Tag: Event Management

The Securities Contracts (Regulation) Act, was enacted in the year 1956. It is also referred to as the SCRA and is one of the first few rules and regulations or legislations made in the Indian capital markets.

The SCRA regulates the contracts executed in the Indian securities markets and stock exchanges. Therefore, all those securities that are defined by the Securities and Exchange Board of India (SEBI) have to necessarily follow the terms and conditions specified under the securities contract or the SCRA.

Important Definitions

Contract means a contract for or relating to the purchase or sale of securities.

Corporatisation means the succession of a recognised stock exchange, being a body of individuals or a society registered under the Societies Registration Act, 1860 (21 of 1860), by another stock exchange, being a company incorporated for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities carried on by such individuals or society.

Demutualisation means the segregation of ownership and management from the trading rights of the members of a recognised stock exchange in accordance with a scheme approved by the Securities and Exchange Board of India.

Derivative includes:

(i) A security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security,

(ii) A contract which derives its value from the prices, or index of prices, of underlying securities,

(iii) Commodity derivatives, and

(iv) Such other instruments as may be declared by the Central Government to be derivatives.

Non-transferable specific delivery contract means a specific delivery contract, the rights or liabilities under which or under any delivery order, railway receipt, bill of lading, warehouse receipt or any other documents of title relating thereto are not transferable.

Scheme means a scheme for corporatisation or demutualisation of a recognised stock exchange which may provide for

(i) The issue of shares for a lawful consideration and provision of trading rights in lieu of membership cards of members of a recognised stock exchange,

(ii) The restrictions on voting rights,

(iii) The transfer of property, business, assets, rights, liabilities, recognitions, contracts of the recognised stock exchange, legal proceedings by, or against, the recognised stock exchange, whether in the name of the recognised stock exchange or any trustee or otherwise and any permission given to, or by, the recognised stock exchange, (iv) the transfer of employees of a recognised stock exchange to another recognised stock exchange; and (v) any other matter required for the purpose of, or in connection with, the corporatization or demutualisation, as the case may be, of the recognised stock exchange.

Securities include

(i) Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate,

(ii) Derivative,

(iii) Units or any other instrument issued by any collective investment scheme to the investors in such schemes,

(iv) Security receipt as defined in clause of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,

(v) Units or any other such instrument issued to the investors under any mutual fund scheme,

(vi) any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case may be,

(vii) Government securities,

(viii) Such other instruments as may be declared Government to be securities, and

(ix) Rights or interests in securities.

Specific Delivery Contract means a commodity derivative which provides for the actual delivery of specific qualities or types of goods during a specified future period at a price fixed thereby or to be fixed in the manner thereby agreed and in which the names of both the buyer and the seller are mentioned.

Spot Delivery Contract means a contract which provides for,

(i) actual delivery of securities and the payment of a price therefor either on the same day as the date of the contract or on the next day, the actual period taken for the despatch of the securities or the remittance of money therefor through the post being excluded from the computation of the period aforesaid if the parties to the contract do not reside in the same town or locality.

(ii) Transfer of the securities by the depository from the account of a beneficial owner to the account of another beneficial owner when such securities are dealt with by a depository.

Transferable Specific Delivery Contract means a specific delivery contract which is not a non-transferable specific delivery contract and which is subject to such conditions relating to its transferability as the Central Government may by notification in the Official Gazette specify in this behalf.

Recognized Stock Exchange

 Any stock exchange that desires to be recognized under this Act can apply to the Central Government in the prescribed form along with a list of particulars that include:

• The governing body of such stock exchange, its constitution, and powers of management and the manner in which its business is to be transacted,
• The powers and duties of the office-bearers of the stock exchange,
• The admission into the stock exchange of various classes of members, the qualifications for membership, and the exclusion, suspension, expulsion, and re-admission of members therefrom or thereinto, and
• The procedure for the registration of partnerships as members of the stock exchange in cases where the rules provide for such membership; and the nomination and appointment of authorized representatives and clerks.

Powers granted by the SCRA

• Granting recognition to stock exchanges
• Withdrawing recognition given to stock exchanges
• Power to call for periodical returns and conducting direct inquiries
• Power to require the furnishing of annual reports of recognised stock exchanges
• Power to make rules and to direct rules to be made
• Power to supersede governing body of a recognised stock exchange
• Power to suspend the business of recognised stock exchanges
• Power to notify contract as illegal in certain circumstances in notified areas
• Power to prohibit contracts in certain cases
• Power to license dealers in securities in certain areas
• Power to grant immunity
• Power to delegate its powers to the Securities and Exchange Board of India and the Reserve Bank of India
• Power to make rules
• Power to vary or set aside the decision of refusal to list securities made by the recognised stock exchange on appeal
• Power to grant or refuse listing of securities in appeal

Powers granted to the Securities and Exchange Board of India (SEBI) by the SCRA:

• Power to approve the transfer of duties and functions of a clearing house to a clearing corporation
• Power to approve the making of bye-laws by recognised stock exchanges for the regulation and control of contracts
• Power to make or amend bye-laws of recognised stock exchanges
• Power to issue directions to stock exchanges, clearing corporations, agencies, persons or classes of persons associated with the securities market
• Power to issue directions to companies whose securities are listed or proposed to be listed in a recognised stock exchange
• Power to approve the establishment of additional trading floor in recognised stock exchanges
• Power to appoint adjudicating officers
• Power to make regulations

Powers granted to the Securities Appellate Tribunal by the SCRA:

• Power to summon and enforce the attendance of any person and examine him on oath
• Power to require the discovery and production of documents
• Power to receive evidence on affidavits
• Power to issue commissions for the examination of witnesses or documents
• Power to review its decisions
• Power to dismiss application for default or deciding it ex- parte
• Power to set aside any order of dismissal of any application for default or any order passed by it ex- parte
• Power to vary or set aside decision of refusal to list securities made by the recognised stock exchange on appeal
• Power to grant or refuse listing of securities in appeal
• Power to exercise any other prescribed matter

Penalties under the SCRA

The offenses and penalties under the SCRA include:

