF analysis is just to estimate the money you’d receive from an investment and to adjust for the time value of money. DCF models are powerful, but they do have shortcomings. DCF is merely a mechanical valuation tool, which makes it subject to the axiom “garbage in, garbage out”. Small changes in inputs can result in large changes in the value of a company. Instead of frying to project the cash flows to infinity, a terminal value approach is often used. A simple annuity is used to estimate the terminal value past 10 years, for example. This is done because it is harder to come to a realistic estimate of the cash flows as time goes on.

 

Q. 16. Demerits of Limitations of Discounted Cash Flow Method.

 

Ans. (1) It involves a good amount of calculations hence it is difficult and complicated.

But the supporters of this method rebute the argument and assert that difficulty of the

method is unfamiliarity rather than its complexity.

(2) It does not correspond to accounting concept for recording costs and revenues with the consequence that special analysis is necessary for the study of capital investment.

(3) The selection of cash inflows is based on sales forecastes which is in itself an indeterminable element.

(4) The economic life of an investment is very difficult to forecast exactly.

(5) The method considers discount on expected rate of return but the determine action of rate of return is in itself a problem.

Despite the above defects, the method provides an opportunity for making valid comparisons between long-term competitive capital projects.

Q. 1. What is Job Evaluation?

 

Ans. Job evaluation is the process of determining systematically and analytically the

comparative or relative worth of various jobs in an organization. It is a formal plan for

appraising the value or worth of a job in relation to other jobs in the organizations.

According to ILO, job evaluation may be defined as an attempt to determine and compare

the demands whichthe normal performance of particular jobs makes on normal workers

without taking account of the individual abilities or performance of the workers

concerned.” Thus, job evaluation assesses the worth of a job not of the job holder. The

worth or merit of employees is determined through met rating. Jol? evaluation is

concerned only with the evaluation of jobs and not of workers performing them It

involves placing a value of each job. When used in connection with salaried staff, it is

known as job grading.

Definition

The following are few definitions of the term job evaluation

“Job evaluation reesents an effort to determine the relative value of every job in a

plant to determine what the fair basic wage for such a job should be.”

- - . -

—Kimball and Kimball

“Job evaluation is a process of determining the relative worth of the various jobs

within the organization, so that differential wages may be paid to jobs of different worth.”

— Wendell French

“Job evaluation is a process and analysis and assessment of job to ascertain reliably

their importance using the assessment as a basis for balanced wage structure.”

- — The British - Institute of Management

 

Q. 2. What are the various objectives of job evaluation.

 

Ans. Objectives of Job Evaluation - -

The main objectives of job evaluation are as follows:

(1) To establish wage differentials between various jobs,

(2) To eliminate wage iniquities, if any

(3) To establish a rational basis for incentive schemes,

(4) To provide a framework for periodic review and revision of wage structure

(5) To provide a basis for wage negotiations during collective bargaining;

(6) To generate job data for use in the selection, training, promotion, transfers-of

employees; etc. -

The principles of job evaluation can be applied to all jobs — operative, supervisory

and executive.

 

Q 3 What are the different principles of Job evaluation

 

Ans. Principles of Job evaluation -

1. Rating of the job should be done rather than the rating of man doing the job (which concerns merit rating). The man doing the job may be a misfit.

2. The factors selected should be less in number. Usually the factors selected are skill, effort, responsibility and working conditions. Each factor should be precisely defined.

3. The job-evaluation plan must be acceptable to employees. In other words, such a plan must be sold to employees by explaining its advantages and objectives.

4. The value or weightage given to the factors should not be disclosed to the foreman or supervisor while discussing with them job evaluation plan. In case monetary values are also explained, it will result in the biased attitude.

5. There should be limited number of occupational wages i.e., there should be few categories of jobs and they should he arranged in terms of their value to the firm.

6. The foreman of the concerned department should participate in job evaluation.

7. Maximum co-operation o. employees is very essential for its success.

 

Q. 4. What is the scope of Joint Consultation?

 

Ans. The scope of discussion of the joint consultation should be as wide as practicable. However, it should not include in its scope negotiations between labour and management. Joint consitation may include the following.subjects:

(a) Schemes to improve quantity and quality of production.

(b) Training of workers.

(c) Systems of wage payment and incentive schemes.

(d) Grievance handling.

(e) Discipline problems.

(f) Working conditions and welfare facilities for the workers.

(g) Safety measures.

 

Q. 5. What are the various problems in Effective Joint Consultation.

 

Ans. Problems in Effective Joint Consultation

In practice, joint consultation is not very much successful  Joint consultation has to face the following difficulties

1. The representatives of the employees have weaker voice in the joint consultation committee because they are not well educated and well informed.

2. One influential member of the joint consultation committe may over-shadow the

views of all other members.

3. It becomes difficult to elect or select the persons as representatives of the workers.

4 Sometimes, the representatives of the workers are narrow-minded and are not

able to see the long-term interests of the organizations. This creates difficulties in the smooth functioning of joint consultation.

 

Q. 6. Describe the limitations of Performance Appraisal.

 

Ans. Limitations of Performance Appraisal:

The drawback and limitations of various methods of performance appraisal are listed below:

(1) If the factors included in the assessment are irrelevant, the result of merit rating

will not be accurate. -

(2) Different qualities to be rated may not be given proper weightage in certain cases.

(3) Some of the factors are highly subjective like initiative and personality of the employees; so the actual rating may. not be on scientific lines.

(4) Supervisors often do not have critical ability in assessing the staff. Sometimes,

they are guided by their personal emotions and likes. So the ratings likely to be biased.

 

Q. 7. Explain the various methods of Job Evaluation.

 

Ans. Methods of Job Evaluation

Several methods of job evaluation are avalable which can be used either in their

present form or in modified form to suit the particular needs of the individual

organization. There are four major methods from which choice can be made, viz : (1)

Simple Ranking (2) Grading (3) Point Rating, and (4) Factor Comparison. Simple ranking

and grading represent non-quantitative methods. The point rating and factor comparison

methods are, however, complex and are quantitative in nature.

(1) Simple Ranking

The simple ranking method was first to be developed. In using this method jobs are

compared with each other. The purpose is to determine whether a job involves the same

level of duties, responsibilities and requirements as others in the series or a higher or

lower level than they do. y comparing the jobs, the ranking of importance of eacR can be determined. In this method, jobs are not split up into their component parts. Instead, comparison is made on the basis of whole jobs.

(2) Grading

The grading method of evaluation consists basically of establishing (1) job grades, (ii) preparing of definition for each grade, and (iii) classifying individual jobs according• to how well their characteristics match those of the different grade definitions. These steps are explained below: -.

(i) Job grades. Broad job grouping such as clerical, factory, sales and executive should first be decided upon. Then within each grouping an effort should b made to determine

the significantly different levels of job difficulty, ranging from least demanding to most

demanding. Quite frequently, the job ranldng method is used in this preliminary stage.

(ii) Definitions of grade levels. Definitions or descriptions of the grade levels are then

carefully written. Usually these are made to cover the samç basic elements, such as what

types of duties are involved nd what requirements or qualifications must be met.

Benchmark or. illustrative jobs are used liberally as examples to guide judgement.

(iii) Evaluation of jobs. Jobs are evaluated by carefully studying each job descriptions

and placing each job in what seems to be the proper classification.

Committees are usually used in order to provide representation to different departments and to attain the advantage of pooled judgement.

 

(3) Point Method

The method of job evaluation that enjoys widest acceptance is the point system.

Fundamentally, this method consists of evaluating each job in respect of certain factors.

such as skill, efforts, responsibthty and working conditions and combining the separate

evaluations for each factor into a single point score for each job The wage level

appropriate for each job is fixed on the basis of total points scored by it

The steps involved under the point method are listed below

I Determine type of jobs

2 Decide upon job factors

3 Construct scale of values for each factor

4 Evaluate each job in terms of scales so constructed

5. Conduct wage survey for sel’ected key jobs.

6. Design the wage structure.

7. Adjust and operate the wage structure.

(4) Factor Comparison method

This method takes a number of factors like mental requirements, physical requirements, responsibilities and working conditions as the basis of evaluation. These factors are listed on a sheetin columnar form. Then the alary for each key job is allocated to different factors as related to each job. Each key job is evaluated with regard to each of the given factors and eitered in the factor column against the appropriate salary index The salary componhts for each factor are added to get the appropriate salary level for each key job Other jobs are ranked in relation to the ranking of key job

 

Q. 8. Describe Performance appraisal.

 

Ans. Merit rating or performance appraisal is defined as the process of evaluating the employee’s performance on the job in terms of requirethents of the job. According to Yoder, performance appraisal refers to all formal procedures used in working organizations to evaluate personalities and contributions and potential of group members. This definition reveals that performance appraisal is a formal programme in an organization which is concerned with not only the contributions of the members of the organization but also aims at spotting their potential.

Merit rating is the systematic evaluation of the individual with respect to his performance on the job and his potential for development Performance appraisal is concerned with determining the differences among the employees working in the organizations. Generally, the evaluation is done by the individual’s immediate superior in the ‘organization and who is reviewed in turn by his superior. Thus, everyone in the /organizations who rates other is also rated by his superior. Performance appraisal employs rating techniques for comparing individual employees in the work-group, in terms of personal qualities or deficiencies and the requirements of their respective jobs. It should be differentiated from job evaluation which is concerned with the determination of worth of different jobs.

 

Q 9 Differentiate Merit Rating and Job Evaluation

 

Ans. Merit Rating vs. Job Evaluation.

The points of difference between merit rating and job evaluation are as under:

I.Merit rating is concerned with the differences among the employees in terms of their performance. That is why, it is also termed as ‘performance appraisal’. But job evaluation is the analysis of various jobs to know the demands which the normal performance of particular jobs make on average employees. It does not take into account the individual abthties or performance of the employees concerned

2. The purpose of merit rating is to appraise the performance of individuals to take decisions like increase in pay, transfer, promotion, etc. It also provides the emoyees with information relating to their strong and weak points. A systematic programme of therit rating will tell them the quality of their performance, it will also serve as the guideline for the management to consider

the type of training which should be imparted to the employees. But the purpose of job evaluation is very limited, i.e. to determine the worth of the job on the basis of demands made by a particular job on the average worker.

3. Merit rating rates the man and not tle job as it is concerned with assessing of the abilities of the individuals. As a matter of fact, it measures the worth of men to theorganization. But job evaluation rates the jobs in the organizations in order to determine their worth and fix the wage or salary level that will be fair and equitable.

4. Job evaluation is generally used as a basis of wage structure in the. organization. But merit ratihg is used as basis of sound personnel policy in relation to transfer, promotion, etc.

