Year: 2020

The need for computerization was felt in the Indian banking sector in late 1980s, in order to improve the customer service, book-keeping and MIS reporting. In 1988, Reserve Bank of India set up a Committee on computerization in banks headed by Dr. C. Rangarajan.

Banks began using Information Technology initially with the introduction of standalone PCs and migrated to Local Area Network (LAN) connectivity. With further advancement, banks adopted the Core Banking platform. Thus branch banking changed to bank banking. Core Banking Solution (CBS) enabled banks to increase the comfort feature to the customers as a promising step towards enhancing customer convenience through anywhere and anytime banking. Different Core banking platforms such as Finacle designed by Infosys, BaNCS by TCS, FLEXCUBE by i-flex, gained popularity.

The process of Computerization gained pace with the opening of the economy in 1991-92. A major driver for this change was propelled by rising competition from private and foreign banks. Several commercial banks started moving towards digital customer services to remain competitive and relevant in the race.

Banks have benefitted in several ways by adopting newer technologies. E-banking has resulted in reducing costs drastically and has helped generate revenue through various channels. As per last available information, the cost of a bank transaction on Branch Banking is estimated to be in a range of Rs.70 to Rs.75 while it is around Rs.15 to Rs.16 on ATM, Rs.2 or less on Online Banking and Rs.1 or less on Mobile Banking.  The number of customer base has also increased because of the convenience in ‘Anywhere Banking’. Digitization has reduced human error. It is possible to access and analyze the data anytime enabling a strong reporting system.

RBI has been a guiding force for the banks in forming regulations and giving recommendations to achieve various objectives. Commercial Banks in India have moved towards technology by way of Bank Mechanization and Automation with the introduction to MICR based cheque processing, Electronic Funds transfer, Inter-connectivity among bank Branches and implementation of ATM (Automated Teller Machine) Channel have resulted in the convenience of Anytime banking. Strong initiatives have been taken by the Reserve Bank of India in strengthening the Payment and Settlement systems in banks.

Technological Milestones in Indian Banks:

According to the RBI Report in 2016-17 there are 2,22,475 Automated Teller Machines (ATMs) and 25,29,141 Point of Sale devices (POS).  Implementation of electronic payment system such as NEFT (National Electronic Fund Transfer), ECS (Electronic Clearing Service), RTGS (Real Time Gross Settlement), Cheque Truncation System, Mobile banking system, Debit cards, Credit Cards, Prepaid cards have all gained wide acceptance in Indian banks. These are all remarkable landmarks in the digital revolution in the banking sector. Online banking has changed the face of banking and brought about a noteworthy transformation in the banking operations.

National Electronic Funds Transfer (NEFT) is the most commonly used electronic payment method for transferring money from any bank branch to another bank in India. It operates in half hourly batches. At present there are 23 settlements.

Real Time Gross Settlement (RTGS) is primarily used for high-value transactions which are based on ‘real time’. The minimum amount to be remitted through RTGS is Rupees Two Lakhs. There is no upper limit.

Immediate Payment Service (IMPS) is an instant electronic funds transfer facility offered by National Payments Corporation of India (NPCI) which is available 24 x7.

The usage of Prepaid payment instruments (PPIs) for purchase of goods & services and funds transfers has increased considerably in recent years. The value of transactions through PPI Cards (which include mobile prepaid instruments, gift cards, foreign travel cards & corporate cards) & mobile wallets have jumped drastically from Rs.105 billion and Rs. 82 billion respectively in 2014-15 to Rs. 277 billion and Rs. 532 billion respectively in 2016-17.

Challenges

1. Security Risks

External threats such as hacking, sniffing and spoofing expose banks to security risks. Banks are also exposed to internal risks especially frauds by employees / employees in collusion with customers

2. Financial Literacy / Customer Awareness

Lack of knowledge amongst people to use e-banking facilities is the major constraint in India.

3. Fear factor

One of the biggest hurdle in online banking is preference to conventional banking method by older generation and mostly people from the rural areas. The fear of losing money in the online transaction is a barrier to usage of e-banking.

4. Training

Lack of adequate knowledge and skills is a major deterrent for employees to deal with the innovative and changing technologies in banks. Training at all levels on the changing trends in IT is the requirement of the day for the banks.

Today banking is amongst the top paying fields in the area of commerce and accounts. With a net worth over INR 64 trillion, the banking industry is growing at a steady rate of 8%. This exponential growth of the banking sector will not only ensure a stronger economy but will continue to open lucrative career avenues for job seekers.