Particulars of the Offence	Penalty
If a person fails to comply with any requisition made under sub-section (4) of section 6	Imprisonment for a term extendable up to 10 years or fine extendable up to rupees 25 crores or both.
If a person enters into any contract in contravention of any of the provisions contained in section 13 or section 16	Imprisonment for a term extendable up to 10 years or fine extendable up to rupees 25 crores or both.
If a person contravenes the provisions contained in section 17 or section 17A or section 19	Imprisonment for a term extendable up to 10 years or fine extendable up to rupees 25 crores or both.
If a person enters into any contract in derivative in contravention of section 18A or the rules made under section 30	Imprisonment for a term extendable up to 10 years or fine extendable up to rupees 25 crores or both.
If a person owns or keeps a place other than that of a recognised stock exchange which is used for the purpose of entering into or performing any contracts in contravention of any of the provisions of this Act and knowingly permits such place to be used for such purposes	Imprisonment for a term extendable up to 10 years or fine extendable up to rupees 25 crores or both.
If a person manages, controls, or assists in keeping any place other than that of a recognised stock exchange which is used for the purpose of entering into or performing any contracts in contravention of any of the provisions of this Act or at which contracts are recorded or adjusted or rights or liabilities arising out of contracts are adjusted, regulated or enforced in any manner whatsoever	Imprisonment for a term extendable up to 10 years or fine extendable up to rupees 25 crores or both.
If a person not being a member of a recognised stock exchange or his agent authorised as such under the rules or bye-laws of such stock exchange or not being a dealer in securities licensed under section 17 wilfully represents to or induces any person to believe that contracts can be entered into or performed under this Act through him	Imprisonment for a term extendable up to 10 years or fine extendable up to rupees 25 crores or both.
If a person not being a member of a recognised stock exchange or his agent authorised as such under the rules or bye-laws of such stock exchange or not being a dealer in securities licensed under section 17, canvasses, advertises or touts in any manner either for himself or on behalf of any other persons for any business connected with contracts in contravention of any of the provisions of this Act	Imprisonment for a term extendable up to 10 years or fine extendable up to rupees 25 crores or both.
If a person joins, gathers or assists in gathering at any place other than the place of business specified in the bye-laws of a recognised stock exchange any person or persons for making bids or offers or for entering into or performing any contracts in contravention of any of the provisions of this Act	Imprisonment for a term extendable up to 10 years or fine extendable up to rupees 25 crores or both.
If any person enters into any contract in contravention of the provisions contained in section 15, section 21, section 21A or section 22	Imprisonment for a term extendable up to 10 years or fine extendable up to rupees 25 crores or both.
If any person is required to furnish any information, document, books, returns or report to the recognised stock exchange or the Board, fails to furnish it within the specified time or furnishes false, incorrect or incomplete information	Not less than 1 lakh rupees but extendable up to 1 lakh rupees each day of offence subject to a maximum of 1 crore rupees.
If any person who is required to enter into an agreement with his client, fails to enter into such an agreement	Not less than 1 lakh rupees but extendable up to 1 lakh rupees each day of offence subject to a maximum of 1 crore rupees.
If any stock broker or sub- broker or a company whose securities are listed or proposed to be listed in a recognised stock exchange, after having been called upon by the Securities and Exchange Board of India or a recognised stock exchange in writing, to redress the grievances of the investors, fails to redress such grievances within the time stipulated by the Securities and Exchange Board of India or a recognised stock exchange	Not less than 1 lakh rupees but extendable up to 1 lakh rupees each day of offence subject to a maximum of 1 crore rupees.
If any person, who is registered under section 12 of the Securities and Exchange Board of India Act, 1992 as a stock broker or sub-broker, fails to segregate securities or moneys of the client or clients or uses the securities or moneys of a client or clients for self or for any other client	Not less than 1 lakh rupees which may extend up to 1 crore rupees.
If a company or any person managing collective investment scheme or mutual fund or real estate investment trust or infrastructure investment trust or alternative investment fund fails to comply with the listing conditions or delisting conditions or grounds or commits a breach thereof	Not less than 5 lakh rupees which may extend up to 25 crore rupees.
If any issuer dematerialises securities more than the issued securities of a company or delivers in the stock exchanges the securities which are not listed in the recognised stock exchange or delivers securities where no trading permission has been given by the recognised stock exchange	Not less than 5 lakh rupees which may extend up to 25 crore rupees.
If a recognised stock exchange fails or neglects to furnish periodical returns or furnishes false, incorrect or incomplete periodical returns to the Securities and Exchange Board of India or fails or neglects to make or amend its rules or bye-laws as directed by the Securities and Exchange Board of India or fails to comply with directions issued by the Securities and Exchange Board of India	Not less than 5 lakh rupees which may extend up to 25 crore rupees.
Where a stock exchange or a clearing corporation fails to conduct its business with its members or any issuer or its agent or any person associated with the securities markets in accordance with the rules or regulations made by the Securities and Exchange Board of India and the directions issued by it under this Act, the stock exchange or the clearing corporations, as the case maybe	Not less than 5 crore rupees which may extend up to 25 crore rupees or three times the amount of gains made out of such failure, whichever is higher.
Whoever fails to comply with any provision of this Act, the rules or articles or bye- laws or the regulations of the recognised stock exchange or directions issued by the Securities and Exchange Board of India for which no separate penalty has been provided	Not less than 1 lakh rupees which may extend up to 1 crore rupees

Executive Corporate Processes are generic processes aiming at safeguarding that the organization is effectively and efficiently governed and managed at all levels and are collectively executed. They are herein distinguished from ‘Management Processes/Duties’, which aim at safeguarding that ‘Line Managers’ at all levels carry out in a balanced way all their ‘Managing Duties’ and from ‘Corporate Core and Support Processes’, which aim at realizing the Corporate Mission.

Analysing Development Needs:

In the first instance, once a decision is made to launch an executive development programme, a close and critical examination of the present and future developmental needs of the organisation is made. It becomes necessary to know how many and what type of managers are required to meet the present and future needs of the organisation.

This requires organisational planning. A critical examination of the organisation structure in the light of the future plans of the organisation reveals what the organisation needs in terms of departments, functions and executive positions.

After getting the information, it will be easy to prepare the descriptions and specifications for different executive positions, which in turn gives information relating to the type of education, experience, training, special knowledge, skills and personal traits for each position.

By comparing the existing talents including those to be developed from within with those which are required to meet the projected needs enables the management to make a policy decision as to whether it wants to fill these positions from within or from outside sources.

