Tag: University of Mumbai BMS Notes

The advantages of cost accounting are:

Disclosure of profitable and unprofitable activities

Since cost accounting minutely calculates the cost, selling price and profitability of product, segregation of profitable or unprofitable items or activities becomes easy.

Guidance for future production policies

On the basis of data provided by costing department about the cost of various processes and activities as well as profit on it, it helps to plan the future.

Periodical determination of profit and losses

Cost accounting helps us to determine the periodical profit and loss of a product.

To find out exact cause of decrease or increase in profit

With the help of cost accounting, any organization can determine the exact cause of decrease or increase in profit that may be due to higher cost of product, lower selling price or may be due to unproductive activity or unused capacity.

Control over material and supplies

Cost accounting teaches us to account for the cost of material and supplies according to department, process, units of production, or services that provide us a control over material and supplies.

Relative efficiency of different workers

With the help of cost accounting, we may introduce suitable plan for wages, incentives, and rewards for workers and employees of an organization.

Reliable comparison

Cost accounting provides us reliable comparison of products and services within and outside an organization with the products and services available in the market. It also helps to achieve the lowest cost level of product with highest efficiency level of operations.

Helpful to government

It helps the government in planning and policy making about import, export, industry and taxation. It is helpful in assessment of excise, service tax and income tax, etc. It provides readymade data to government in price fixing, price control, tariff protection, etc.

Helpful to consumers

Reduction of price due to reduction in cost passes to customer ultimately. Cost accounting builds confidence in customers about fairness of price.

Classification and subdivision of cost

Cost accounting helps to classify the cost according to department, process, product, activity, and service against financial accounting which give just consolidate net profit or loss figure of any organization without any classification or sub-division of cost.

To find out adequate selling price

In tough marketing conditions or in slump period, the costing helps to determine selling price of the product at the optimum level, neither too high nor too low.

Proper investment in inventory

Shifting of dead stock items or slow moving items into fast moving items may help company to invest in more proper and profitable inventory. It also helps us to maintain inventory at the most optimum level in terms of investments as well as variety of the stock.

Correct valuation of inventory

Cost accounting is an accurate and adequate valuation technique that helps an organization in valuation of inventory in more reliable and exact way. On the other hand, valuation of inventory merely depends on physical stock taking and valuation thereof, which is not a proper and scientific method to follow.

Decision on manufacturing or purchasing from outside

Costing data helps management to decide whether in-house production of any product will be profitable, or it is feasible to purchase the product from outside. In turn, it is helpful for management to avoid any heavy loss due to wrong decision.

Reliable check on accounting

Cost accounting is more reliable and accurate system of accounting. It is helpful to check results of financial accounting with the help of periodic reconciliation of cost accounts with financial accounts.

Budgeting

In cost accounting, various budgets are prepared and these budgets are very important tools of costing. Budgets show the cost, revenue, profit, production capacity, and efficiency of plant and machinery, as well as the efficiency of workers. Since the budget is planned in scientific and systemic way, it helps to keep a positive check over misdirecting the activities of an organization.

Disadvantages

1. Lack Of Fixed Principles

Generally, cost accounting system is practiced on presumed notions. It does not follow fixed accounting principles. So, there is a lack of uniformity in this system.

2. Costly System

This is another major drawback of cost accounting. There is a need of highly skilled and qualified manpower and resources to maintain cost accounting system in the organization. A lot of clerical works and various procedure make cost accounting more expensive.

3. Complex System

It is very complicated system of accounting. It requires various formulas to record cost related data. It needs specific knowledge to prepare different reports. Due to numerous steps and rules, it is considered as complex system of accounting.

4. Not Suitable for Small Business

Small business firms with less number of production or transactions do not prefer cost accounting because of higher cost and complexity. 

5. Ignores Financial Items

Actual profit or loss of the business cannot be ascertained by cost accounting because it ignores income and expenses of financial nature.

6. Lack Of Accuracy

Cost accounting avoids financial character expenses at the time of cost calculation. It does not follow double entry system to check the accuracy. So, result obtained from cost accounting may lack accuracy.

7. Not Helpful In Decision Making

Only cost related past data and information can be obtained from cost accounting. So, top level management cannot be benefited from cost accounting to make future decision and plans. Delay in data and information may also hamper decision making process.

8. Dependent

Cost accounting cannot be installed and maintained without other accounting system. It is totally dependent with other branches of accounting, especially with financial accounting.