Opportunities in banking sector in India are enormous. It is estimated that in the coming few years over 5 lakh fresh jobs will be up for grabs. Also with the new banking license regime coming into play, the job scenario is expected to become more lucrative in the times to come.

It is not only the private sector that will have vacancies on offer, but the public sector banks will also not be far behind. With an expected deficit of 50% employees in the coming years due to retirement, the public sector banking scenario will also witness huge recruitment drives. 

Job Prospects

An aspirant who wishes to make a career in the banking industry has quite a lot of options to choose from. It is not only the conventional fields like marketing, sales, financial analysts, human resource, client servicing, insurance etc in banking sector that are in vogue, but upcoming areas such as investment banking, internet banking etc. are also to look out for.

Educational Requirements

An aspirant can get into the banking industry after completing his/her graduation. Profile and pay package of the job depends on the aspirant’s educational qualification and experience. Higher one’s qualifications and more the experience, the better will be the salary.  The starting salary could range between Rs. 10,000 – 15,000.

Banking Scene

FICCI and a few other reputed financial institutions have said that the Indian banking sector is set to become the third largest by the year 2025. The public sector banks alone are giving away more than 7 lakh jobs every year. Moreover, since there is a huge population in the banks waiting for retirement, around 40,000 additional jobs get created automatically annually. Imagine the opportunities you have to get a career that is not only promising but also offers a better lifestyle and perks.

Admit it. Nothing makes you look smarter than a white-collar job in a bank. But that’s just the cosmetic part of it. Banking careers include relationship managers, personal banking and loan officers, wealth advisory, book keeping professionals, auditing clerks, finance service representatives to name a few. Indian banking is now on a competitive mode, so you will land faster growth opportunities in your career. Since India still does not have formal schools and institutions offering specific courses in banking, there is always a dearth for competitive personnel. Even SBI- one of the oldest banks- is now opening opportunities to the younger executives who work with better efficiency.

Banking career has always been respectable but now it has also become challenging. In addition, Indian banks follow employee-benefit norms and have great promotion opportunities. Private banks such as ICICI, HDFC, HSBC, Yes Bank, etc. are known to possess great learning and growing environment for young professionals.

Banks in India recruit through common and specific exams, interviews, aptitude test and GDPI. Only last month, the government has relaxed the 60% marks in graduation criterion for the common entrance exam for public sector banks, scrapped the computer literacy requirement and raised the maximum age to 30 from 28.

Most people think Finance sector jobs are rather boring. Another popular myth is that most of these careers are meant for people with Math and/or Commerce background.

First of all, understand that Finance sector is a very vast field that includes financial analysis, finance management, chartered accountancy, company secretaryship, management accountancy, equity sales and share trading, share consultancy, insurance and the likes. The public sector alone offers a variety of options in organizations such as FICCI, NABARD, UTI, SEBI and the likes.

And no if you choose the area of your interest, it cannot be boring. The best thing about this sector is the scope of becoming consultants, so in the long run you don’t really work under anyone but create your own niche. Every CA intern starts off with a firm and eventually opens his own. Similarly, an equity sales is an area where you can become your own boss if you excel in it. In addition, a Company Secretary job is one that is both exciting and respectable. Then there is a whole array of insurance sector jobs.

Another good thing about this sector is you can always keep upgrading yourself. So even if you are an MBA in Finance, you can do a certificate programme in Financial Analysis.

There are three big Indian professional bodies that are offering certifications in chartered accountancy (CA), management accountancy (ICWA) and company secretary (CS). Many universities and colleges in India offer MBA in Finance. There are short-term certifications available through correspondence and online.

According to Samuelson, “Every Central Bank has one function. It operates to control economy, supply of money and credit.”

According to Vera Smith, “The primary definition of Central Bank is the banking system in which a single bank has either a complete or residuary monopoly of note issue.”

According to Kent, “Central Bank may be defined as an institution which is charged with the responsibility of managing the expansion and contraction of the volume of money in the interest of general public welfare.”

According to Bank of International Settlement, “A Central Bank is the bank in any country to which has been entrusted the duty of regulating the volume of currency and credit in that country.”

Functions of Central Bank

The central bank does not deal with the general public directly. It performs its functions with the help of commercial banks. The central bank is accountable for protecting the financial stability and economic development of a country.