Appraisal of Present Management Needs:

For the purpose of making above mentioned comparison, a qualitative assessment the existing executives will be made to determine the type of executive talent available within the organisation and an estimate of their potential for development is also added to that. Then comparison is made between the available executive talent and the projected required talent.

Inventory of Executive Manpower:

An inventory is prepared to have complete information about each executive. For each executive, a separate card or file is maintained to record therein such data as name, age, length of service, education, experience, health, test results, training courses completed, psychological test results, performance appraisal results etc.

An analysis of such information will reveal the strengths and weaknesses of each executive in certain functions relative to the future needs of the organisation.

Planning Individual Development Programmes:

Guided by the results of the performance appraisal which reveal the strengths and weaknesses of each executive, the management is required to prepare planning of individual development programmes for each executive. According to Dale S. Beach, “Each one of us has a unique set of physical, intellectual, emotional characteristics. Therefore, a development plan should be tailor-made for each individual”.

“It would be possible to impart knowledge and skills and mould behaviour of human beings, but it would be difficult to change the basic personality and temperament of a person once he reaches adult-hood stage”.

Establishing Training and Development Programmes:

It is the responsibility of the personnel or human resource department to prepare comprehensive and well-conceived development programmes. It is also required to identify existing levels of skills, knowledge etc. of various executives and compare them with their respective job requirements.

It is also required to identify development needs and establish specific development programmes in the fields of leadership, decision-making, human relations etc. But it may not be in a position to organise development programmes for the executives at the top level as could be organised by reputed institutes of management.

In such circumstances, the management deputes certain executives to the development programmes organised by the reputed institutes of management.

Further, the personnel or human resource department should go on recommending specific executive development programmes based on the latest changes and development in the management education.

Evaluating Development Programmes:

Since executive development programmes involve huge expenditure in terms of money, time and efforts, the top management of the organisation is naturally interested to know to what extent the programme objectives have been fulfilled. Such programme evaluation will reveal the relevance of the development programmes and the changes that have been effected by such programmes.

If the objectives of the programme have been achieved, the programme is said to be successful. But it is difficult to measure the changes or effects against the pre-determined objectives.

While the effect of certain programmes can be noticed only in the long-run in a more general way, the effect of certain other programmes may be noticed in the short-run in a specific way. Grievance reduction, cost reduction, improved productivity, improved quality etc. can be used to evaluate the effects of development programmes.

Factors Influencing the Executive Development Processes in Organizations

1. Failure to train the managers will lead to ineffective and inefficient managers who negatively affect the organization’s performance.
2. In the absence of training and developmental avenues, the performing managers may get de-motivated and frustrated in leading the organizations. This would lead to severe losses for the organization in financial parameters, in terms of the cost of recruiting and training the new incumbent.
3. The organizational performance may be affected by the loss of market shares, lower sales, reduced profitability, etc.
4. The absence/shortage of trained and skilled managers makes it important for the organizations to have appropriate retention strategies. Training and development is being used by organizations as a part of their retention strategy.
5. The competitive pressures make it necessary for organizations to continuously roll out new products and services, and also maintain the quality of the existing ones. The training and development of managers would help them in developing the competencies in these areas.
6. The competitive environment is making it imperative for the organizations to continuously restructure and re-engineer, and to embark upon these processes, it is essential for the organizations to train the managers for the new scenarios.

Executive Development and E-learning:

The IT environment has, in a way, created challenges and also opportunities for organizations. The challenges include the rapid pace of changes, and on the opportunities front, it has provided the following advantages-

• Knowledge management has become easy for implementation. In the traditional environment, sharing of intellectual resources and knowledge was a herculean task. Organizations had to prepare, print, and mail the circulars across the organization for the dissemination of information, which frequently led to the obsoleteness of information by the time the employees, because of the time gap, received it.

Further, it was tough for the organiza­tions to come up with strategies to continuously collect, update, and dissem­inate the information.

• Knowledge management has provided various forums such as Intranets, on-line discussion forums, expert panels, etc.
• E-learning has made learning easy, irrespective of the time and distance factors, e-learning has led to the empowerment of employees, since the employers are now able to decide upon the pace and content of learning, depending on their requirements.

The above developments have affected the executive development process in a significant way and have helped in transforming the brick-and-mortar learning scenario to an e-learning scenario.

Important Methods of Executive Development: On the Job Techniques and Off the Job Techniques

The methods of executive development are broadly classified into two broad categories:

1. On the Job Techniques.
2. Off the Job Techniques.

1. On the Job Techniques:

On the job development of the managerial personnel is the most common form which involves learning while performing the work. On the job techniques are most useful when the objective is to improve on the job behaviour of the executives. This type of training is inexpensive and also less time consuming. The trainee without artificial support can size up his subordinates and demonstrate his leadership qualities.

The following methods are used under on the job training:

(i) Coaching:

In this method the immediate superior guides and instructs his subordinates as a coach. It is learning through on the job experience because a manager can learn when he is put on a specific job. The immediate superior briefs the trainees what is expected from them and guides them how to effectively achieve them. The coach or immediate superior watches the performance of their trainees and directs them in correcting their mistakes.

Advantages of the Coaching Method:

(a) It is the process of learning by doing.

(b) Even if no executive development programme exists, the executives can coach their subordinates.

(c) Coaching facilitates periodic feedback and evaluation.

(d) Coaching is very useful for developing operative skill and for the orientation of the new executives.

Disadvantages of the Coaching Method:

(a) It requires that the superior should be a good teacher and the guide.

(b) Training atmosphere is not free from the problems and worries of the daily routine.

(c) Trainee may not get sufficient time for making mistakes and learn from the experience.

(ii) Under Study:

The person who is designated as the heir apparent is known as an understudy. In this method the trainee is prepared for performing the work or filling the position of his superior. Therefore a fully trained person becomes capable to replace his superior during his long absence, illness, retirement, transfer, promotion, or death.

Advantages of Under Study Method:

(a) Continuous guidance is received by the trainee from his superior and gets the opportunity to see the total job.

(b) It is a time saving and a practical process.

(c) The superior and the subordinate come close to each other.

(d) Continuity is maintained when superior leaves his position.

Disadvantages of Under Study Method:

(a) The existing managerial practices are perpetuated in this method.

(b) The motivation of the personnel is affected as one subordinate is selected for the higher position in advance.

(c) The subordinate staff may ignore the under study.