 

Q. 10. Describe the methods of Worker’s Participation.

 

Ans. Forms or Methods of Worker’s Participation

Participation of workers in management of industrial enterprises is achieved by the

following methods

1. Works Committee. A works committee consists of equal representatives of both

employers and workers. It meets frequently for discussion on common problems of the workers and the management. After discussion, joint decisions are taken and such decisions are binding on both the parties. Matters like wage payment, bonus, training, discipline, etc. are discussed in such  meetings. Work committees are extremely popular and effective in France and England. In India, there is a stationary provision.for the establishment of workstommittee under the Industrial Disputes Act, 1947. Such committees deal with various matters like amenities to workers, safety and accident - prevention, administration of welfare funds, educational and recreational facilities, etc.

The works committee have not proved to be effective in India.

2. Joint Management Council. Joint consultation scheme was started in the UK with the formation of Whitley Councils (works councils, district councils and national councils) on the recommendations of the Whitley Committee which was appointed by the British Government to recommend measures for the permanent settlement of difference between. the works and the management. Joint consulation involves setting up of joint committees represented by the workers and the management to discuss and give suggestions for improvement with regard to matters of mutual interest. The decIsions of such committees are not binding on either party, yet

they are implemented as they are arrived at mutual consultations. The subject-matter of joint consultation includes such problems  areas as labour welfare, safety measures, grievances redressal, training, working hours, etc. Matters relating to wages, bonus and incentive schemes are generally kept otitside the scope of joint consultation as they are considered appropriate for collective bargaining.

3. Collective Bargaining. It is an industrial relations process in which employees through their elected representatives participate on equal basis with management in negotiating labour agreements, In administrating the agreements and in redressing their grievances.

4. Co-partnership. In co-partnership, workers arallowed to purchase shares of the company and thus become its co-owners. In this-way, they can participate in the management of the company through their elected representatives on the Board of Directors. As shareholders, the workers canalso attend general meetings of shareholders and exercise their voting rights.

5. Worker-Director. Should labour association with management result in a ‘workers’ representative bemg given a seat on the board of directors ‘ Many trade unionists point out that such an idea is illogical In countries where the trade unions are very strong as in Britain and U S A, the trade unions definitely reject the idea Thus, according to them, would Simpi cuse a confusion of roles and that the unforturite worker director would not be able to reconcile his position as a trade unionist representing the workers interest with himself being a member of the management once the worker-director identifies himself with the cause o?management either at the top level or down the line, he cannot act contrary to the management’s decision because of the principle of collective responsibility in the management. Thus, he will not be in a position to defend his role as a workers’ representative.

 6. Suggestion Scheme. Under suggestion scheme, the workers are encouraged to give their suggestions to the management on various administrative matters and their suggestions are considered carefully and accepted, if found suitable. In addition, rewards are also given to those who make constructive suggestions. For collecting suggestions of workers, suggestion boxes are kept in all departments. The workers may put their suggestions in writing into the box. These suggestions are collected every month and suitable decisions on these are taken jointly by a committee consisting of the representatives of workers and management.

7. Grievance Procedure. A grievance procedure also provides an opportunity to the

workers to participate in decisions on matters affecting their interest. It is established for

an early settlement of worker’s grievances. In India, Sec. 9—C of the Industrial Disputes

Act provides that in every establishment in which 100 orlhore workers are employed or

have been employed on any one day in the preceding twelve months, the employer

shall set up a time bound grievance redressal procedure

 

Q 11 Describe various measures to evaluate the success of workers’ participation

in management?

 

Ans Measures for Success of Workers’ Participation in Management

In order to make WPM a success in an enterprise, the following conditions should

fulfilled :

(i) There should be progressive outlook of management in the enterprise. It should

1be conscious of its obligations and responsibilitks to the owners of the business, the

employees, the consumers and the country.

(ii) A truly representative, enlightened and strong unionshould come into being and

should function on strictly constitutional lines.

(iii) There should be unanimity between labour and management on the basic

objectives of the organizations and a mutual recognition of their rights and obligations.

(iv) Atmosphere of trust should be created on both sides. Unions should feel that

management is not side-tracking the effective unionthrough a works committe

Management should equally realize that some of their known prerogatives are meant to

be parted with It should do Justice with the workers and treat them equal co-partners in

the progress and prosperity of the enterprise

(v) Both the workers and the managements should be made conscious of the benefits

of participation. So long as the true spirit of participation is missing, no scheme of

participation can be successful Mere legislative action cannot make participation effective

unless employers, trade unions and government are fully committed to participation

and make a determined effort to make it successful.

(vi) One and only one union should be recognized in each industrial unit so that

inter-union rivalry cease to play the disruptive role which it is now playing in the progress

of the industry. .

 

Q. 12. Describe the need and significance. of workers’ participation.

 

Ans. Need and Significance of Workers’ Participation

Workers’ participation in management has assumed great importance these days

because of the following advantages:

1. Reduced industrial unrest. Industrial conflict is a struggle between two organized groups which are motivated by the belief that their respective interests are endangered by the self-interested behaviour of the other. Participation cuts at this very root of industrial conflict, it es to remove or at least minimize the diverse and conflicting interests between the parties. It substitutes in their place, cooperation, homogeneity of objects and common interests. Bth sides are integrated and decisions arrived at become “ours” rather than “theirs”.

2. Reduced misunderstanding. Participation helps dispelling employees’ misunderstandings about the outlook of management. These misconceptions would otherwise die hard, and have damaging effect. In addition, the difficulties which management encounters in managing the enterprise will be appreciated by the employees.

3. Improved communication. It is seldom possible for managers to have knowledge of all alternative and all consequences related to the decisions which they must make. Because of the existence of barriers to the upward flow of information in most enterprises, much valuable information possessed by subordinates never reaches their managers. Participation tends to break down the barriers, and makes the information available to managers. The quality 0r decisions is improved.

4. Higher productivity. Increased productivity is possible bnly when there exists fullest co-operation between labour and management. It has been empirically tested that poor ‘labour management relations’ do not encourage the workers to contribute anything more than the

minimum desirable to retain their jobs. Thus participation of workers in management is essential to increase industrial productivity.

5. Increased commitment. Participation allows individuals to express themselves at the work-place rather than being absorbed into a complex system of rules, procedures and systems. If an individual knows that he can express his opinions and ideas, a personal sense of gratification and involvement takes place within him This, in turn, forfities his identification with the orgamzation resulting m greater commitment

6. Industrial democracy. Participation helps to usher in an era of democracy in industry. It is based on the principle of recognition of the human factor. It tends to re4uce class conflict between capital and labour

 

Q. 13. Explain the reasons of failure of workers’ participation in India.

 

 Ans. Reasons for Future of Workers’ Participation in India

Broadly speaking the shemes of workers’ participation in management have failed in India. The reasons for this are listed below:

1. There has been managerial resistance to workers’ participation schemes because they feel that workers are not competent to take decisions. The managers have been presented with little clear evidence that participation will really lead to increase in productivity and profitability in which they are truly interested.

2. A vast majority of workers in India are not strongly motivated to assume decision making responsibility either directly or through representatives. One plausible reason for this may be that their lower level needs as defined by Maslow have not yet been adequately satisfied.

3. Under participative management, the employees’ representatives have to assume the dual role of spokesmen of the workers and co-managers. Thus, employees’ representatives are required to perform two incompatible roles-sharing- managerial responsibility and leading the workers. This creates difficulties in effective participation 4. In India, more emphasis hasleen given to participation at the higher levels. That means active involvement only to a few, and the creative potential of rank and file of workers is ignored.

5. Normally, workers’ representatives are also active members of political parties. Many a time, preference is given to political ends than to the interest of workers. This brings down the effectiveness of. participation.

6. Workers’ participation schemes have been inspired and sponsored by the Government. There has been a lack of initiative on the part of management and trade unions.

7. There have becn labour tâws which pervade virtually all areas Of the workplace. Wages, hours of work and other principal work rules have been determined by various Acts. This has distracted the attention of unions from the work place, except in efforts to secure ‘over award’ wages or in reaction to threats of job dislocation introduced by major technological changes.

 

Q. 14. Explain pre-requisites of Job-evaluation programme.

 

Ans .Pre-requisites of Job-evaluation Programme

It is very essential to decide following matters before starting a evaluation programme:

I Jobs must be thoroughly examined and clear cut job descriptions and job specifications must be available for selecting factors to be evaluated for job-evaluated for job-evaluation purpose

2 The next important decision is about the jobs and persons to be covered e g houi ly paid jobs or salaried jobs

3 One job should be compared with others and put in a list in order of its worth

4 In the job-evaluation plan, all persons who are going to be effected should participate. This will be possible only if job-evaluation plan is successfully comunicated the employees

5. The job selected should be divided into certain parts and each part (i.e. factors

such as responsibility, skill effort, working conditions) should be e .ialuated separatc ly

6 Supervisors should feel convinced about the job evaluation programme

7 Supervisor should be given training in advance about job evaluation methods

8 It should be widely published in the factory so that everybody is awart. of this system For major groups, separate pay structures should exist Since th nature of work is different in production, sales, marketing and finance departmcnts then pay struiturcs must also be different.

9 There is no sense in believing that job evaluation will not be challenged by the union. The management should accept, its deficiencies with open mind.

.10. The job evaluation programme must be sold through a process of education to all employees.

11. Any internal or external inconsistency in wage structure should be removed after completing the job evaluation.

12 Build definitions, measuring scales, forms, questionnaires and prcllmlnar) descriptions beforehand.

13 If job content changes, the supervisor should notify the job analyst so that ncccssary changes are made in the rating. It must be kept upto dating.

 

Q. 15. Explain the procedure of Job Evaluation.

 

Ans. Procedure of Job Evaluation

There is no standardized procedure for planning, installing and operating a system of job evaluation . Each scheme should be tailored to meet the particular needs of the organizations concerned.

Basically, job evaluation involves the following steps:

1. Describing the jobs. Job evaluation process begins with detailed written description of work involve in each job. The descriptions are used to find out the nature and requirements of the job and to identify job factors for rating of jobs. The relative value of job is determined by relating job descriptions, The agreement of the operator who is actually carrying out the job should be obtained on his job descriptiàn. Job descriptions can be prepared through job analysis.

2. Choosing key jobs. Once jobs have been described a number of “key jobs” are selected as standards against which other jobs are to be compared. The key jobs should be representative of the type of work carried out. Every type of jobs should be included.

3. Weighting factors. Weights or points are assigned to each job factor. Each factor is given a value ancf the values are totalled to find out the total value for the job.

4. Assigning money values. The job. values are linked with wage or salary structure. Each job is priced in terms of its worth. -

Job evaluation may be carried out by the employees of theV organization or by outside consultants or jointly by btth. Whatever method is adopted, the corisultation and participation of workers is essential. Unless the idea of job evaluation receives full support of workers and

management it caimot succeed. Job evaluation staff should be well trained and unbiased. The jobs to be evaluated should be selected carefully. The tools and aids used in job evaluation should be properly arranged. Job evaluation tools consist of job evaluation forms for recording information, job analysis procedure for collecting necessary information about jobs, job evaluation manual which defines in detail the job

factors that are to be analyzed and evaluated.