Apart from this, the central bank also plays a significant part in avoiding the cyclical fluctuations by controlling money supply in the market. As per the view of Hawtrey, a central bank should primarily be the “lender of last resort.”

On the other hand, Kisch and Elkins believed that “the maintenance of the stability of the monetary standard” as the essential function of central bank. The functions of central bank are broadly divided into two parts, namely, traditional functions and developmental functions.

1. Traditional Functions

Refer to functions that are common to all central banks in the world.

The traditional functions of the central bank include the following:

(i) Bank of issue

Possesses an exclusive right to issue notes (currency) in every country of the world. In the initial years of banking, every bank enjoyed the right of issuing notes. However, this led to a number of problems, such as notes were over-issued and the currency system became disorganized. Therefore, the governments of different countries authorized central banks to issue notes. The issue of notes by one bank has led to uniformity in note circulation and balance in money supply.

(ii) Government’s banker, agent, and advisor

Implies that a central bank performs different functions for the government. As a banker, the central bank performs banking functions for the government as commercial banks performs for the public by accepting the government deposits and granting loans to the government. As an agent, the central bank manages the public debt, undertakes the payment of interest on this debt, and provides all other services related to the debt.

As an advisor, the central bank gives advice to the government regarding economic policy matters, money market, capital market, and government loans. Apart from this, the central bank formulates and implements fiscal and monetary policies to regulate the supply of money in the market and control inflation.

(iii) Custodian of cash reserves of commercial banks

Implies that the central bank takes care of the cash reserves of commercial banks. Commercial banks are required to keep certain amount of public deposits as cash reserve, with the central bank, and other part is kept with commercial banks themselves.

The percentage of cash reserves is deeded by the central bank! A certain part of these reserves is kept with the central bank for the purpose of granting loans to commercial banks Therefore, the central bank is also called banker’s bank.

(iv) Custodian of international currency

Implies that the central bank maintains a minimum reserve of international currency. The main aim of this reserve is to meet emergency requirements of foreign exchange and overcome adverse requirements of deficit in balance of payments.

(v) Bank of rediscount

Serve the cash requirements of individuals and businesses by rediscounting the bills of exchange through commercial banks. This is an indirect way of lending money to commercial banks by the central bank. Discounting a bill of exchange implies acquiring the bill by purchasing it for the sum less than its face value.

Rediscounting implies discounting a bill of exchange that was previously discounted. When owners of bill of exchange are in need of cash they approach the commercial bank to discount these bills. If commercial banks are themselves in need of cash they approach the central bank to rediscount the bills.

(vi) Lender of last resort

Refer to the most crucial function of the central bank. The central bank also lends money to commercial banks. Instead of rediscounting of bills, the central bank provides loans against treasury bills, government securities, and bills of exchange.

(vii) Bank of central clearance, settlement, and transfer

Implies that the central bank helps in settling mutual indebtness between commercial banks. Depositors of banks give checks and demand drafts drawn on other banks. In such a case, it is not possible for banks to approach each other for clearance, settlement, or transfer of deposits.

The central bank makes this process easy by setting a clearing house under it. The clearing house acts as an institution where mutual indebtness between banks is settled. The representatives of different banks meet in the clearing house to settle inter-bank payments. This helps the central bank to know the liquidity state of the commercial banks.

(viii) Controller of Credit

Implies that the central bank has power to regulate the credit creation by commercial banks. The credit creation depends upon the amount of deposits, cash reserves, and rate of interest given by commercial banks. All these are directly or indirectly controlled by the central bank. For instance, the central bank can influence the deposits of commercial banks by performing open market operations and making changes in CRR to control various economic conditions.

2. Developmental Functions

Refer to the functions that are related to the promotion of banking system and economic development of the country. These are not compulsory functions of the central bank.

These are discussed as follows:

(i) Developing specialized financial institutions

Refer to the primary functions of the central bank for the economic development of a country. The central bank establishes institutions that serve credit requirements of the agriculture sector and other rural businesses.

Some of these financial institutions include Industrial Development Bank of India (IDBI) and National Bank for Agriculture and Rural Development (NABARD). These are called specialized institutions as they serve the specific sectors of the economy.

(ii) Influencing money market and capital market

Implies that central bank helps in controlling the financial markets Money market deals in short term credit and capital market deals in long term credit. The central bank maintains the country’s economic growth by controlling the activities of these markets.