(iii) Job Rotation:

Job rotation is a method of development which involves the movement of the manager from one position to another on the planned basis. This movement from one job to another is done according to the rotation schedule. It is also called position rotation.

Advantages of Job Rotation:

(a) By providing variety in work this method helps in reducing the monotony and the boredom.

(b) Inter departmental coordination and cooperation is enhanced through this method.

(c) By developing themselves into generalists, executives get a chance to move up to higher positions.

(d) Each executive’s skills are best utilized.

Disadvantages of Job Rotation:

(a) Disturbance in established operations is caused due to the job rotation.

(b) It becomes difficult for the trainee executive to adjust himself to frequent moves.

(c) Job rotation may demotivate intelligent and aggressive trainees who seek specific responsibility in their chosen responsibility.

(iv) Special Projects Assignment:

In this method a trainee is assigned a project which is closely related to his job. Further sometimes the number of trainee executives is provided with the project assignment which is related to their functional area. This group of trainees is called the project team. The trainee studies the assigned problem and formulates the recommendations on it. These recommendations are submitted in the written form by the trainee to his superior.

Advantages of the Special Projects:

(a) The trainees learn the work procedures and techniques of budgeting.

(b) The trainees come to know the relationship between the accounts and other departments.

(c) It is a flexible training device due to temporary nature of assignments.

(v) Committee Assignment:

In this method the special committee is constituted and is assigned the problem to discuss and to provide the recommendations. This method is similar to the special project assignment. All the trainees participate in the deliberations of the committee. Trainees get acquainted with different viewpoints and alternative methods of problem solving through the deliberations and discussions in the committee. Interpersonal skills of the trainees are also developed.

(vi) Multiple Management:

This method involves the constitution of the junior board of the young executives. This junior board evaluates the major problems and makes the recommendations to the Board of Directors. The junior board learns the decision making skills and the vacancies in the Board of Directors are filled from the members of the junior board who have sufficient exposure to the problem solving.

(vii) Selective Readings:

Under this method the executives read the journal, books, article, magazines, and notes and exchange the news with others. This is done under the planned reading programmes organized by some companies. Reading of the current management literature helps to avoid obsolescence. This method keeps the manager updated with the new developments in the field.

2. Off the Job Training Programme:

The main methods under off the job training programme are:

(i) Special Courses:

Under this method the executives attend the special courses organized by the organisation with the help of the experts from the education field. The employers also sponsor their executives to attend the courses organized by the management institutes. This method is becoming more popular these days but it is more used by the large and big corporate organisations.

(ii) Case Studies:

This method was developed by Harvard Law professor Christopher C. Langdell. In this method a problem or case is presented in writing to a group i.e. a real or hypothetical problem demanding solution is presented in writing to the trainees.

Trainees are required to analyze and study the problem, evaluate and suggest the alternative courses of action and choose the most appropriate solution. Therefore in this method the trainees are provided with the opportunity to apply their skills in the solution of the realistic problems.

(iii) Role Playing:

In role playing the conflicting situation is created and two or more trainees are assigned different roles to play on the spot. They are provided with the written or oral description of the situation and roles to play. The trainees are then provided with the sufficient time, they have to perform their assigned roles spontaneously before the class. This technique is generally used for human relations and the leadership training. This method is used as a supplement to other methods.

(iv) Lectures and Conferences:

In this method the efforts are made to expose the participants to concepts, basic principles, and theories in any particular area. Lecture method emphasizes on the one way communication and conference method emphasizes on two way communication. Through this method the trainee actively participates and his interest is maintained.

(v) Syndicate Method:

Syndicate refers to the group of trainees and involves the analysis of the problem by different groups. Thus in this method, 5 or 6 groups consisting of 10 members are formed. Each group works on the problem on the basis of the briefs and the backgrounds provided by the resource persons. Each group presents their view on the involved issues along with the other groups.

After the presentation these views are evaluated by the resource persons along with the group members. Such exercise is repeated to help the members to look into the right perspective of the problem. This method helps in the development of the analytical and the interpersonal skills of the managers.

(vi) Management Games:

A management game is a classroom exercise, in which teams of students compete against each other to achieve certain common objectives. Since, the trainees are often divided into teams as competing companies; experience is obtained in team work. In development programmes, the management games are used with varying degrees of success. These games are the representatives of the real life situations.

(vii) Brainstorming:

It is a technique to stimulate idea generation for decision making. Brainstorming is concerned with using the brain for storming the problem. It is a conference techniques by which group of people attempt to find the solution for a specific problem by amazing all the ideas spontaneously contributed by the members of the group. In this technique the group of 10 to 15 members is constituted. The members are expected to put their ideas for problem solution without taking into consideration any type of limitations.

Corporate governance is a system by which corporates are directed and controlled. The Board of Directors have a fiduciary duty to the shareholders, and thereby are responsible for overseeing the operations and activities of the company. Corporate governance also provides the framework for the attainment of a company’s objectives. The main focus is to make the business function in a highly effective manner so as to achieve positive results and thereby maximise the returns of the stakeholders.

Principles of Corporate Governance

Transparency

The more informed you are, the more certain you are. This is the mantra that the stakeholders firmly believe in. Transparency, in the business world, also pays dividends. Companies that are upfront about the goings-on in the operations and with regard to their financials earn the public trust, something that is immeasurable.

Transparency is an essential component at all levels of operation in a business entity; especially at the top management level, where major decisions are made and where major plans are formulated. Keeping the investors and other stakeholders informed helps build a relationship of trust and solidarity those results in the rewards of a higher valuation and easy access to funding.

Accountability

Accountability, in essence, means willingness or an obligation to accept responsibility for one’s actions. Accountability is generally looked at from a negative viewpoint and misconstrued by many who think it is associated with the traditional “Blame Game”. In reality, accountability answers more questions than just the one regarding who the responsible person is. It has to be looked at from a positive standpoint as well because it recognises accomplishments too.

Accountability gives the shareholders confidence in the business that, in any case, that leads to an unfavourable situation in the company, the ones responsible are dealt with in an appropriate manner. Accountability establishes a system in place where everyone is held accountable for their respective work and associated duties. Accountability holds two main things firmly in place:-

• Ensures that the management is accountable to the Board.
• Ensures that the Board is accountable to the shareholders.