 

Q. 16. Explain Job Analysis.

 

Ans.  Job analysis is a process of determing the task components or work content of a job. It is a systematic and detailed étudy of a job in order to obtain all pertinent facts about the jobs. It is the technique by which specified jobs facts are discovered and recorded for different uses. Job analysis may thus be defined as “the process of determining by observation and study the tasks wluch comprise the job, the methods and equipment used, and the skills and responsibilities required for the successful performance of the job, and reporting pertinent information relating to the nature of the job.”

The job is basically a position mvolvmg substantially the same tasks, duties and responsibilities which is assigned to and performed by a single individual or a group of individuals. Job analysis is a very important prerequisite to job evaluation because the accuracy of job evaluation results depends upon the copecthess of information obtained about a job.

The object of job analysis is to gather and report necessary information about jobs being studied. By revealing the duties, responsibilities and skills required in a job, it helps in the selection, p1cement and training of employees It also facilitates improvements in job design and work methods. jobanalysis provides data essential for correct evaluation of a job.

 

Q. 17. What are the benefits of Job Evaluation.

 

Ans. The various advantages of Job evaluation are:

(1) Job evaluation provides a sound basis for developing a fair wage and salary structure. By eliminating wage iniq’uities, it increases the satisfaction of employees which

in turn increases employees co-operation, employees morale and productivity. It helps

to reduce labour absenteeism and turnover.

(2) Wage administration becomes easier. Management has sound information for

wage negotiations during collective bargaining. The principle of equal pay for equal

work can be applied. Overpaid and underpaid jobs can be eliminated. New jobs can

be brought into the wage structure at a proper level.

(3) Management can control labour costs and avoid unwarranted pay claims. Wage

disputes can be handled more effectively. Estimates of labour costs facilitate budgetary

control and incentive scheries;

(4) Job evaluation provides a rational for selection, placement, training and promotion

of employees. It becomes possible to indicate the lines of authority and responsibility,

Thus, job evaluation is an extremely valuable tool of management.

 

Q. 18. Explain the limitations of Job Evaluation..

 

Ans. Limitations of Job Evaluation

Job evaluation suffers from the following limitations :

(1) The job evaluatoris deciding the pay 6f employees and therefore, human

considerations are very important. Too much reliance on scientific evaluation without

consulting employees and the union may cause dissati5factión with the entire scheme.

A successful job evaluation scheme requires the support of all members of the

organizations

(2) Job evaluation does not take into account the supply and demand for labour

which exercise an important influence on wage rates. If the job evaluation scheme is

followed without regard to labour market conditions, the firm may find it difficulties to

,‘recruit trained employees.

(3) Job evaluation is not a complete answer to the wge problem. It does not make

allowance for difference in performance.

(4) Job evaluation is a time-consuming and expensive process. As job contents

change, revaluation of jobs becomes necessary. The results of job evaluation will not be

meaningful unless the standards are set for the jobs tobe studied. Job standardization is

a prerequiste to job evaluation. Absolute accuracy cannot be obtained in job evaluation

as judgement is involved.

Q. 19. Describe Collective Bargaining.

 

Ans.  Collective bargaining is a process in which represents of two groups (employers and

employees) meet and attempt to negotiate an agreement which specifies the nature Of

relationship between them. According to Flippo “Collective bargaining is a process in whi cli

the representatives of a labour organisation and the representatives of business organIzation tneet

and attempt negotiate a contract or agreement, which specifies the nature of employees-employer

union relationship.

“Collective bargaining is a mode of fixing the terms of employment by ñwans of

bargaining between organised body of employees and an employer or an association of

employers acting usually through authorized agents. The essenceof collective bargaining

is a bargaining between interested parties and not a decree from outside parties.”

 

Q. 20. Describe workers’ participation in management.

 

Ans. Wokers  participation in management has become an important part of the human relations in  any organization The increasing association of workers with management offers great potential for  higher productivity, improved satisfaction and creative thinking. This item is interpreted in many  ways by various parties to industrial relations, namely, workers, management and government.  Managers generally interpret it merely as joint consultation prior to decision-making. This is a very narrow view of the term participation. Workers normally think of it as equivalent to co-decision or  co-determination in the sphere of managerial functions.  

Many industrial relations experts regard it as association of labour with management without the

final authority or responsibility in the general area of managerial functions. To them, means sharing in a appropriate manner the decision-making power with the lower ranks of the organizations. Thus, workers’ participation in management means giving scope

for workers to influence the managerial decision-making process at different levels ‘y various

forms in the organisation. The pri nci pal forms through which workers participate are information

sharing, joint consultation and suggestion schemes.

Workers’ participation in management is recommended to achieve the following aims:

1 Increasing productivity for the general benefit of the enterprise, the employees and

the community

2 Givmg employees a better understanding of the role m the workmg of the industry

and of the process of prodüaion.

3. Satisfying the worker’s urge for self-expression.

4. Achieving industrial peace, better relations and increased co-operation in industry.

5. Development of human personality.

6. Development of leaders from within the industry.

 

Q. 21. Explain the benefits of Merit Rating.

 

Ans. Benefits of Merit Rating

The benefits of performance appraisal are as follows

1. It helps the supervisors to evaluate the performance and to know the potential of

their subordinate systematically. It also helps them to assign work to individuals for

which they are best suited. Thus, it facilitates to correct placement of workers.

2. Ratings can be used as the basis of sound personnel policy in relation to transfer

and promotion. If the performatice of a worker is better than others, he can be

recommended for promotion, buL if a person is not doing well on a job, he may be

transferred to some other job for which he is considered to be better suited.

3. Merit rating helps in designing the training programme in a better way. Weaknesses

of the workers are revealed by such appraisal and the training programme can be

developed and modified accordingly.

4. Performance ratings help in guiding the employees. The supervisors may use the

result of the system for the purpose of constructively.-guiding the employees in the

efficient performance of work. The employees also come to know where they stand and

cosequently they try to improve their performance.

5. If the performance appraisal is done scientifically and systematically, it will prevent

grievances and develop a sense of confidence among the workers because they are

convinced of the impartial basis of evaluation. The records of performance appraisal are

available in permanent form to protect the management against subsequent charges of

discrimination which might be levelled by the trade unions.

 

Q 22 What are the advantages of workers’ participation in management

 

Ans. (a) Advantages to the employees. These include a sense of identity and belongingness motivation to perform better. When an organization perform better, he will have economic gains in terms of increased wages and incentives and better standard of living.

(b) Advantages to the organizations. These include, improved quality of decision making, better implementation of the decisions, better quality performance, resulting in better profit, easier acceptability of change of technology etc. on the part of employees, better materialization of creative ideas and suggestions

 

Q. 23. What are the various rules for Quality Circles.

 

 Ans .

(a) Each member can contribute an idea on his turn in rotation

(b) Each member offers only one idea per turn regardless of how many he or she has in mind

(c) Not every one has an idea during each rotation when this occurs just say Pass’

(d) No criticism or comments should be passed on the ideas, being contributed by th.. member however old it may look to, be patient and welcome their ideas

(e) During brain-storming no evolution of suggested idea should occur fhis app equally to leader, phrases such as’ We have tried itl5efore’ Impractical, ‘Well may be it would work,’ Doubtful , “very good , etc should not be uttered

(I) Members can vote by raising their hands

(g) Only supporting votes are taken Votes against the ideas are not allowed

(h) The time allotted for brain-storming session should be variable The length of time that can be spent profitably will vary widely with nature of problem and the group itself As a general practice one hour is probably the minimum

(i) While members give their ideas, they are recorded by the Recorder on a large sheet.

(j) It is often helpful to set a goal originally.

(k) When all members say “pass” then the first phase of brain-storming session is over This mans all ideas have been exhausted

‘(1) Now all the ideas recorded on the sheet are displayed.

(m) Thesemassive number of ideas are then narrowed down by the process of voting. The voting technique works because the members re eperts in their areas.

(n) Members vote on each idea. The leader records each vote next to the idea. Members  can vote for as many ideas as they feel have value. Only -supporting votes are taken.

(o) Leader draws a circle around those ideas that receive the most votes. The members decide how many of the top ideas will be so identified.

(p) Now the members can focus on a few important ideas insteadof being somewhat confused by a large number of them. These few important ideas are voted on the given ranking to the circle ideas Leader writes the ranking number beside each ideas that have been circled.

(q) A member can halt the voting on any idea and argue for or against it. Others can join, if they wish. Only when.the disdission has finished then- the voting takes place.

 

Q. 24. What are steps for setting up Quality-Circles. -

 

Ans .  For starting Quality Circles in an organization following steps should be taken

1. First of all Managers, Supervisors and Foremen must be made to understand the concepts and activities of Q C circles.

2. (ii) Management’s total support and commitment should be made known to every. one in the organizations.

3. (iii) Steering committee is formed with the top management personnel to give direction to Quality Control Circle activities.

4. (iv) A facilitator or (some time known as promoter) is selected from the senior management level, who will servé as coordinator and advisor to the circle.

5. (v) Supervisor and former are then trthned to act as Q.C. circle leaders.

6. (vi) Members of ach circle must be selected from the persons who are doing similar type of work or belong to the same department or section.

7. (vii) Membership to the circle is voluntary.

8. (viii) First few meetings of the circle are held with a view to train them.

9. (ix) To start with only one of two circles should be formed in an organization, and then increase the number gradually as more and more experience is gained.

10. (x) Meetings must be held regularly may be once a weak initially and once a month on completion of basic training of members.

11. (xi) Everyone’s suggestion or problem matching with the circle’s objectives be discussed.

12. (xii) Total participation of team members. must be encouraged.

13. (xiii) Recommendations of the circle must be considered and decision should be taken without delay.

 

Q 25 What are responsibility of Quality Circle Leader

 

 Ans  For the success of Quality Circles, circle leader must have following duties

(i) He must assume the responsibility of guiding the members

(ii) He must make his members sure about what is going on.

(iii) He must channelise the discussions.

(iv) Every member be allowed equal opportunity.

(v) Specific task be assigned to each member.

(vi) He must work in coordination with facilitator.

 

Q. 26. What are the objectives of workers’ participation in management.

 

Ans. The following are the main objectives of workers’ participation in management:

(a) To raise productivity, production and efficiency of workers.

(b) To improve morale of workers.

(c) To satisfy the desire of workers for self-expression.

(d) To promote industrial peace in the concern.

(e) To have better industrial relations and establish harmonious relations

(j) To evoke the fullest collaboration of the employees.

(g) To encourage social education which promotes solidarity in the working class.

 

Q. 27. What are the advantages -of workers’ participation.

 

Ans. Advantages

1 The responsibility for implementing the decisions taken at Joint councils rests with the workers. There will be no opposition from the workers if new machines have to be

-introduced.

2. The decisions taken are effective as they have been taken after considering at length the view points of workers and management.