(iii) Collecting statistical data

Gathers and analyzes data related to banking, currency, and foreign exchange position of a country. The data is quite helpful for researchers, policymakers, and economists. For instance, the Reserve Bank of India publishes a magazine called Reserve Bank of India Bulletin, whose data is useful for formulating different policies and making macro-level decisions.

The short-term variable costs should be identified to products using volume related cost drivers such as direct labour hour, direct material cost, machine hours etc. Kalpan and Cooper claimed that volume related cost drivers are inappropriate for tracing long-term variable costs to products because they are driven by complexity and variety and not by volume and the key to understanding what causes (drivers) overhead costs in transactions undertaken by support departments costs and factory overheads to product lines under ABC system is shown in the following figure:

Steps to Develop ABC System:

1. Identify the main activities performed in the organization, such as manufacturing, assembly etc., as well as support activities, including purchasing, packing and dispatching.
2. Identify the factors which influence the cost of each activity- the cost drivers.
3. Collect accurate data on direct labour, material and overhead costs.
4. Establishing the demands made by particular products on activities, using the cost drivers as a measure of demand.
5. Trace the cost of activities to products according to a product’s demand for each activity.

The rules developed by Kaplan and Cooper for this process is:

1. Focus on expensive resources, thus directing attention to resource categories where the new costing process has the potential to make big differences on product cost.
2. Emphasis on resources whose consumption varies significantly by product and product type-look for diversity.
3. Focus on resources whose demand patterns are un-correlated with traditional allocation measures.

Thus, ABC is the process of tracing costs first from resources to activities and then from activities to specific products. The technique of ABC lays the importance of different costs for different purposes and the identification of just those costs, which are relevant to a particular decision. However, it does not challenge the conventional accounting methods and theory; instead, it refines the ideas and concepts of conventional methods.

Traditional Versus ABC Approach to Designing a Costing System:

In traditional approach, there is lack of cause and effect relationship between the cost allocation bases and indirect cost pools because one or a few cost pools for each department or entire plant having little homogeneity are used. In ABC approach, many homogeneous indirect cost pools for various activity areas rather than a department or entire plant are used. There is a cause and effect relationship between the cost allocation bases and the indirect cost pools.

The traditional approach usually uses a few pools of indirect costs, so cost allocations are of intently based on broad averages. The costs of products thus, ascertained may be either over-costed or undercoated which may lead managers to make wrong pricing decisions resulting in loss of market share by fixing higher selling prices or selling prices for some products may be below the costs incurred to produce them. Activity based costing is a rational way of assigning indirect costs to various activities and pricing decisions taken by managers will be rational.

The activity based job costing method or process costing method is helpful in ascertaining areas where cost reductions are possible. Activity based costing can lead to improved decision making such as fixing selling price and pinpointing the area where cost reduction is possible because it provides more detailed information about various activities involved in a product or service.

Activity based principles can be successfully applied to the art of budgeting. Activity based budgeting is an approach to budgeting that lays emphasis on budgeting the costs of activities necessary to produce and sell products and services. Activity based budgeting is especially useful in case of budgeting of indirect costs.

Important steps in activity based budgeting are as follows:

1. Determining the demand for each individual activity on the basis of budgeted production.
2. Determining the budgeted cost of performing each activity.
3. Ascertaining the actual cost of each activity.
4. Comparing the actual cost with the budgeted cost of each activity, noting down the difference and taking corrective action, wherever necessary.

Kaplan and Cooper of Harvard Business School, who have developed this new approach in costing to calculate product costs, claim that the costs should be classified as long-term variable costs and short-term variable costs. Traditionally short-term variable costs are known as variable costs and long-term are known as fixed costs.

Short-term variable costs are volume related and change proportionately with the volume of production. Long-term variable costs vary in long term but not instantaneously. For example, production scheduling costs can be changed in the long-term by changing number of runs rather than changing number of units produced.

They further claim that this approach relates overhead costs to the forces behind them. The forces behind overhead costs are named ‘cost drivers’. Costs drivers can be defined as those activities or transactions that are significant determinants of costs. Under ABC system, product cost is determined by obtaining a greater understanding of cost behaviour and using new measures of quantity of resources consumed by each product.

A cost driver is ‘an activity which generates cost’. ABC system is based on the belief that activities cause costs and that a link should, therefore, be made between activities and products by assigning costs of activities to products based on an individual product’s demand for each activity.