Independence

The ability to make decisions while being free from any sort of constraint or without any influence is what independence is. And this is something that has proven to be crucial to the smooth operation of businesses as well. Independence is:

• The ability to stand firm in the face of inappropriate influences.
• The ability to make unadulterated, firm decisions on any given issue
• The ability to adhere to professionalism and do right by the company

It allows the person to act with integrity and make decisions and form judgments bearing in mind the best interests of the stakeholders. This is the reason companies appoint independent directors, so as to ensure that there is no force of hand being used or that the director does not have any personal interests with the company thereby hampering his ability to make decisions freely.

Principles of Corporate Governance

Leadership: The board of directors and the CEO should be competent in decision-making.

Risk Management: There should be a robust risk management mechanism for handling uncertainties.

Responsibility: The board of directors is responsible for running the business on behalf of the shareholders.

Fairness: All the stakeholders should be treated equally.

Effectiveness and Efficiency: The policies and procedures should be clear and uniform. Moreover, it should be well-communicated.

Principles, OCED Principles of corporate governance:

In addition to shareholders, crucial information should also be communicated to vendors, customers, financers, and employees.

Promote ethical and responsible decision-making

The Board ensures that the Bank promotes ethical and responsible decision-making and complies with all relevant policy, laws, regulations and codes of best business practice using the Group’s ethics and operating principles. The ethics and operating principles address the following matters: conflicts of interest, corporate opportunities, confidentiality, fair dealing, protection of and use of the Group’s assets, compliance with laws and regulations and encouraging the reporting of unlawful/unethical behaviour.

Advantages of Corporate Governance

Good corporate governance can turn a good company into a great one. The leaders in any industry are at the helm of their respective industries, mainly because of outstanding corporate governance practices.

Lesser fines and penalties: Since the legal compliance aspect is taken care of credit to the corporate governance practices, companies are able to save a fortune on unnecessary fines and compliances and possibly redirect those funds towards business objectives to achieve greater heights.

Compliance with laws: With corporate governance in place, compliance with various laws is taken care of easily, as corporate governance includes the rules, regulations and policies that enable a business to stay compliant throughout and function without any hassle or legal inconveniences whatsoever.

Better management: Since there is a structure in place with regard to how the entity operates, its day-to-day functioning, managing the activities and achieving targets becomes a whole lot easier. The work atmosphere also takes care of itself under good principles of corporate governance fostering teamwork, unity, efficiency and a drive for success.

Lesser conflicts and frauds: The rules instilled in the workplace encourage the employees to be morally conscious in every situation that they encounter, thus eliminating the possibility of fraud and conflict between employees.

Reputation and relationships: Companies with good corporate governance are able to attract investors and external financiers with relative ease, going by their sterling reputation and brand image. One of the pillars of corporate governance is transparency, which is the practice of sharing key internal information with the stakeholders. This improves the relationship of the entity with its stakeholders and sows the seeds of trust between the company and society at large.

Disadvantages of Corporate Governance

When it comes to the matter of smaller corporations, there might be a bit of hassle where the shareholders may serve as the directors and managers, having no segregation as such. Bearing this in mind, it gives rise to:

Increased costs: Administrative costs for companies with corporate governance are pretty exorbitant, considering all the requirements to be met. Here are a few documents to be maintained:

Stock sales and purchases > Legal compliance records > Annual registration

The burden of staying legally compliant: Corporates generally have loads of compliance that have to be followed, attracting different laws based on their industry. Corporate governance ensures legal compliance, but it does come at a very hefty price.

The conflict between the principal and the agent: Large corporations have made it a common practice to appoint a well-known manager, one with a good track record to manage the day to day operations of the business. Unfortunately, this gives rises to a conflict between the shareholders and the managers as they both may have very different objectives and perspectives. This often leads to a clash between the two, thus affecting the overall ability of the business to run its operations in a smooth and efficient manner.

Maintenance of segregation: Irrespective of the size of the corporation, the adherence to all formalities and requirements must be met without any exceptions. Failure to comply with these rules leaves the company with huge exposure such as “piercing of the corporate veil”, where the separate legal entity status of the corporation is ignored in order to understand the goings-on behind the closed doors.

OECD Principles of Corporate Governance

The six OECD Principles are:

• Ensuring the basis of an effective corporate governance framework
• The rights and equitable treatment of shareholders and key ownership functions
• Institutional investors, stock markets, and other intermediaries
• The role of stakeholders in corporate governance
• Disclosure and transparency
• The responsibilities of the board

1. Ensure the basis of an effective corporate governance framework

The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.

2. The rights and equitable treatment of shareholders and key ownership function

‘The corporate governance framework should protect and facilitate the exercise of shareholders’ rights and ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.’

Basic shareholder rights should include the right to:

• Secure methods of ownership registration;
• Convey or transfer shares;
• Obtain relevant and material information on the corporation on a timely and regular basis;
• Participate and vote in general shareholder meetings;
• Elect and remove members of the board; and
• Share in the profits of the corporation.

3. The Institutional investors, stock markets, and other intermediaries

‘The corporate governance framework should provide sound incentives throughout the investment chain and provide for stock markets to function in a way that contributes to good corporate governance.’

• All shareholders of the same series of a class should be treated equally
• Insider trading and abusive self-dealing should be prohibited
• Members of the board and key executives should be required to disclose to the board whether they, directly, indirectly or on behalf of third parties, have a material interest in any transaction or matter directly affecting the corporation.

4. The role of stakeholders in corporate governance

The corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

5. Disclosure and transparency

The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.

6. The responsibilities of the board

The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.

Cost allocation is the process of identifying, aggregating, and assigning costs to cost objects. A cost object is any activity or item for which you want to separately measure costs. Examples of cost objects are a product, a research project, a customer, a sales region, and a department.

Cost allocation is used for financial reporting purposes, to spread costs among departments or inventory items. Cost allocation is also used in the calculation of profitability at the department or subsidiary level, which in turn may be used as the basis for bonuses or the funding of additional activities. Cost allocations can also be used in the derivation of transfer prices between subsidiaries.

Example of Cost Allocation

The African Bongo Corporation (ABC) runs its own electrical power station in the hinterlands of South Africa, and allocates the cost of the power station to its six operating departments based on their electricity usage levels.