3. The workers feel jobsatisfaction. It res”’- in an increase in productivity.

4. The morale, loyalty and respect of workers increase. They work with a team spirit for achievement of organizational goals

5. The problems of labour turnover and absenteeism are minimized to a great extent. In other words it stabilizes labour force.

6. It leads to good industrial relations.

7. It encourages the employees to give suggestions..

8. The profit of the concern increases which is ultimately. Shared by the workers.

 

Q. 28. Describe pre-requiste of Collective Bargainging.

 

Ans. (i) Both parties (emoyer and employees) should realise the necessity of collective bargaining. Both should command respect of each other.

(ii) Both parties should try to solve the problems through negotiations sincerely and

honestly.

(iii) A single plant bargaining is preferred to a multiple plant bargaining, in single

plant bargaining there is a bargain between .a single employer and single union.

(iv) Both parties should present facts and figures on the discussion table. Their

approach should be constructive.

(v) The management should pay reasonable wages and any unfair labour practice should be avoided

(vi) If any agreement is reached it must be in writing

(vii) Both parties should ensure that agreement reached is respected and implemented

and industrial peace is established.

(viii)There should be a provision for arbitration if there is any dispute regarding

interpretation of agreement.

 

Q. 29. What are the characteristics of collective bargaining.

 

Ans. (i) It is a bargaining between management and workers.

(ii) Both parties have flexible attitude so that there should be mutual give and take.

(iii) It is a two party process.

(iv) It is a continous  process and goes on for whole of the year.

(v) Collective bargaining to be successful must cover all areas including formulation of policies effecting workers.

 

Q 30 What are the different levels of Collective Bargaining

 

Ans. Levels of Collective Bargaining. Collective bargaining takes place at the

following levels

1. At Plant level. Such a bargaining is limited to a particular unit or undertaking only. In India, a number of agreements have been reached at plant level in the noted industrial undertakings viz.) The Tata Iron & Steel Company, The Bata Shoe Company.

2.. At the Industry level. Here all unions of a industry enter into an agreement with the employers in general. In India collective bargaining of this type is very popuJir in textile industry where agreements are reached between labour unions and employers union.

3. At the inational level. At the national level agreements usually take the form of ‘bipartite agreements’ entered into between labour union and managements in the presence of the Government. The agreement entered into between Indian Tea Association. Indian Tea Planters’

Association and Hind Mazdoor Sabha (HMS) can be cited as an example of collective bargaining at the national level.

 

Q. 31. What are the benefits of Quality Circle.

 

Ans.

1. Through the forum of Q.C. the chronic problems of organisations which

really create hurdles in work, get resolved by the grass root employees of organization,

whose knowledge and experience otherwise is not fully utilized.

2. With such a capable work force any orgamzation can easily undertake more difficult

and challenging assignments for its growth and profit.

3. As the employees gain experience they take more challenging projects, in due

course they undertake projects on cost reduction, material handling, quality improvement, preventing wastage, improvement delivery schedule, improving customer service,

improving inspection and test methods, preventing accidents improving design and process etc.

 

Q. 32. Define Brain storming & discuss the activities in Brain Storming.

 

Ans.

1. What is Brain Storming. It is a technique for stimulating a group of people to

come out with ideas on a specific topic and collectively seek the solution of a problem.

. .

2. When Brain Stormin can be used. It can be used in all fields, whether the subject is at one’s home or work area.

3. What happens during Brain Storming. A group of people meet and generate ideas. The session may be used to identify analyse and solve the problems.

Flow Diagram of Activities in Brain Storming.

(i) A group of people having 8-10 members is formed. The group members should

have some backgrOUxd, information or previous experience with the work area.

(ii) One of the member can be nominated/chosen as a leader of the group and another

member as recorder. The leader must have all the skills of a good conference leader.

(iii) The recorder puts down all ideas on a big sheet of paper even the ones which

seen to overlap. He is also free to contribute his own ideas at his turn.

(iv) At the start of Brain-storming session, the leader warms up the group to get the

group attention and interest.

 

Q. 33. Describe Quality Circle.

 

Ans. Conceptually Quality Circle can be described as a small group of employees of

the same work area, doing similar work, that meets voluntarily and regularly to identify,

analyses and resolve work related problems. This small group with every member of the

circle participating to the full, carries on the activities, utilizing problem solving

techniques to achieve control or improvement in the work area and also help self and

mutual development in the process.

The, concept of the Quality Circle is based on “respect for the human individual” as

agamst the traditional assumption based on suspicion and mistrust between management

and its employees Quality Circles built mutual trust and create greater understanding

between the management and the workers Cooperation and not confrontation is the

key element in its operation. Quality Circles aims at building people, developing them,

arousing genuine interest and dedication to their work to improve quality, productivity,

cost reduction etc.

 

Q. 34. What are the objectives of Quality Circle.

 

Ans. Objectives: .

Some of the broad objectives of the Quality Circle are:

(i) To improve quality, productivity, safety and cost reduction.

(ii) To give chance to the employees to use their wisdom and creativity.

(iii) To encourage them spirit, cohesive culture among different levels and sections of

the employees.

(iv) To promote self and mutual development including leadership quality.

(v) To fulfil the self esteem and motivational needs of employees.

(vi) To improve the quality of work-life of employees.

 

Q. 35. What actions are required to implement quality circle in organizations.

 

Ans. For the success of Quality Circle programme following actions are necessary in

a Organization:

(a) Few managers representing production, quality, control, design, process planning

fofrn the Quality Circle (Q.C.) steering committee. This acts as a policy making body

and will monitor the Q.C. ii the Organisation.

(b) Top management must attend the orientation courses designed for them.

(c) A committed top and middle management is necessary.

(d) A facilitator must be appointed, who serves as a link between top management,

Q C steering committee, middle management circle leaders and circle members

Facilitator will coordinate regarding training courses, get the support from all concerned

including top managemetit Q.C., steering committee, circle leader and circle members to

help the circle leader in conducting the meetings, and to provide necessary resources.

 

Q. 36. Describe the required pre-requisities for participation of workers.

 

Ans. The success of participation is directly related to how well certain pre-requisites —

given below are satisfied : — V V

(a) Ample time must be allowed to participate bef9re action is required. Participation

may not be appropriate in emergency situations.

(b) The financial cøst of participation should not exceed the values, economic and

otherwise, that. it produces. V

(c) The subject of participation must be relevant to the participants organisation, spmething in which he is interested, or he will regard it as mere busy work.

(d) The participant should have the abilities, intelligence and knowledge to participate

effectively.

(e) The participants must be able to communicate in order to be able to exchange

ideas.

(f) No one (employee or manager) should feel that tus position is threatened by participation.

(g) Participation for deciding a course of action in an organisation can take place

only within the group’s area of job freedom

 

Q 37 Give some suggestions for the effective result of participation of workers

 

Ans. In order to make workers participation effective in India, following suggestions

can be given — 1 Managements should have a more responsive attitude towards workers

2. The trade union should be strong and fully support the idea of worker’s participation

in management.

3. The scope and functions of works committees should be clearly specified.

4. The decisions of joint mähagement councils must be implemented in good faith.

5. Managements and workers should develop an attitude of co-operation and adjustment

6. The meetings of such councils should be at regular intervals.

7 Since the level of education of Indian workers is very low, training must be given

to them for developing rghtàttitude to work.

8. There should be proper co-ordination of different unions.

 

Q. 38. Compare the different methods of Job Evaluation.

 

Ans. Comparision of different methods of job evahiatior

 

Q. 39. Explain the need of Merit rating in detail.

 

Ans. Merit rating brings into light the abilities and aptitudes of the employees. An employee who is doing a job in a better manner can be considered for promotion. Others can be informed about their shortcomings so that they can improve their performance. It is an objective evaluation of the man doing the job and there is no scpe for bias or prejudices. The subjective evaluation results in bad industrial relations. Thus merit rating is an art as well as science. -

The following are the advantages of Merit-Rating:

(a) It provides a scientific bis for judging the worth of employees who will try to improve their performance if it is not up to the satisfaction of the employers. Hence it helps in making comparisons.

(b) It is a sound basis for promotion, demotion transfer or termination fo employees. Better persons are selected for promotion. The systematic evaluation remains as a permanent record.

(c) It helps in distinguishing between efficient and inefficient workers. In this way it reveals the defects in the selection procedure. Thos employees who are misfits may be spotted and appropriate action taken against them.

(d) Workers may be given increase in pay if their performance is good. It helps the management in avoiding spot of judgments and replacing it by advance decisions.

(e) It develops confidence among the employees since the methods of evaluation are systematic and impartial. Among the workers, a sense of competition develops resulting into increased output.

(f) It helps in creating a congenial atmosphere in which empoyer-employee relations are improved. Subordinates are motivated to work harder for getting favourable rating.

(g) It helps in stimulating and guiding the development of an employee as it points out the weakness of the employees. In this way training needs can be known and training programme can be accordingly drawn.

(h) A systematic evaluation produces better supervisors and executives. On the basis of.merit-rating report, the top management can judge the ability of executives writing such reports.

 

Q 40 Explain the methods of Merit Rating

 

Ans. Methods of Merit Rating

Every concern whether big or small, must have a merit rating programme The only choice of the employer is to select the method of performance appraisal A systematic merit rating programme has a number of advantages over casual, unsystematic or haphazard appraisal.

Certain methods of merit-rating are similar to job-evaluation methods. These ai

explained below:

 

• 1. Ranking -

Under this method, a man is compared with all others without considering any specific

factors. A rank is prepared by placing the best at the top aM the poorest in performance althebottom.

This method is simple and is suitable in case of small scale concerns. However, the

method is subject to following limitations:

(a) It is not only difficult but rather impossible to compare a whole man with the

whole men.

(b) When a rank is prepared, it is not possible to know the difference between the

two persons listed in the rank order.

The above limitations can be overcome to some extent if pairee comparison method is

followed. Here an employees’ performance is compared with every other employee

individuJly rather than whole men. Under this method the total number of comparisons ill be as followes

                                                                         

 

2. Grading

Under this method, the performance of the employees is evaluated against certain

grades such as poor, good, very good, exception or outstanding, satisfactory or

unsatisfactory. The grade which describes his performance can be allocated to him.

3. Graphic Scales

Under this method, performance of an employee is evaluated against certain specific

factors. Five degree or scale are established for each factor and each degree is defined.

This method is most widely used in merit rating and is also the oldest.

The factors to be selected are of two types

(1) Characteristics of employee viz., initiative, ability to learn, dependability, etc., and

(2) Contributions of employees viz., quality and quantity of output, safety record, etc.

The scales may be classified as:

Poor Fair Good Very good Excellent Quanlity of work

Usually the other factors considered for merit rating in addition to four discussed

above are : co-operation, personality, health, attendance, knowledge of job, initiative,

safety, potential for development. For each factor we can name five degrees as explained

above The crucial part of this method is, therefore, the determination of factors and

their degrees. The following definitions may be given for these degrees:

Poor—Lazy, not interested in his work

Fair — Does his job without any interest in his work

Good—Does his job with interest.