Cost Drivers and Cost Pools:

The assumptions underlying ABC is that virtually all of a company’s activities exist to support the production and delivery of goods and services. They should, therefore, all be considered as product costs. And because nearly all factory and corporate support costs are separable, they can be split apart and traced to individual products to product families. On the basis of this assumption, the philosophy of ABC is that costs can be controlled more effectively by focusing directly on managing the forces that cause the activities—the ‘cost drivers’ rather than costs.

The reporting of the costs consumed by the significant activities of business and their cost drivers provides the basis for understanding what causes overhead costs and direct attention to where steps can be taken to improve profitability. Knowing the high costs of material movements or the cost of producing, many different components or maintaining many different machines, highlights the need to carry out these activities more effectively. Thus, ABC provides better and more accurate information and decision making on prices and product mix and for the control of manufacturing operations.

The ABC technique aims at to overcome the drawbacks by cutting across conventional departmental boundaries. Costs are grouped into ‘pools’ according to the activities which drive them e.g. a cost pool may be of procurement of goods. In this, all the costs associated with the procurement (ordering, inspection, storing etc.) would be included in this cost pool and cost driver identified.

The procurement cost per requisition is then calculated and this provides a means of tracing the cost of procurement to product. The technique of ABC lays importance on different costs for different purposes and the identification of just those costs which are relevant to particular decision.

1. Simple traditional distinction made between fixed cost and variable cost is not enough guide to provide quality information to design a cost system.
2. The more appropriate distinction between cost behaviour patterns are volume (scale) related, diversity (scope) related, events (decisions) related and time related.
3. Cost drivers need to be identified. A cost driver is a structural determinant of cost related activity. The logic behind is that cost drivers dictate the cost behaviour pattern. In tracing overhead cost to product, a cost behaviour pattern must be understood so that appropriate cost driver could be identified.

Key Areas of ABC:

Following are the three key areas of ABC:

1. Product cost differentiation.
2. Activities and their cost drivers.
3. Identification of non-value added cost.

In ABC system a cost center is established for each cost driver and identification, measurement and control of cost drivers is essential in ABC. ABC is the planned and systematic study and determination of cost of each of the branches of business activities that add to the value of product and services.

Benefits of ABC:

Accurate Product Cost:

ABC brings accuracy and reliability in product cost determination by focusing on cause and effect relationship in the cost incurrence. It recognises that it is activities which cause costs, not products and it is product which consume activities. In advanced manufacturing environment and technology where support functions overheads constitute a large share of total costs, ABC provides more realistic product costs.

ABC produces reliable and correct product cost data in case of greater diversity among the products manufactured such as low-volume products, high-volume products. Traditional costing system is likely to bring errors and approximation in product cost determination due to using arbitrary apportionment and absorption methods.

Information about Cost Behaviour:

ABC identifies the real nature of cost behaviour and helps in reducing costs and identifying activities which do not add value to the product. With ABC, managers are able to control many fixed overhead costs by exercising more control over the activities which have caused these fixed overhead costs. This is possible since behaviour of many fixed overhead costs in relation to activities now become more visible and clear.

Tracing of Activities for the Cost Object:

ABC uses multiple cost drivers, many of which are transaction based rather than product volume. Further, ABC is concerned with all activities within and beyond the factory to trace more overheads to the products.

Tracing of Overhead Costs:

ABC traces costs to areas of managerial responsibility, processes, customers, departments besides the product costs.

Better Decision Making:

ABC improves greatly the manager’s decision making as they can use more reliable product cost data. ABC helps usefully in fixing selling prices of products as more correct data of product cost is now readily available.

Cost Management:

ABC provides cost driver rates and information on transaction volumes which are very useful to management for cost management and performance appraisal of responsibility centres. Cost driver rates can be used advantageously for the design of new products or existing products as they indicate overhead costs that are likely to be applied in costing the product.

Use of Excess Capacity and Cost Reduction:

ABC, through the processes of pooling of activity costs and the identification of cost drivers, can lead to a range of applications. These include the identification of spare capacity and the fostering of cost reduction by comparing the resources required under ABC with the resources that are currently provided. This provides a platform for the development of activity-based budgeting in which the resource relationships identified by ABC are used to project future resource requirements.

Benefit to Service Industry:

Service organizations, such as banks, hospitals and government departments, have very different characteristics than manufacturing firms. Service organizations have almost no direct costs, most of the costs are overheads and they do not hold stocks of service as the service is consumed when it is produced. Traditional costing has generally been considered inappropriate for these organizations, whereas ABC offers the potential of benefits from improved decision making and cost management.