Types of allocated costs

When allocating costs, it’s important to know the types of costs your organization associates with the selected cost objects. Here are some of the most common types of costs you may use in your cost accounting processes:

Fixed costs

Fixed costs are the expenses that remain consistent when other factors change. For example, the cost of rent or loan payments are fixed costs because they don’t usually change from month to month. Fixed costs are usually relatively easy to connect with specific cost objects, and they can be direct or indirect.

Variable costs

Variable costs change based on factors such as market conditions and production. For example, think of a toy company that produces a toy car featuring plastic pieces. If there’s a shortage of plastic material for a short period, the production costs for the toy may increase. In addition to production costs, other variable costs may include packaging supplies and delivery costs. Variable costs are often direct costs but can be indirect as well. For example, the cost of a utility bill may fluctuate depending on the weather.

Operating costs

Operating costs, which some people also refer to as overhead costs, can be either fixed or variable. They relate to a company’s daily functions. For example, operating costs can include sales, marketing and travel costs.

Direct costs

A business professional can connect a direct cost with an identifiable cost object. For example, you may consider the materials and labor that are necessary for a product’s production. These are direct costs because they result in a tangible cost object.

Indirect costs

Indirect costs are expenses that contribute to production without a direct connection to any particular cost object. For example, you can consider rent, utilities and office supplies. These costs are necessary for production, but a company doesn’t usually associate them with a specific cost object.

Cost Allocation Methods

The very term “allocation” implies that there is no overly precise method available for charging a cost to a cost object, so the allocating entity is using an approximate method for doing so. Thus, you may continue to refine the basis upon which you allocate costs, using such allocation bases as square footage, headcount, cost of assets employed, or (as in the example) electricity usage. The goal of whichever cost allocation method you use is to either spread the cost in the fairest way possible, or to do so in a way that impacts the behavior patterns of the cost objects. Thus, an allocation method based on headcount might drive department managers to reduce their headcount or to outsource functions to third parties.

Cost Allocation and Taxes

A company may allocate costs to its various divisions with the intent of charging extra expenses to those divisions located in high-tax areas, which minimizes the amount of reportable taxable income for those divisions. In such cases, an entity usually employs expert legal counsel to ensure that it is complying with local government regulations for cost allocation.

Reasons Not to Allocate Costs

An entirely justifiable reason for not allocating costs is that no cost should be charged that the recipient has no control over. Thus, in the African Bongo Corporation example above, the company could forbear from allocating the cost of its power station, on the grounds that none of the six operating departments have any control over the power station. In such a situation, the entity simply includes the unallocated cost in the company’s entire cost of doing business. Any profit generated by the departments contributes toward paying for the unallocated cost.

Cost Allocation Mechanism

Identify cost objects

The first step when allocating costs is to identify the cost objects for which the organization needs to separately estimate the associated cost. Identifying specific cost objects is important because they are the drivers of the business, and decisions are made with them in mind.

The cost object can be a brand, project, product line, division/department, or a branch of the company. The company should also determine the cost allocation base, which is the basis that it uses to allocate the costs to cost objects.

Accumulate costs into a cost pool

After identifying the cost objects, the next step is to accumulate the costs into a cost pool, pending allocation to the cost objects. When accumulating costs, you can create several categories where the costs will be pooled based on the cost allocation base used. Some examples of cost pools include electricity usage, water usage, square footage, insurance, rent expenses, fuel consumption, and motor vehicle maintenance.

Benefits of Cost Allocation

Helps evaluate and motivate staff

Cost allocation helps determine if specific departments are profitable or not. If the cost object is not profitable, the company can evaluate the performance of the staff members to determine if a decline in productivity is the cause of the non-profitability of the cost objects.

On the other hand, if the company recognizes and rewards a specific department for achieving the highest profitability in the company, the employees assigned to that department will be motivated to work hard and continue with their good performance.

Assists in the decision-making process

Cost allocation provides the management with important data about cost utilization that they can use in making decisions. It shows the cost objects that take up most of the costs and helps determine if the departments or products are profitable enough to justify the costs allocated. For unprofitable cost objects, the company’s management can cut the costs allocated and divert the money to other more profitable cost objects.

(i) Direct Re-Distribution Method:

Under this method, the costs of service departments are directly apportioned to production departments without taking into consideration any service from one service department to another service department. Thus, proper apportionment cannot be done and the production departments may either be overcharged or undercharged. The share of each service department cannot be ascertained accurately for control purposes. Budget for each department cannot be prepared thoroughly. Therefore, Department Overhead rates cannot be ascertained correctly.

(ii) Step Distribution Method:

Under this method the cost of most serviceable department is first apportioned to other service departments and production departments. The next service department is taken up and its cost is apportioned and this process goes on till the cost of the last service department is apportioned. Thus, the cost of last service department is apportioned only to the production departments.

(iii) Reciprocal Services Method:

In order to avoid the limitation of Step Method, this method is adopted. This method recognizes the fact that if a given department receives service from another department, the department receiving such service should be charged. If two departments provide service to each other, each department should be charged for the cost of services rendered by the other.

There are three methods available for dealing with inter-service departmental transfer;

(a) Simultaneous Equation Method,

(b) Repeated Distribution Method and

(c) Trial and Error Method.

(a) Simultaneous Equation Method:

Under this method, the true cost of the service departments are ascertained first with the help of simultaneous equations; these are then redistributed to production departments on the basis of given percentage. This method is preferable and is widely used even if the number of service departments are more than two. Due to the availability of computer it is not difficult to solve sets of simultaneous equations. Following illustration may be taken to discuss the application of this method.

Inter-Service Departmental Mutual Allocation System (Simultaneous Equation Method):

The method given above assumes that service is rendered by say, Repairs and Maintenance department to the Power House but not by the latter to the former. This assumption is not valid since service departments not only render service to production departments but also mutually. This fact should be considered while apportioning expenses.

Cost Sheet is a statement, prepared at given intervals of time, which provides information regarding elements of cost incurred in production. It discloses the total cost as well as the cost per unit of the product manufactured during the given period. If it is desired to compare the costing results of a particular period with any of the preceding periods, comparative columns can be provided in the Cost Sheet.

The cost sheet is prepared to ascertain cost of product/job/operation or to give quotations or to determine tender price for supply of goods or providing service.

Cost sheet is a statement presenting the items entering into cost of products and services, analysed by their elements, functions and even by their behaviour. It is a statement prepared to show the different elements of cost.