V. Good—Good keen employee.

Excellent— Exceptionally hardworker.

It may be pointed out that method is just like ‘Point System’ of Job Evaluation. The rating of an employee may be done by putting a tick or marks from 0 to 20 i.e., for

poor 0 marks and for excellent 20 marks.

4. Man-to-Man Comparison

This method resembles with the factor-comparison method of job-evaluation. Under

this method certain key personnel are selected for each factor (which may include initiative,

leadership, dependability, safety etc.). Other employees will be compared with these key

personnel by considering one factor at a time.

This method is not very much used in perfomance appraisal because of difficulty in

selecting the key men.

5. Check List

In order to reduce bias or prejudice of the rater, the merit rating under this method

is actually done by the personnel department. The supervisor simply reports the

performance of the employee by putting ‘Yes’ or ‘No’ against a series of descriptive

phrases. The rater is not aware of the weightage of these questions but he can definitely

distinguish between positive and negative questions.

The following is the specimon of check list statements

Checklist method requires the rater to think in terms of specific traits. But it is a time- consuming method. In some cases, a statement may be partially true for an employee.

6. Critical IncidentsMethod.

 Under this method employees are rater on the basis of their behaviour during an exceptional situation (critical incident). Employees showing desirable behaviour are given higher rating than those giving undesirable response. For example, five workers in a group may react diffelently to a fire in their work area. Their reactions and corresponding scores may be as follows

 

Q. 41. What are the requirements of successful Merit Rating. ?

 

 Ans  A successful merit rating scheme must satisfy the following requirements

(1) It must originate from the belief aRid desire of top management to adopt good merit rating procedures

(2) It must be installed and operated in consultation with employees at different levels and with adequate support from them.

(3)1proper education and training should be given to the raters to enable them to

make objective and accurate appraisal.

(4) Personnel department should provide the necessary administrative support by

handling routine operating procedures and disseminating information of appraisal.

(5) The rating plan should be reviewed and kept up to date.

(6) There should be a regularmechanism for the redressal of grievances arising out of the. employee ratings.

 

Q. 42. Explain the Limitations of Merit Rating.

 

Ans. The various limitations are

1. Halo effect. There is a tendency to rate the employee on the basis of one factor

only. It is also known as ‘blending tendency’. If the rater finds that the man is good in

one factor he will rate him good in all other factors.

2. Clarity in standards. Each rater may apply his own standards with the result that

final ratings simply cannot be compared. For example, a rater may think that ‘satisfactory’

rating is better than ‘excellent’. -

3 Leniency or strictnes Lenient raters give high ratings whereas strict raters always give low ratings. Hence there is a big difference of ratings between two raters. A supervisor may feel that low ratings may reflect his own weakness in dealing with workers.

4. Central tendency. Generally the raters evaluate employees by keeping them in the average category though some may be falling in the extreme ends of the scale i.e., excellent or poor.

5. Influence of hfgher-paid jobs. Usually there is a tendency to give high rating to a person who is doing the higher paid job Merit rating has nothmg to do with the worth of the job (which is the scope of job evaluation).

6. Differing perceptions. Even if a person tries to be fairçst rater in performance

evaluation, he cannot eliminate bias because of differing perceptions. Certain unconscious

factors such as race, caste, creed, etc., effect merit rating. If a manager who is less qualified,

rates his subordinate who is more qualified, evaluation may not be fair.

The limitations of merit-rating explained above can be counteracted to some extent

by educating and training the raters.

 

Q. 43. Describe the objectives and uses of Merit Rating.

 

Ans. Objectives of Uses of Merit Rating.

Merit ratings can be used for the following purposes:

1. Merit ratings are helpful in judging the effectiveness of selection, placement and training programme It reveals misfits who need to be transferred or trained for improvements in work performance.

2. Formal and systematic appraisal of employees provides a continous record of the relative worth of its personnel. Such record is useful in making sound decisions regarding placement, confirmation, hierit increments, promotion and transfer of employes. In this

way merit r,ating improves the accuracy of executive judgements.

3. Merit rating encourages the employees to improve their performance. They are

informed about their relative performance and given an opportunity to discuss ways

and means of improvement. Thç assets and deficiencies revealed through merit rating

serve as the basis for counselling individual employees.

4. Nierit ratings help to discover special talents of employees. Sich ratings are alsç

useful in personnel research They are often used to validate tests and to develop trammg

methods and to establish interrelation ships among measures of performance

 

Q. 44. What are various factor in Merit Rating.

 

Ans. Factors in Merit Rating

Various procedures are used in merit rating. In most of the cases, employees are rated on the .basis of performance measures and personal attributes which are known as factors. These factors relate to both the quantity and quality of work done. The factors usually considered in merit-rating are as follows

1. Amount of work done

2. Accuracy of work

3. Economy of materialg and time

4. Attendance

5. Judgment

6. Safety habits

7. Ability to follow instructions

8. Co-operation with fellow-workers

9. Initiative and creativeness

10. intelligence

11. Loyalty

12. Honesty and integrity.

 

Q 45 What is Relationship between Job satisfaction and Motivation’

 

Ans. Mayo argued that by increasing job satisfaction the performance and productivity of workers could be increased. Other theorists have questioned this direct link, but where job satisfaction links with motivation (Herzberg) then performance improves. Vroom puts it thus:

,‘ Performance = Ability x Motivation

There is general agreement among experts that job dissatisfaction can have harmful effects on both job holders and the organisation. Research has associated job dissatisfaction/low morale with : high labour turnover; skills wastage; absenteeism; high accident rates; poor timekeeping; a lack of commitment to quality.

The individual in a low job satisfaction situation may suffer frustration and stress.

Although stress may arise from many quarters, it is that the ability to deal with and manage stress that afflicts the individual who suffers job dissatisfaction.

 

Q. 46. Define the ‘Quality of work Life’. What are the important determinants of quality of work life

 

Ans  The QWL tecnique draws together the ideas of job design, job satisfaction and performance appraisal and operationahses these The starting point of QWL is th. measurement of job satisfaction, so that areas for improvement can be identified 1 his is done by the use of questionnaries, with numerical scores allocated to the answers Respondents are asked to rank features of work in order of importance Free-expression mterviews may also be undertaken, to allow employees to give their views on the job However, critics argue that job satisfaction is better revealed by factors siih as absenteeism, sickness rates and labour turnoyer.

QWL tries to involve employees in identifying problems and suggesting solutions; the

workers themselves say that is important to them, and management acts upon tese ideas Research reveals that job satisfaction can be increased if individuals are properly

trained for the jobs they are expected to perform.

 

Q. 47. Describe the techniques of Job analysis.

 

Ans. Job analysis consists of the following broad parts:

I Job Identification

First of all the job should be completely and accurately identified. Identification of a

job implies stating clearly the scope of tasks involved in the job and distinguishing the

job from all other jobs in the organisation. Collection and recording of accurate job facts

is a difficult process. The War Manpower Commission of the United States of America

has developed a technique for discovering the facts that are required to analyse a job.

This is known as the “WHAT-HOW-WHY technique”. This “job analysis formula” is as follows

1. The Questions:

What the worker does: (a) Physical activities—e.g., cut, grind, lift, etc.

(b) mental activities — e.g., calculate, plan, direct, etc. How he doesit (a) Physical factors—e.g., tools, machinery, etc.

(b) Mental factors — e.g., tables, formulae, etc.

Why he does it The purpose or the reason of the task in relation to other

tasks in the same job and other jobs

2. Skills involved. Determines the degree of difficulty of any job in terms of:

(a) Responsibility.

(b) Job knowledge.

(c) Mental application.

(d) Dexterity and accuracy.

3. Physical Demands. Determines the physical effort required by a job:,

(a) Physical activities.

(b) Working conditions.

(c) Hazards of injury or disease to which the worker is exposed.

II. Obtaining Job Facts

. . .

Information about jobs in an organisatlon can be obtained by three methods:

(a) Observation. Under this metod the job analyst carefully studies the worker

performing is job through a complete work cycle and with a thorough attempt to

determine the contents and requirements of a job.

(h) Interview. In case of jobs involving a very long work cycle, direct observation becomes difficult. In such cases, information is obtained through interview. The interview

technique can also be applied for those jobs in which direct observation does not provide

adequate information. Interview technique helps to obtain facts which cannot be obtained

by direct observation. It also enables one to verifyӉnd supplement the information

collected through direct observation.

(c) Questionnaire. This method is used as a supplement to other methods. Under it, a

list of questions is prepared and the workers and supervisors who perform the job are asked to give answers to these questions.

These methods are not mutually exclusive and the best results can be obtained by

simultaneous used of all the methods. A combination of direct observation and interview

is the most common method because the analyst not only observes the job in its setting but also discusses, the job with” people actually performing the tasks.

 

Q. 48. Describe Job Description.

 

Ans   Job Description. Job description is an organised and factual statement of the activities comprising a properly indentified job It contams a written summary of the tasks and duties performed, materials and tool used, working conditions and relations with other jobs The purpose of job description is to identify, define and describe clearly

the job to be rated and to provide a full understanding of the factors to be evaluated.

Job description is helpful in the selection, training and appraisal of employees. It identifies the job by defining it and establishes the content and scope of the job by describing it It states the constituent tasks of a job and describe why, how and when these are done. Job descriptions are prepared from the information contained in job analysis report.

A job description comprises three major parts:

1. Job Identification.

2. Job Summary.

3. Job Duties.

Job Identification. Jzb identification section of job description contains the various identifying facts, e.g. job title, the department, job, number, the date on which the information was collected, location of the job, name of supervisor, etc.

Job title is the name by which the job is to be known. Job title by itself does not define the job but it helps to identify the job and its category Job titles should be precise and standardised ançl each job must have only one title This will help to avoid confusion and mistakes If jobs actually different in content are given the same name workers

performing difficult tasks may be given the same wage rate. Alternatively, different rate, may be paid for performing identical duties if job titles are not uniform. Job titles should also be as simple and straight-forward as possible.

Job Summary. Job summary gives the reader an overall picture of purpose, nature and extent of the tasks performed. It provides a brief picture of the entire job and therefore, helps in understanding the job. It states what is being done, how it is done and why it is done and how the job differs from other jobs. Job summary must be written very carefully according to specified standards. It must be simple, brief, precise (using specific terms), and accurate. It should be designed for organisation of all facts for an orderly presentation.

Job duties. A list of major-duties and responsibilities is given in this section. It should also mention the equipment used on the job and the surroundings of the job If the duties are listed in a chronological order, it would help the reader in picturing the job. Use of uniform job descriptions will provide the various tasks in the same relative position in each case.