An ABC system can provide better costing information and help management manage ef­ficiently and gain a better under-standing of the firm’s competitive advantages, strengths and weak­nesses. Often, managers recognize needs for a better costing system such as ABC when they are experiencing increased lost sales due to erroneous pricing that resulted from inaccurate costing data.

An ABC system has the most impact on firms that have areas with large, increasing expenses or have numerous products, services, customers, processes, or a combination of these. Example are plants that produce standard and custom products, high-volume and low-volume products, or mature and new products.

Firms that accept small and large orders, offer standard and customized deliveries, or satisfy all customers including those who demand frequent changes and services either before or after the delivery, and customers who hardly ever request special services can benefit substantially from activity-based costing systems.

Colin Drury observes:

“ABC provides not only a base for calculating more accurate product costs but also a mechanism for managing costs. An ABC system focuses management attention on the underlying causes of costs. It assumes that resource-consuming activities cause costs and that products incur costs through the activities they require for designing, engineering, manufacturing, marketing, delivery, invoicing and servicing. By collecting and reporting on the significant activities in which a business engages, it is possible to understand and manage costs more effectively.

With an ABC system, costs are managed in the long run by controlling the activities that drive them. In other words, the aim is to manage the activities rather than costs. By managing the forces that cause the activities (i.e., cost drivers), costs will be managed in the long-term. The applica­tion of activity-based systems may have the greatest potential for contributing to cost management, budgeting, and control and performance evaluation.”

According to Weil and Maher:

“Activity-based costing plays an important role in companies’ strategies and long-range plans to develop a competitive cost advantage. While activity-based costing focuses attention on activities in allocating overhead costs to products, activity-based management focuses on managing activities to reduce costs. Cost reduction generally requires a change in activities. Top management can send notices to company employees to reduce costs, but the implementation requires a change in activi­ties. If you have lived in a city that has had to reduce costs, you know that achieving the reduction required a change in activities such as fewer police patrols, a cut in library hours, and reduced social services. An entity cannot know the effect of a change in activities on costs without the type of cost information provided by activity-based costing.”

Demerits of Activity Based Costing (ABC):

Expensive and Complex:

ABC has numerous cost pools and multiple cost drivers and therefore can-be more complex than traditional product costing systems. It can prove costly to manage ABC system.

Selection of Drivers:

Some difficulties emerge in the implementation of ABC system, such as selection of cost drivers, assignment of common costs, varying cost driver rates etc.

Disadvantages to Smaller Firms:

ABC has different levels of utility for different organisation such as large manufacturing firm can use it more usefully than the smaller firms. Also, it is likely that firms depending on cost-plus pricing can take advantages from ABC as it gives accurate product cost. But those firms who use market based prices may not favour ABC. The level of technology and manufacturing environment prevailing in different firms also affect the application of ABC.

Measurement Difficulties:

The main costs and limitations of an ABC system are the measurements necessary to implement it. ABC systems require management to estimate costs of activity pools and to identify and measure cost drivers to serve as cost allocation bases. Even basic ABC systems require many calculations to determine costs of products and services. These measurements are costly. Activity cost rates also need to be updated regularly.

In ABC the hidden weaknesses and high cost segments are identified for maximum effectiveness of cost accounting system. The process of designing and implementing an ABC system for support, departments usually by way of interviewing the concerned departmental heads to have an insight into the departmental operations and into the factors that trigger departmental activities. Subsequent analysis traces these activities to specific products. Suppose the inventory control department is responsible for raw materials and purchased components.

The relevant questions that could be asked are:

1. How many people work in the department?
2. What do they do? What determines the time required to process an incoming shipment?
3. Does it matter if the shipment is large or small?
4. What other factors affect your department’s workload?
5. Do you usually disburse the total amount of material required for a production run all at once or does it go out in smaller quantities?

After the interview the system designer can use the number of people involved in each activity to allocate the departments costs. ABC calls for high level costing policy, cost technology and modules for activities effectiveness in a competitive economy for survival and prosperity.

Since allocation of indirect costs to various products or departments on a reasonable basis is a complicated job, activity based costing technique helps a cost accountant to find out product cost to a greater accuracy.