A cost sheet may be defined as “a detailed statement of the elements of cost incurred in production, arranged in a logical order under different heads such as material, labour and overheads, prepared at short intervals of time”. Within the strict meaning of the term it does not include sale proceeds and profit earned. If these are included it is called as “Statement of Cost and Profit”.

Cost sheet reveals the details of total cost of the job, order or operation. It shows the total cost as well as different elements of the total cost and cost per unit. Thus, Cost Sheet is a statement which presents an assembly of the components of cost.

Cost sheet is a statement prepared to show the cost of production in an industry in terms of total and also in several stages. It also shows the cost at every stage in terms of total production and each unit. This can be prepared for any period of time such as a week, month, quarter year, half year or a year based on the requirement of the industry.

A cost sheet is an exercise in collection of information regarding all the costs incurred in the industry and arranging them in a certain order. The information required to prepare a cost sheet is gathered from several records in the organization.

Since a cost sheet is only a statement, it can be prepared in any format so as to suit the needs of the organization. A cost sheet is also called a statement of cost. A typical cost sheet does not include total sales and profit. If a cost sheet includes sales and profit, it is called a statement of cost and profit.

Cost Sheet: Definitions

All costs incurred or expected to be incurred during a given period are presented in the form of a statement, popularly called cost sheet or statement of cost or production statement.

The chartered Institute of Management Accountants, London defines cost sheet as “a document which provides for the assembly of the detailed cost of a cost centre or cost unit” The cost sheet is prepared with separate columns, one for the cost per unit and the other for the total cost.

Separate columns can also be provided for the current cost and cost of the previous periods. The cost sheet is generally prepared periodically, say weekly, monthly, quarterly and yearly. There is no prescribed format or form of the cost sheet. It’s from, contents and arrangement vary from firm to firm.

According to Harold J. Wheldon, “Cost sheets are prepared for the use of the management and consequently, they must include all the essential details which will assist the management in checking the efficiency of production.”

According to Walter W. Bigg, “The expenditure, which has been incurred upon production for a period, is extracted from the financial books and the store records, and out in a memorandum statement. If this statement is confined to the discloser of the cost of the units production during the period, it is termed cost sheet.”

Objectives of Cost Sheet

(1) It reveals the total cost and cost per unit of goods produced.

(2) It discovers the break-up of total cost into different elements of cost.

(3) It provides a comparative study of the cost of current period with that of the corresponding previous period.

(4) It acts as a guide to management in fixation of selling prices and quotation of tenders.

Cost Sheet Features

The basic features of cost sheet are as follows:

(i) This statement is usually prepared under the output costing method, where the object is to ascertain the per unit cost of production.

(ii) A cost sheet is prepared for a specified period of time, generally for a month, quarter, half year or year.

(iii) The cost sheet generally contains the following information:

(a) Period,

(b) Total Output,

(c) Cost of raw materials consumed,

(d) Cost of direct labour,

(e) Details of chargeable expenses

(f) Details of overheads namely factory, office and administration and selling and distribution, and

(g) Aggregate of elements of cost at various stages e.g., Prime Cost, Works Cost, Office Cost and Total Cost.

Cost Sheet Elements: Prime Cost, Gross Factory, Cost of Production, Cost of Goods Sold, Cost of Sales and Profit (with Formula)

Various elements of the cost sheet are given below:

Prime Cost:

Prime cost is the addition of all direct costs. It includes direct material cost, direct labour cost and other direct costs. Other direct expenses may include patterns, designs, power expenses etc.

One should remember that direct material cost mean amount of direct material consumed during the period which can be calculated or given below:

Material consumed: Opening stock of Raw material+ Purchases made during the year+ Carriage in words– Materials returned– Scrap of raw materials– Closing stock of raw material at end.

Gross Factory Cost:

Factory cost is obtained by adding factory related expenses to the direct costs.

Various factory related expenses are:

• Indirect materials like oil, lubricants
• Indirect labour like foreman, factory manager, clerks
• Factory lighting, heating, rent, insurance of factory building
• Repairs and maintenance of plants, machine tools, factory building
• Factory stationery, welfare expenses of the workers etc.

In addition to that adjustments in respect of cost of opening and closing WIP is also adjusted to calculate net factory/work cost as given below:

Net factory/work cost = Gross factory cost + Opening stock of WIP – Closing stock of WIP

WIP: WIP is that part of production at which same work has been done but it is still not complete. So WIP is semi-finished stock.

Cost of Production/Officer Costs:

Where office and administration expenses may include:

• Office salaries
• Rent, rate, taxes, depreciation of insurance of office building
• Lighting, heating of the office building
• Stationary, printing, telephone expenses and other expenses related to office building
• Director and management salaries.

Cost of Goods Sold:

Cost of production is adjusted with the value of opening and closing stock of finished goods to obtain value of cost of goods sold,

The value of opening stock is generally given in the question.

Closing stock (units) = Production during year + opening stock – Sales during year

Cost of Sales:

Various selling and distribution expenses are added to obtain cost of sales. Selling and distribution expenses may be fixed or variable in the nature.

Some examples of selling and distribution expenses are:

1. Salesman salaries and commission
2. Advertisement expenses
3. Commission sales
4. Warehouses rent, depreciation etc.
5. Depreciation, maintenance of delivery vans
6. Expenses relating to showrooms.

Tender

Tender is nothing but a response to an invitation to offer to provide product or services at quoted prices and specified quality, but subject to specific conditions.

An invitation to tender is floated by the government undertaking, financial institution or a big corporation for different projects, when they want to purchase goods on a large scale, hire services or acquire/construct something but they are not able to deliver it on their own. For this purpose, third party suppliers are invited to bid and submit tenders.

The tender document is sent to prospective suppliers, to solicit information, to select the supplier on the basis of price, delivery terms and availability. The sellers who are interested in the request for proposal can respond to the request, within the deadline specified, by submitting their best offer in sealed covers, with the appropriate authority.

Tender is like a competition for a contract, where various prospective suppliers are requested to submit tenders, containing the price and quality of the material required.

The invitation is published in a vernacular newspaper of the concerned state or country, as it is a mandatory requirement, to maintain transparency in their operations.

Quotation

The quotation may be understood as a formal document of promise, given by the prospective supplier, to supply the stated goods or services needed by the buyer at the stated price under specific conditions. It comprises of terms of sale, payment and warranty, which includes the price decided to charge for the product or service, date, time and place of delivery, validity period of quotation.