 

Q. 49. Explain Job Specification.

 

Ans. Job Specification. Job specification is a written statement of the minimum human qualities required for the successful performance of job. It specifies the qualification for the holder of a job. A job specification is prepared on the basis of information contained in the job analysis form. It provides relevant information for evaluating a job and.helps in finding the right man for the right job. It is also useful in the training and promotion

of employees. –

Job specification should be written in simple and precise language. Specific terms should be used. Arbitrary, vague and general statements should be avoided. It should state the requirements of the job concisely and briefly. Job specification should indicate the extent to which each factor is present in the job and degree of difficulty to that factor as it exists in that job. With this information values can be assigned to each job factor easily.

The outline of a job specification consists of two parts—the job identification data and the job requirements. Job identification contains job title, job code, department, etc. in the same manner as contained in a job description. Job requirements section should state edcuation, skills, experience, responsibility, mental. and physical effort, etc.

A specimen job specificatic!p is given below:

 

Q. 50. Describe the applications-of. Job Analysis.

 

Ans. The information obtained through job analysis may be utilized for a number of purposes

Preparation of job descriptions which include the job objective and the principal activities required to perform the job. This data is useful for the new entrant to a job aswell as for drafting an advertisement for recruitment to the position.Preparation of job specifications which provide the educational qualifications,experience, critical skills, special knOwledge, abilities and aptitudes required to performthe job. This data is useful for nfcruitment and selection.

- (c) Development of key result areas (KRAs) which state clear goals and targets the

jobholder has to achieve in a specified time. KRAs are developed using the principal

activities stated in the job description. KRAs are a critical component of the performance

appraisal system.

(d) Design to training programmes based on the knowledge and skills essential for a job. Job analysis also provides information on inputs required for an employee to progress

from one stage to another. This data can be utilised to design management development programmes to prepare an employee for promotion and higher responsibilities.

(e) Development of compensation structure since compensation is commensuratewith duties and responsbilities of a job. For compensation to be equitable accurateassessment of the job reqi.tjrements has to be made. Job analysis can be utilised for job

evaluation which in turn is used to classify jobs. Salary structures may then be developed for each job class.

(f) Job analysis can help in strategic planning by identifying jobs that need to be changed, eliminated or restructured to meet the demands of a changing environment.

 

Q. 51. Name the factors used in used evaluation.

 

Ans. The following factors are commonly used in job evaluation:

(a) Education

(b) Experience

(c) Skill

(d) Physical requirements

(e) Mental requirement

(J) Responsibility for materials and product

(g) Responsibility for tools and equipment

 Responsibility for the safety of others

Working conditions and hazards

activities required to perform the job. This data is useful for the new entrant to a job as

well as for drafting an advertisement for recruitment to the position.

(b) Preparation of job specifications which provide the educational qualifications,

experience, critical skills, special knOwledge, abilities and aptitudes required to perform

the job. This data is useful for nfcruitment and selection.

- (c) Development of key result areas (KRAs) which state clear goals and targets the

— jobholder has to achieve in a specified time. KRAs are developed using the principal

activities stated in the job description. KRAs are a critical component of the performance

appraisal system.

(d) Design to training programmes based on the knowledge and skills essential for a job. Job analysis also provides information on inputs required for an employee to progress

from one stage to another. This data can be utilised to design management development programmes to prepare an employee for promotion and higher responsibilities.

(e) Development of compensation structure since compensation is commensurate with duties and responsibilities of a job. For compensation to be equitable accurate assessment of the job requirements has to be made. Job analysis can be utilised for job

evaluation which in turn is used to classify jobs. Salary structures may then be developed for each job class.

(f) Job analysis can help in strategic planning by identifying jobs that need to be changed, eliminated or restructured to meet the demands of a changing environment.

 

Q. 51. Name the factors used in used evaluation.

Ans. The following factors are commonly used in job evaluation:

(a) Education

(b) Experience

(c) Skill

(d) Physical requirements

(e) Mental requirement

(J) Responsibility for materials and product

(g) Responsibility for tools and equipment

(h) Responsibility for the safety of others

(i) Working conditions and hazards

 

Q 52 Explain the factors that effect on Job Satisfaction

 

Ans. Job Satisfaction:

Job satisfaction and its opposite, job dissatisfaction, refer to the attitudes and feelings job holders have towards their work. Morale can be viewed as a state of mind dependent on the degree of job satisfaction experienced by an individual or group.

Factors which influence the level of job satisfaction which a job holder experiences fall into two broad categories : intrinsic and extrinsic.

Instrinsic influences refer to factors arising from the perfomance of the job itself. These include: whether the job ifas variety; whether it is challenging; whether it allows the job holder to use a wide range of talents or skills; whether the job holder has control over the work situation; and whether his/her views influence decisions affecting the job.

Extrinsic influences refer to factors which fall outside of the doing of the job. These

influences include : the pay or salary earned for doing the job; fringe benefits that accrue

to the job holder; how well the individual integrates into the work group (the work of

Mayo is important in this context) the nature of management and supervision (Mayoand McGregor stress this aspect) Success and recognItion by superiors contribute to high job satisfaction.

(a) Job satisfaction and motivation

Mayo argued that by increasing job satisfaction the performance and productivity of

workers could be increased. Other theorists have questioned this direct link, but where

job satisfaction links with motivation (Herzberg) then performance, improves. Vroom

puts it. thus:

Peformance Ability x Motivation *

There is general agreement among experts that job dissatisfaction can have harmful

effects on both job ho1ders and the organisation Research has associated job

dissatisfaction/low moraI with : high labour turnover; skills wastage; absenteeism;

high accident rates; poor timekeeping; a lack of commitment to quality.

The individual in a low job satisfaction situation may suffer frustration and stress.

Although stress may arise from many quarters, it is the inability to deal with and manage

stress that afflicts the individual who suffers job dissatisfaction.

(b) Increasing Job Satisfaction .

Job satisfaction will be increased by careful job design which includes job enrichment,

and a thoughtful consideration of the intrinsic and extrinsic factors. Experts agrue as

follows :

Decentralisation and delegation should take place in organisation where there are

“too close controls” This would give employees a degree of freedom to direct their own

activities and assume new responsibilities,

Participation and consultative management should be used to encourage people to

direct their creative energies towards organisational objectives and to give employees

some voice in decisions that affect them.

The management expert, W Ouchi, argues that participation is the crucial motivator

and contributes greatly to job satisfaction. Employees will be motivated to higher levels

of.performaiie if they are involved in meaningful participation in decision-making in

their organisation. Employees should participate in groups and decisions should take

account of the views of people actually doing the job.

(c) Quality of Working Life (QWL) Approach

The QWI techingue draws together the ideas of job design, job satisfaction and

performance appraisal and operationalises these The starting point of QWL is the

measurement of job satisfaction, so that areas for improvementcan be identified. This is

done by the use of questionnaires, with numerical scores allocated to the answers.

Respondents are asked to rank features of work in order of importance. Free-expression

interviews may also be undertaken, to allow employees to give their views on the job.

However, critics argue that job satisfaction is better revealed by factors such as

absenteeism, sickness rates and labour turnover.

QWL tries to involve employeçs in identifying problems and suggesting so1utih; the

workers themselves say what is important to them, and management acts upon these

ideas. -

Research reveals that job satisfaction can be increased if individuals are properly

trained for the jobs, they are expected to perform. .

 

Q. 53. F.plain Job Rotation.

Ans. Job Rotation

Job rotation is the simplest fojm of job restructuring or design and refers to moving

workers from one job to another — even though these jobs are of similar level of skills,

they do at least afford a change from boring routine.

The employee is given a greater variety of tasks, arid for some this may give the

opportunity to move from a standing task to one which involves sitting down, thus

avoiding physical strain. The advantages for management are that job rotation rarely

leads to a need for additional machinery and tools, and employees become more flexible

in their abilities and can cover holiday and sickness absences more easily.

There are, however, a number of problems that are associated with job rotation.

If job rotation is imposed by management it may be resisted by employees if it interferes

with the development and functioning of the work group.

Some individuals may,prefet to be excellent at one task, rather than good at several

tasks.

The training required is likely to be more complex and extensive and therefore more expensive. The changeover situation may cause problems, e.g. if a work station is left in a mess, on if a task is left unfinished.

According to Torringtpn and Hall (Personnel Management, A New Approach) the amount

of change for the employees concerned may be very limited. Birchall (1975) claimed

that workers soon became familiar with each type of work and the actual work done

was still repetitive, although he did report that Volvo:workers in Swedon expressed

themselves in a positive way about job rotation.

 

Q. 54. Define Job Design

Ans. The management expert, L.E. Davis, defines job design as:

, . . . . .

The specification of the contents, methods and relationships of jobs in order to satisfy

technological and organisational requirements as well as the social and personal

. .

requirements of the job holders.

 

Q. 55. What are the Principles of Job Design.

 

Ans. The experiences of a number of beavioural scientists and industrial organisations

have led to the development of certain “principles” of job design. A number of

psychological requirements have been identified that exist for the large majority of

persons at all levels of employment. These are:

(a) The need for the content of the job to be reasonably demanding in terms of other

than sheer endurance, and yet provide variety.

. (b) The need to be able to learn on the jab and to go on learning, and have some

measure of freedom in the way in which a person carries out his or her work.

(c) The need for an area of decision-making where the individual can exercises his

. -

or her discretion.

(d) The need for social support and recognition in the workplace.

(e) The value of work groups given a high degree of autonomy over the work

situation, i.e. to a large extent self-managing groups. These groups allocate tasks and

-ensure members have variety to work and the satisfaction of contributing to the team

performance.

(/) The value of multi-skilling i e breakmg down the old demarcation imes between

types of job and the constant updating of skills.

(g) Sufficient challenge in the job to lead to a sense of satisfaction when the task is

completed satisfactorily.

(h) The opportunity to have social interaction when doing the job and at other times.

(i) The establishment of agreed targets/goals and appropriate feedback of results.

 

Q. 56. Explain Job Enlargement.

 

Ans. job Enlargement

Job enlargement refers to ways of making a job less boring by introducing more

variety, e.g. increasing the number of different tasks the worker has to perform.

This usually involves widening a jbb from a central task to include one or more

related tasks, usually of the same type as the original task This means that as the member

of staff is doing a wider range of tasks he/she is less dependent on colleagues and can

work at his/her own pace. It is argued that the gains in performance by the worker with

higher morale outweight any loss of production from making the work less specialised.

Job enlargement is often criticised on the basis that the enlarged job tends to consist

of multiples of the original task and nothing of any significance is added that will improve

job satisfaction or motivation. For management job enlargement may lead to requirements

for additional equipment, space and training; staff may quickly become familiar with

the additional tasks and the motivations effects may wear off.

An example of job enlargement was reported at the Endicott plant of IBM The jobs

of the operators were redesigned to include the tasks (previously done by other groups)

of machine set-up and output inspection. In this case, benefits were reported to include

improved quality, reduction in waste, less idle time (operative and machine) and huge

cost reductions in set-up and Inspection

 

Q. 57. Explain Job Enrichment

 

Ans. This is a more ambitious technique which incorporates the idea of job enlargement

but goes much further in changing the nature of jobs. Job enrichment supporters argue

that a job may be enriched by introducing more variety, but this can go far beyond

giving the employee more tasks to do or job rotation. The worker is given a greater

opportunity for achievement and recognition and job enrichment aims to increase the

workers’ involvement in the organisation and/or the job. Job enrichment ideas include:

Job freedom, e.g. letting workers decide their own ntthods and pace of work so long

as the job is done well.