Following steps are involved in implementing ABC to achieve the desired results:

1. Identifying the functional areas (like material management, production, quality control etc.) involved.
2. Identifying the key activities involved in each functional area.
3. Allocating the common indirect costs to various activities in each functional area.
4. Identifying the most suitable cost driver in each activity under functional areas for better allocation of indirect costs to get accurate cost information. A cost driver is any factor that influences cost. A change in the cost driver will lead to a change in the total cost of a related cost object.
5. Preparing the statement of expenditure activity wise and comparing it with the value addition activity wise to know the activities which are to be eliminated or need improvement for better performance of the organisation.

Functional areas may be as follows:

(a) Material Management

(b) Stores Management

(c) Production Management

(d) Quality Control Management

(e) Personnel Management

(f) Sales Management

(g) Repairs & Maintenance

(h) Administration

(i) Public Relations

The Cash Budget is a budget prepared to estimate the cash inflows and outflows during a specific period of time. In other words, cash budget shows the cash inflows and cash outflows expected to occur in the immediate future period.

The purpose of preparing the cash budget is to determine that whether the enterprise has sufficient cash balance to meet out its short-term cash requirements or whether too much cash is being left idle and unproductive in the organization. Thus, it helps the management to determine the surplus and shortage of funds so that suitable actions can be undertaken.

One of the major advantages of cash budget is that it provides a clear picture of all the expected cash flows, thereby enabling the firms to plan their expenditures accordingly. Also, the companies can raise adequate funds in case of the shortage of the cash balance and can make an optimum utilization of funds in case of cash surplus, for example investing in marketable securities.

But however, these cash budgets are not free from the limitations. These are less reliable as the future is uncertain and the cash forecast may not be correct. For example, unseen demands of cash, delayed cash collection, unanticipated cash disbursements, etc. Also, the cash budget is inefficient to track a significant movement in the working capital items.

The cash budget consists of three parts:

(1) The forecast of cash inflows,

(2) The forecast of cash outflows, and

(3) The forecast of cash balance.

Principal Objectives of Cash Budget:

Cash budget in a firm is prepared to accomplish the following objectives:

(1) To project firm’s cash position in future period.

(2) To predict cash surplus or deficit for the ensuing months.

(3) To permit planning for financing in advance of need. By indicating when cash will be required, the budget helps the management to arrange in advance bank loans or other short-term credits, to prepare for a sale of securities or to make other preparations for new financing.

(4) To help in selection of proper source of financing cash requirements of the firm.

(5) To permit proper utilisation of idle cash.

(6) To maintain adequate balance between cash and working capital, sales, investments and loans.

(7) To exercise control over cash expenditure by limiting the spending of various departments.

Utility of Cash Budget:

Cash budget is an extremely important tool available in the hands of a finance manager for planning fund requirements and for controlling cash position in the firm. As a planning device, cash budget helps the finance manager to know in advance the cash position of the firm in different time periods.

The cash budget indicates in which months there will be cash surfeit and in which months the firm will experience cash drain and by how much.

With the help of this information finance manager can draw up a programme for financing cash requirements. It indicates the most opportune time to undertake the financing process. There will be two advantages if the finance manager knows in advance as to when additional funds will be required. First, funds will be available in hand when needed and there will be no idle funds.

In the absence of the cash budget it may be difficult to determine cash requirements in different months. If cash required is not available in time it will entail the firm in a precarious position. The firm’s output is reduced because of imbalance in financial structure and the rate of return consequently declines.

If the firm is marginal, the decline in profits could lead to disaster. Further, it would be difficult for the firm to meet its commitments and would consequently lose its credit standing. A firm with a poor credit standing stands little chance of success.

With the help of cash budget finance manager can determine precisely the months in which there will be cash surplus. Nevertheless, a reasonable amount of cash adds to a firm’s debt paying power of the firm, holding excess cash for any period of time is largely a waste of resource yielding no return. This will result in the decline in profits.

The cash budget offsets the possibility of decline in profits because the finance manager in that case will invest idle cash in marketable securities. Thus, with the help of the cash budget, finance manager can maintain high liquidity without jeopardizing the firm’s profitability.

The cash budget, besides indicating cash requirements, reflects the length of time for which funds will be needed. This will help the finance manager to decide the most likely source from which the funds can be obtained. A firm which stands in need of funds for a short-term duration will use a source different from the one requiring funds for a long time.

Features of Cash Budget

1. The cash-budget period is broken down into periods, mainly in months.
2. The cash-budget is always in columnar form i.e. column showing each month.
3. Payments and receipts of cash are identified in different heading and showing total for each month.
4. The surplus of total cash payment over receipts or of receipts over payment for each month is shown.
5. The running balances of cash, which would be determined by taken the balance at the end of the previous month and adjusting it for either deficit or surplus of receipts over payments for current month, is identified.