Quotation helps the buyer in knowing the cost of goods or services, before making a purchase. In order to obtain the quotations (i.e. price for the required material), generally, tenders are floated by the government enterprises.

Tender	Quotation
Supplier bid on goods/services.	Document of estimated cost for supplying goods/services.
Find out the best price.	Offering fixed price.
Response for request for tender.	Response to request for quotation.
Price and quality are the components in Tender.	Price is the component in quotation.
Large scope	Narrow scope

Under this method, a minimum quantity of stock is always to be held in stores as fixed asset. The minimum stock is known as base stock and it should not be issued unless there is an emergency. The stock in excess of base stock would be issued in accordance with one of the methods of pricing of issue e.g. LIFO, FIFO, Average, etc. Thus it is not an independent method in itself.

The base stock method is a valuation technique for the inventory asset, where the minimum amount of inventory needed to maintain operations is recorded at its acquisition cost, while the LIFO method is applied to all additional inventory. This approach is not acceptable under generally accepted accounting principles.

Advantages:

(1) As already said this method is ideal for processing industries like refineries, taneries, etc.

(2) Base stock is always valued at its cost of acquisition.

(3) The additional stock over the basic requirement can be valued under any suitable method.

Disadvantages:

(1) Base stock is valued at historical cost. It is treated as a fixed asset, but there is no scope of depreciating it.

(2) The disadvantages of FIFO or LIFO exist regarding the valuation of additional stock.

(3) This method is somewhat rigid. It requires necessary changes to cope with changes of production capacity and policy matters regarding stock.

Highest-In First-Out (HIFO) is a type of stock distribution and valuation method. The HIFO method follows the concept that stock or inventory with the greatest purchasing costs is first to be sold, used, or removed from the stock or inventory count. The use of HIFO is not recognized by GAAP (Generally Accepted Accounting Principles) and is hardly used in accounting.

This method is based on the assumption that closing stock should always remain at the minimum value, so materials with higher value are issued first and get exhausted at the earliest. But this method is not popular as it always undervalues the stock which amounts to creating secret reserves. This method may be used in case of cost plus contracts or monopoly products.

Realizable Price Method

Net realizable value (NRV) is the value for which an asset can be sold, minus the estimated costs of selling or discarding the asset. The NRV is commonly used in the estimation of the value of ending inventory or accounts receivable.

The net realizable value is an essential measure in inventory accounting under the Generally Accepted Accounting Principles (GAAP) and the International Financing Reporting Standards (IFRS). The calculation of NRV is critical because it prevents the overstatement of the assets’ valuation.

NRV and Lower Cost or Market Method

Net realizable value is an important metric that is used in the lower cost or market method of accounting reporting. Under the market method reporting approach, the company’s inventory must be reported on the balance sheet at a lower value than either the historical cost or the market value. If the market value of the inventory is unknown, the net realizable value can be used as an approximation of the market value.

Calculation of NRV:

The calculation of the NRV can be broken down into the following steps:

• Determine the market value or expected selling price of an asset.
• Find all costs associated with the completion and the sale of an asset (cost of production, advertising, transportation).
• Calculate the difference between the market value (expected selling price of an asset) and the costs associated with the completion and sale of an asset. It is a net realizable value of an asset.

Net realizable value (NRV) = Expected Selling Price – Total productions and Selling Cost

Standard Price Method

Calculate of a pre-determined price, and this price is kept constant for a definite time period. In this method of inventory valuation, we post all receipts into the stock ledger account and sales/ issues are valued at the pre-determined price (standard price). If there is any difference between the actual price and standard price, it is transferred to the material price variance account.

At that standard price materials issued are valued. For establishing standard price, the factors usually considered are:

(a) Due to possible changes in market conditions, apprehended changes in price.

(b) Depending upon the quantity to be ordered, the amount of discount that may be available from the suppliers.

(c) Expenses which are related to purchases i.e. freights & carriage, customs duty, godown expenses, packing, handling etc.

Difference, if any, between the standard price & the actual purchase price, is known as material variance. However, the variance which arises due to the difference between standard rate of purchase & the actual rate of purchase is known as rate variance. On the other hand, variance due to difference between total actual material cost & total standard material cost, there being no difference in rates, the variance is called usage variance. Either at the time of actual purchase or at the end of accounting period, the variance may be worked out. The variance is analyzed into causative reasons & by taking suitable measures its recurrence is prevented.

Advantages:

(a) Efficiency of the purchase department can be revealed.

(b) As all the issues are charged at a standard price, the method is easy to apply.

(c) Even if standard costing method is not applied in any industry, the method can be used there.

(d) By setting the standard price, control on material cost may be exercised by the method, which may be called the price that should be.

Disadvantages:

(a) At actual cost, the issues are not charged.

(b) Profit or loss on materials may be there.

(c) The purpose for which it is set may be spoiled by a very low or high standard price.

(d) Fixing a reliable standard price is difficult, since upon a number of unknown variable factors, the price depends.

Inflated Price Method

There are some materials which are subjected to natural wastage. Examples are: (1) material lost due to loading and unloading, and (2) timber lost due to seasoning. In such cases, the materials are issued at an inflated price (a price higher than the actual cost) so as to recover the cost of natural wastage of materials from the production.

In this way, the total cost of the material is recovered from the production. For example, if 100 tonnes of coal are purchased at Rs 75 per tonne and if it is expected that 5 tonnes of coal will be lost due to loading and unloading, the inflated issue price in this case will be Rs 78.95 (i.e. 100 x Rs 75/95) per tonne. With the actual issue of 95 tonnes of coal the actual cost of Rs 7,500 (100 tonnes purchased @ Rs 75 per tonne) will be recovered from production (95 tonnes @ Rs 7 78.95).

Specific Price Method of Stock Valuation:

When materials are purchased fora specific job or work order, they should be issued to that specific job or work order at their actual cost. This method is used where job costing is in operation and the actual materials issued can be identified.

Base Stock Price Method of Stock Valuation:

Each concern always maintains a minimum quantity of material in stock. The minimum quantity is known as safety or base stock and this should be used only when an emergency arises. The base stock is created out of the first lot of the material purchased and therefore, it is always valued at the cost price of the first lot and is carried forward as a fixed asset.