Participation, e.g. consultation on possible changes, more direct communication

instead of going through formal channels.

Delegated “control”, i.e. the operative performs his/her own inspection function on

what he/she makes

Allocation of natural, meaningful modules of work, if not to the individual, at least

to a work group; e.g. bench work rather than assembly-line work.

Allowing employees to feel iesponsible for their own work perforftance. Ideally

workers should have regular feedback direct to themselves on the quality and quaiity

of their performance at work. -

In general, the worker is allowed to complete a whole or much larger part of a job and

the added tasks are often of a different natuEè to the ones already performed this is the

difference between job enrichment and job enlargement. Job enrichment may well expand

the job to include supervisory or managerial functions and elements of decision-making.

 

Q. 58. Explain Job Design Approaches.

 

Ans.

 (a) Scientific Management Approach

In this approach, the primary objective of Taylor and Gilbreth was to determine the most efficient method of working, using what can be termed an “engineering approach”.

Employees were regarded as just’ another production resource that could be organised to work efficiently in a predeterthined way. The characteristics of this approach were as fOllows

Jobs were broken down into small, repetitive components so as to reduce skill requirements. (The car assembly line is, perhaps, the classic example.) This passed control to management and away from previously “skilled workers”.

Employee motivation was based on a “carrot and stick” approach - the stick being the threat of such “punishments” as suspension or dismissal, and the carrot being such extrinsic rewards as pay and job security.

Realisation gradually dawned, however, that in many cases the scientific management approach did not produce the expected results in terms of increased efficiency. Although a production line might be highly efficient in work study or engineering terms, the lack of job satisfaction resulted in a fall in motivation. This adversely, affected overall performance, increased absenteeism and labour turnover, and caused a deterioration in industrial relations.

You will note that the extrinsic rewards referred to in (b) above relate to Maslow’s lower level needs and to Herzberg maintenance factors. In order, therefore, to imporve motivation, attention was directed towards Maslow’s higher level needs and Herzberg’s motivational factors, This resulted in the so-called intinsic rewards — the restructuring or redesign of jobs to provide greater scope for an employee to use his/her abilities and skills and to give him/her greater control over the way he/she carries out his/her work.

(b) Current Approach

We can identify the two key strands of job design as:

The achievement of organisational goals through efficient job performance; and

Meeting the needs of the job holders for satisfaction from their work.

There is a potential for conflict between all-out organisational efficiency and the human needs of employees, e.g. extreme division of labour can be efficient but the work may be so boring as to destroy the job satisfaction of the job holders.

The tasks required of job holdets will vary with different types of organisation and with the sorts of technology-displayed, but every job will have its duties, responsibilities, methods and relationships between the job holder and other people working in the organisation. In the final analysis, these functions must be performed in a satisfactory way for the employee to retain his/her job. However, human needs for job satisfaction must also be respected and workers must be motiyated to perform well. There are a number of ways in which this may be achieved. Remenber though, that practical job design is based on motivation theory and the work characteristic which have been identified as increasing motivation, with the objective of trying to increase both work satisfaction and performance. However, any job design study must also consider factors which may limit the way the job can be redesigned the technology involved; the cost of any additional equipment required for the “redesigned” job; the attitude of any trade unions involved and the employees themselves; management values and styles, etc.

 

Q. 59. Describe the Importance or Significance of Motivation.

 

Ans. If the members of an organisation are effctively motivated then from such motivation the expected results are that:

1. all the members will try to cooperate and coordinate their activities with a view to

achieve the goals which they are required to achieve.

2. all the members will do their best to carry out the plans in accordance with the

policies and programmes laid down by the organisation.

3. all the members will also try to be as efficient as possible and will try to improve upon their skill and knowledge so that they may be able to contribute to the progress of the organisation as much as it is possible.

These results will accrue to the organisation because all the members are in known of

the fact that in return thy will get what have been promised to them and ultimately they will be able to satisfy theireeds—personal as well as social.

An effective instrument. Motivation is an effective instrument in the hands of management in inspiring and creating confidencc in the working force that are capable of achieving sparking results. Only the “will to work” is to be created which certainly

th management has to do. One should remember thata man may be immensely. “capabil

of work” but if he is not willing to work nothing could be achieved. Creation of a will

to work is motivation in simple but true sens of the term.

Creation of a will to work But how to create a will to work in the worker is a difficult question to answer. It is a task in itself. Needs — personal (both primary and secondary) and soical — may force a human being to work. Need is the greatest motivation factor. It is natural that man wants to satisfy his needs. He knows that he has to work in order to satisfy his needs Man by nature does not want to work when he fels that he is satisfied. A desire of wants should therefore be insatiable. If satiability point reaches the man will stop workmg and no amount of motivation would make him to work The efforts of a management should be to offei more and more inducement to its working force in order to multiply the wants. The moment it succeçds in multiplying the wants the working force is movated and then the force, which the management has at its disposal, will leave no stone unturned to satisfy its management’s wants. Obviously indirectly but surely the enterprise will be able to attain its objectives.

The team pulls weight effectively. Thus, motivation is getting the members of the team to pull weight effectively, to give their loyalty to the group, to carry out properly the activities allocated and to play an efficient pat.I in the purpose or task that the organisation has undertaken. The manager hasto develop the skill in commanding his people by motivating them to give their best for the benefit of:

I their personal well being and satisfaction

2. theirsociety iii which they have status and which they have to maintain, and

3. their enterprise by attaining its defined goal.

it is often said that “the tone of an organisation is a reflection of the motivation from the top” — (E.F.L. Brech).

 

Q. 60. What are the characteristics of Motivation?

 

Ans. (i) Motivation is a psychological concept. Motivation is a psychological concept

which should be inherent in every person.

(ii) Man as a whole is motivatéd and not a part.

(iii) Motivation is created from aims. -

(iv) Motivation is an unending process Man is a social animal, his needs are unending. Needs instigate to motivation. Because after the completion of a need, commence the second need and hence act of motivation also is an unending process. Time, place, behaviour and circumstances uniting together prepare favourable and Un- favourable atmosphere.

(v) Motivation is the strength of work. Motivation is that strength which leads to do or not do a work and instigates to do work in the same specific direction.

(vi) Motivation is different from mental strength. There is difference between motivation and mental strength. Motivation is the strength that instigates a person to do an act while mental strength is the desire to do a work oneself which is strengthened by motivation.

 

Q. 61. What are the different methods of Motivation?

 

Ans. Methods of Motivation. Motivation is a planned inducement to the working force offered by an organisation. Any motivation plan may either be of monetary nature or that of non-monetary nature. Monetary motivation comes under the financial incentives programmes. History stands in testimony that only monetary motivation has not resulted into the desired achievement of the goals set for. Man cannot live by bread alone. Money too in all the casesand in all circumstances cannot motivate the man. Motivation of both the types may help in getting better results from the working force.

 

Q. 62. What are the advantages of motivation.

 

Ans. Advantages of Motivation

A sound motivation plan as depleted by the chart above helps in:

1. increasing the productivity and efficiency of operation;

2. decreasing the tardiness and absentism;

3. decreasing the opposition to changes being effected for better organisational results;

4. decreasing the friction between workers themselves and between the management

and workers. Instead it improves the relations;

5. decreasing the wastage and accidents;

6. decreasing the number of complaints and grievances there by reducing the loss in

man-hour

7. increasing the possibility of reduced production and distribution costs;

8. increasing all-round efficiency

 

Q. 63. Write a note on problems of Motivation:

 

Ans. Motivation is a less of management problem and more of psychological problem.

In principles motivation is too a simple description But in practice unforeseen

problems can be seen daily by manager. Experiene,of course, helps him but the act of

motivation is a continuous learning process. The problems of motivation may be grouped

and classified as under :

PROBLEM OF IMPLEMENTATION

A manager and of course a supervisor too have ample opportunities to have a

favourable impact 6n them by way of their conduct and behaviour. They do have

impact—favourable indded.butmay not have it in desired manner. And here arises the

problem as to which of the motive power and at what time and in what way will they

have an impact on an individual. These are a few of the problems which even is not

known to the mdividual himself How a poor manager or supervisor can come to know

of it? Only trial is possible and to the best of his ability a manager tries and generally he

succeeds.

Problems bf elements The elements of a motivation system can be divided into four

the moti’ator; the worker to be motivatd; motivation system and motivation

circumstances Who plays a role which in true sense can e called as dominant role in

motivation” ? The answer is NO ONE. Because the motivation depends on all the four

elements and none of the elements acquires an important place. The time of course may

be the deciding factor. But time changes. And with the change in time motivation element

acquiring a dominant place may prove to be quite insignificant in the similar

circumstances and in the same system but with a different individual.

Limitation of employees. An employee is a member of the society. This fact should

always be kept in mind by the manager. His circle, his domestic life, his education, his

family liabilities and other factors mould his character, habits, temperament and mental

and physical capacity to work. A management must not expect from an employee to tot

their lines ahays. Because of the above limitations he may not come up to the. thark

even if greatest inducement is offered to him. The management should not be discouraged.

“Try and try agan without much of hope” should be the aim of the manager — the

motivator provided the worker is trying his best to improve and doing his best to the

best of his capabilities.

Motivation — an internal instinct. Motivation involves human element. Psychology

plays a distinct role. Motivation though comes from the above should come from within. It is an internal urge and desire. This differs from individual to individual.

The management should be prepared for disappointment because of internal instinct

in a man. Moderate motivation, uneven motivation, even no motivation may help to a

certain extent. Trial and error method has to be adopted.

 

Q. 64. What do you understand by Morale ? Discuss the measurement of morale.

What steps can be taken to raise (or to build) the morale of employees?

Or

How ‘morale’ is related with ‘motivation’ ? What measure would you take as a

manager-leader to build the morale of your men?

 

Ans. MEANING AND DEFINITION OF MORALE

“Motivation is intimately connected with the morale. Good motivation leads to high

morale. Poormorale is the manifestation of a weak or defective motivating process.”

Mrityunjay Banerjee

Physical and mental well-being of an individual is a morale for a psychologist. For a

social scientist it is a social phenomenon. But for an individual it is the satisfaction

which certainly is relat’d to a state of mental health. Mr. A is happy He is satisfied with

his job. His surroundings are conductive. His fellow workers are cooperative and

gentlemen. His morale is high. But the organisation is not conerned very much with Mr.

A as an individual. If he functions in a group and there he maintains his high morale

only then his organisation is benefited by his moral. For the organsation it is the group

behaviour and group satisfation which is important and a management is obviously

onceqred with this aspect of morale.