Importance of Cash Budget

Cash budget is an important tool in the hands of financial management for the planning and control of the working capital to ensure the solvency of the firm.  The importance of cash budget may be summarised as follow:

2. Helpful in Planning: Cash budget helps planning for the most efficient use of cash. It points out cash surplus or deficiency at selected point of time and enables the management to arrange for the deficiency before time or to plan for investing the surplus money as profitable as possible without any threat to the liquidity. 
3. Forecasting the Future needs: Cash budget forecasts the future needs of funds, its time and the amount well in advance. It, thus, helps planning for raising the funds through the most profitable sources at reasonable terms and costs. 
4. Maintenance of Ample cash Balance: Cash is the basis of liquidity of the enterprise. Cash budget helps in maintaining the liquidity. It suggests adequate cash balance for expected requirements and a fair margin for the contingencies. 
5. Controlling Cash Expenditure: Cash budget acts as a controlling device. The expenses of various departments in the firm can best be controlled so as not to exceed the budgeted limit. 
6. Evaluation of Performance: Cash budget acts as a standard for evaluating the financial performance. 
7. Testing the Influence of proposed Expansion Programme: Cash budget forecasts the inflows from a proposed expansion or investment programme and testify its impact on cash position.
8. Sound Dividend Policy: Cash budget plans for cash dividend to shareholders, consistent with the liquid position of the firm. It helps in following a sound consistent dividend policy. 
9. Basis of Long-term Planning and Co-ordination: Cash budget helps in co-coordinating the various finance functions, such as sales, credit, investment, working capital etc. it is an important basis of long term financial planning and helpful in the study of long term financing with respect to probable amount, timing, forms of security and methods of repayment.

A production budget is a financial plan that lists the number of units to be manufactured during a period. In other words, this is a report that estimates the number of units that a plant will produce from period to period.

The production budget calculates the number of units of products that must be manufactured, and is derived from a combination of the sales forecast and the planned amount of finished goods inventory to have on hand (usually as safety stock to cover for unexpected increases in demand). The production budget is typically prepared for a “push” manufacturing system, as is used in a material requirements planning environment.

Managers use the production budget to estimate how many units they will need to produce in future periods based on the future estimated sales numbers. They also use this report as a planning tool for future production processes, machine times, and scheduling. Production managers have to estimate the future demands and plan out the workflow to make sure everything is produced timely and there aren’t long periods of wait time or down time.

This is the main reason why the production budget does not show the costs of production nor the sales revenue from the estimated sales during the period. Instead, it always shows the total estimated sales in units and the budgeted number of units produced. Remember, this is a report used to determine the number of units that need to be produced during the period. The sales budget and manufacturing budget are used to estimate the total revenues and expenses for the period.

The preparation of production budget involves the following stages:

(i) Production planning

(ii) Consideration of plant capacity

(iii) Stock quantity to be held

(iv) Sales budget figures.

A production budget depends on 3 factors:

(1) Sales Forecast in unit as indicated in the sales budget.

(2) Finished Goods Inventory level that management wants at the end of the period.

(3) Anticipated inventory at the start of the budget period.

The production budget also depends on a company’s inventory policy. Inventories may be build-up or liquidated depending upon the outlook adopted by management. Also, the cost of carrying larger inventories should be compared with the cost of being out-of-stock when the firm cannot deliver.

The production budget will project the number of units to be produced in a period using the formula:

Production Budget = Budgeted Sales Units – Opening Stock of Finished Goods + Closing Stock of Finished Goods

This can be justified because:

• The opening stock of finished goods has already been produced, and can
• Therefore be deducted from our calculation of what needs to be made, and
• The closing stock has yet to be made so needs to be added into our total of goods to be produced.

Summary:

• if stocks of finished goods are to increase, then production must be greater than sales
• if finished goods stocks are to remain constant, production will be the same as sales
• if finished goods stocks are to fall, production will be less than sales

Cost of Production Budget:

The production budget determines the number of units to be produced. When these units are converted into monetary terms, it becomes a cost of production budget. The cost of production budget is the total amount to be spent on producing the units stipulated in the production budget. The physical units are broken into elements, i.e., material, quantity, labour, time and manufacturing overheads. The material cost, labour cost and overheads required for manufacturing are totalled together to make it a cost of production budget.