The following are a few of the definitions of morale which attaches greater importance

to the group aspect of the term morale:

“Morale is the capacity of a group of people to pulL together persistently and

consistently in pursuit of a common goal.”

“Morale is a feeling of togtherness. There is a sense of identification with an interest

in the elements of one’s job, working conditions, fellow workers, supervisors, employers

and the company.” . —Blankmanship

“To. define morale primarily in terms of attitudes and behaviour traits associated

with or derived from the activity of the individual as a member of a group. An important

element in high morale Is the feeling on the part of the individual that he shares the

basic purpose of the group Of which he is a member.” — Morris S. Uitales

From the point of management the morale is:

1. a stimulation of the feeling of togetherness

2. an identification of group interest and thatof the interest of the enterprise, fellow

. workers and the requirement of the job;

3. a creation of an atmosphere in the organisation conductive to the achievement of

the enterprise.

Measurement of morale. According to John M. Pfiffner there are two ways of

measuring the morale

1. Result method. Checking the extent to which the organisation is achieving results.

The extent of increase or decrease in profitability, produtivity or any other direct benefit

to the enterprise.

2. Attitude-gain method. The extent to which sentiments and attitude of an employee

has developed for the betterment of the organisation and the work has gained momentum can be a measuring rod. Attitude surveys help in measuring the morale in quantitative terms.

Sometimes these two methods are known as (i) Indirect and (ii) Direct methods of measuring morale. Through measuring levels of output, absentism, labour turnovr, accidents, grievances and complaint records etc. the morale is measurded indirectly. It, thus, represents the Result Method. The Attitude-gain Method can be called Direct Method of measuring morale.

Building morale. To raise ths morale of workers is referred to as the building df the morale. This is a difficult tasas human behaviour and motives behind it is largely reponsible for building the morale. Morale is mental phenomenon. Building the morale is like marching ahead without knowing the end of the journey. The target here in building morale is not known and the management has to go on trying and trying without caring for the results. Morale building is a perpetual object that has to be attained continuously without stopping even for a moment.

Morale is a changing mental phenomenon which, for the manager, is the greatest

problem in his action of morale building. The morale cannot be built for ever. Today

morale is very high. Tomorrow it may not be and day after it may be on its peak.

Morale building may be done either:

1. on invividual basis, or

2. on group basis.

 

Q. 65. Define Motivation.

 

‘ Ans. Motivation is a word used to refer to the reason or reasons for engaging in a ,‘particular behaviour - especially human behaviour. These reasons may include a drive, a need, a desire to achieve a goal, a state of being, or an ideal. In human beings, motivation involves both conscious and sub-conscious drives.

As put forth by “Brech” Motivation is a general inspiration process which gets the members of the team to do their task effectively, to give their loyalty to the group, to carry out properly the tasks they have accepted and generally to play an effective part in the job that the gro1p has undertaken.

According to “Michael J Jucius”

“Motivation is the act of stimulating someone or oneself to get a desired course of

action, to push the right button to get desired action”

As mentioned by “Dalton E McFarland”

“The concept of motivation is mainly psychological It relates to those forces operating

within the individual employee or subordinate which impels him to act or not active in certain ways”.

 

Q. 66. Name the Motivation theories.

 

Ans. Types of Motivation Theories:

Content Theories

Define motivation in termS of need satiscaction

— Maslow’s Hierarchy of Needs Theory

— Herzberg’s Two - Factor Theory

— McClelland’s Achievement Motivation Theory

Process Theories

Define motivation as a rational cognitive process

occurring within the individuil.

— Vroom’s Expectancy Theory

— Adam’s Equity Theory

— Maslow’s Need Hierarchy

— Self Actualization

— Esteem

— Social

— Safety

— Physiological

Herzberg’s Two-factor (Dual Factor) Theory

— Motivator

— Hygiene

* Satisfier Job Content (Motivator)

* Dissatisfier Job context

 

Q. 67. Compare Maslow, Herzberz and McGragore theories of Motivation.

 

 

Q. 68. Explain the role of Incentives in Motivation.

 

 Ans. (i) Financial Incentives In the light of need hierarchy concept, in case of persons operating at the lower level, where the physiological needs are not fully satisfied, money can be very powerful motivator of human conduct.

It is necessary to have an adequate compensation programme that will attract and retain key people of superior calibre in the orgamsatlon Such a programme would also stimulate such persons to improve their performance. Monetary compensation can be

used to reward significant achievement made by them.

Some people suggest that besides compensation in mpnetary rewards geared directly

to an employee’s performance1 fringe benefits including bonus motivate an employee.

(ii) Non-financial Incentives

Money is not the only motivator of human behaviour in terms of need hierarchy, it

can help to satisfy only the ‘physiological’ needs of the person. The psychological need

for “safety or security” can be satisfied by the psychological, climate or environment of

the work place.

The employee should be made to feel that owner has achieved something through his

contributions. Such a feeling of.achievement can motivate him to extra effort. Still,

achievement should be followed by recognition. Human being want others to know of

their accomplishments,

Some of the important non-financial incentives are:

(1) Providing responsibility through job enlargement. -.

(2) Providing participation.

(3) Creating a sense of achievement.

(4) Providing recognition for accomplishment.

(5) Offering inducement of promotion and growth as a result of effective performance.

 

Q. 69. What are factors affecting motivation?

 

Ans. Motivation ia the drive ‘or the driving force’ behind an individual. Motivation is

dependent on many factors which influence it directly and indirectly.

Sustenance : This is probably the most basic of all human motivations. Every person

has some primary needs to survive and sustain. These needs may be physical like the

/need for food, clothing and shelter.

Respect : One of the most important employee motivation factors is treating people

fairly and with respect. As a manager if you do not respect your employees, you will

never be able to motivate them. Furthermore, they will not respect you. You can show

that you respect your employees by assigning them tasks that they are best suited for.

Everyone one has a unique set of skills and talents. These skills and talents are a huge

resource for a savvy manager. By accentuating your employees strong points you make

them feel good, and they are motivated because they can accomplish tasks best suited for

them. V

Need for achievement and power : Man typically has a thirst for achievement and

power. He tries to obtain greater control over his environment. He .also desires for self

actualisation, that he may fully realize his abilities. He prizes his personal autonomy and

is motivated by the need for personal freedom of choice in his thoughts and actions.

Incentives and working conditions also play important role to motivate the workers.

 

Q. 70. Describe various promotion policies to motivate workers.

 

Ans. Sufficient policies should be laid down regarding promotion to generate

continued motivation of the employees. Promotion refers to assignment of a position of

greater responsibility or increased authority to-an individual. Normally, it involves

ascending in the management hierarchy or at last an increase in the pay or status or both V

for the employee concerned

An adequate promotion policy giving effective motivation would be one which offers the employee a career within the organisation itself. A climate is to be created that promotion is not only based on seniority but that merit plays an important role.

Promotion Systems

1. Promotion by seniority.

2. Promotion by merit.

3. Promotion through Reports.

Each system has its own merits and demierits.

1. Promotion by seniority. In this system, those who have put in some years of service, are considered for promotion in order of their seniority.

Advantages

(i) In this the organisation obtains mature and experienced people with sufficient

know-how of the job.

(ii) Workers continue to obtain their incentive and thus take interest in the success

of the organisation.

(iii) Employees know that if they continue to perform their duties and responsibilities

satisfactorily, they will get regular promotion. -

(iv) Even the qualified people do not leave their job, if the chances of promotion by

seniority are available.

(v) As experienced persons are not required to work under young qualified people from outside market, hence there is no heart burnin

(vi) There are no chances of nepotism and favouritism.

 

Disadvantages

(i) l’he initiative of the junior persons who at the bottom is killed because they

know that the chaiices of their promotions are low.

(ii) When a senior-most person knows that at his turn he will get his promotion, he

will not try to have better qualifications or make extra efforts for self-improvement.

(iii) This system believes that all persons arefit for promotion, which is not correct

and it will not motivate the workers.

(iv) There is a danger that when incompetent person gets promotion by virtue of

Seniority, the whole organisation suffers.

2. Merit System. In this the organisation fixes job requirements for all the higher

posts as and when these fall vacant and all persons whether, inside or outside the

organisation are allowed to compete to that those who are the best should come forward

and have their chance.

Advantages

(i) The owner gets th best persons available.

(ii) The owner engages fresh blood having initiative and in sight into the job.

(iii) The owner gets the worker, who are necessarily needed.

Disadvantages ,

(i) The initiative of the workers already working in the industry is killed.

(ii) The workers know that their seniority has no meaning for the organisation.

3. Promotion Through Reports. In this the organisation is more concerned with results.

All workers, senior or junior, with proper qualifications and experience should be given

promotion, if their work has been found satisfactory by their superiors..

Demerits. This system is not found much favourable, as employees believe that in

this there are more chances of favouritism and nepotism.

4. All Promotions left to the Head of the Office. it is argued that the head of the

office will be the most impartial person in the organisation and his decision should usually be accepted to the workers.

Demerits

 it is not accepted by the workers, who feel that the head of the office is afterall a human being. He is likely to be under pressure from certain sources. It usually happens that he does not use his judgement impartially-with the result that the deserving persons do not get their fair chance.

 

Q. 71. What are the different motivation theories ? Which theory is applicable for Indians?

 

Ans. Abraham Màslow’s Needs Hierarchy Theory

Behaviour is determined by an individual’s strongest nee,ds, but the lower-level needs

must be satisfied before the next higher-level needs can motivate behaviour. People are motivated to satisfy five categories of needs.

1 Physiological Needs (food, shelter, clothing) Physical and psychological survival

These are usually associated with money.

2. Safety Needs (security, freedom from threat or disease, avoidance of pain) Safety

needs are crucial for infants.

3. Social Needs. (friendship and affection) Relationship building. Striving for acceptance. -

4. Esteem Needs (recognition, respect, and responsibility) Esteem needs only occur when a person is comfortably situated. Esteem needs come from others (respect), and then internalized (self-respect). Prestige and power are motivators.

5. Self-actualization. (creativity and self-expression) Enhancement of life, An extremely small portion of the population is self-actualized. Are people every satisfied?

 

Q. 72. What are the Limitations of Maslow’s Hierarchy?

 

Ans. While Maslow’s hierarchy makes sense from an intuitive standpoint, there is

little evidence to support its hierarchical aspect. In fact, there is evidence that contradicts

the order of needs specified by the model. For example, some cultures appear to place

social needs before any others. Maslow’s hierarchy also has difficulty explaining cases

such as the “starving artist” in which a person neglects lower needs in pursuit of higher

ones. Finally, there is little evidence to suggest that people are motivated to satisfy only

one need level at a time, except in situations where there is a conflict between needs.

Even though Maslow’s hierarchy lacks scientific support, it is quite well-known and

is the first theory of motivation to which many.. people they are exposed Tar address

some of the issues of Maslow’s theory, Clayton Alderfer developed the ERG theory, a

needs-based model that is more consistent with empirical findings