1. Payroll Accounting:

It is concerned with the maintenance of records for the amounts due to the employees like salaries, wages, allowances, contributions to provident fund and E.S.I, etc. and the deduction to be made from the employees’ earnings. Payroll accounting requires the information relating to employee’s attendance, leaves, rates of pay, amounts to be deducted etc.

2. Labour Cost Accounting:

It is concerned with identifying the amount of labour cost to be charged to individual jobs and overhead accounts. For this purpose, information relating to the time spent on each job or process or number of units produced is obtained from the job cards, piece work tickets etc. The idle time analysis is also necessary for labour cost accounting.

The main objective of it is to record the time spent by all workers on each activity on a separate job card or time sheet and then apply the appropriate hourly rate. The labour costs are then charged to each of these activities. The job cards, time sheets, idle time cards are the important documents for analyzing production labour costs to various jobs and overhead accounts.

3. Time Keeping:

Time keeping means to note the attendance of workers for wage payments. It is the marking of attendance of a worker when he comes and leaves the factory. This record is generally kept at the factory gate and the workers coming in and going out have to record their time in it. Based on their attendance in the factory, they receive the wages.

The prime objectives of time keeping are as follows:

(a) Preparation of Payroll:

The wage bills of the organization are prepared by the payroll department on the basis of information given by the time keeping department.

(b) Computation of Cost:

The Costing department will compute the labour cost of different jobs, departments, cost centres etc. basing on the data of time spent provided by the time keeping department.

The time record will give us an idea about the total time for which the workers were present in the factory and for which they are paid. There are various methods of time keeping – hand written record, disc or token system, punch card system etc.

With the advancement of technology, the computers are also being used for time recording and analysis. The person who looks after time keeping is called ‘time keeper’ and his place of work is called ‘time office’. The time records are the basic data used for calculation of salaries and wages, overtime premium etc.

4. Time Booking:

It is necessary to account for labour cost against each job, department, process, contract, cost centre etc. for which time booking records are kept to ascertain the labour time spent. Time booking means to know how much time is effectively spent by the worker on each job or in each department or on a process or on each contract etc. It is the recording of time spent within the working day upon different jobs.

It is the keeping of record of particulars of work done, or time spent on each job, process, operation etc. It is used to ascertain the labour time spent on each job, analysis of idle time, labour cost of various jobs and products. The time booking record is kept in the form of time cards for each worker, recording therein the actual time spent by him on the work.

The objectives of time booking are as follows:

(a) To ascertain the labour time spent on the job and the idle labour hours.

(b) To ascertain labour cost of various jobs and products.

(c) To calculate the amount of wages and bonus payable under the wage incentive scheme.

(d) To compute and determine overhead rates and absorption of overheads under the labour and machine hour methods.

(e) To evaluate the performance of labour by comparing actual time booked with standard time.

Bonus and Labour incentives

Incentive Scheme: Type # 1. Halsey Premium Plan:

This plan was introduced by F. A. Halsey, an American engineer, in 1891. It recognises individual efficiency and pays bonus on the basis of lime saved. Under the method a worker is given wages at the time rate for the time he actually worked and also paid a bonus if he can complete the work in less than the time allotted to do the work.

The bonus is paid at a fixed percentage of the time saved, usually 50%, (though the percentage varies from 30% to 70% of time saved). The remaining 50% of the time saved is shared by the employer.

Thus,

Total Earnings = T.T. × H.R. + 50% (T.S. × H.R.)

where, T.T. = Time Taken

H.R. = Hourly Rate

T.S. = Time Saved

The main advantages of the method are:

(i) The method is simple to operate and easy to understand.

(ii) The slow workers are not penalised, as time wage is guaranteed.

(iii) It provides incentives to more efficient workers.

(iv) Worker’s efficiency means reduction in cost per unit.

(v) The benefit of time saved is shared between employer and employee equally.

The main disadvantages of the method are:

(i) Many employees organisations do not like to share the benefit of time saved equally.

(ii) Attraction of bonus reduces the quality of work.

(iii) Reduction of quality means chances of more wastage, spoilage, defective and break down etc. and more supervision cost.

(iv) It is not so much attractive as in the case of piece rate payments.

(v) It offers less incentive to the workers as compared to other incentive plans.

(vi) If the time rate is not fixed properly, this may lead to a higher bonus.

Incentive Scheme: Type # 2. Halsey-Weir Premium Scheme:

The scheme was introduced by Weir Ltd. of Glasgow in about 1900. It is similar to Halsey Scheme except that under this scheme the employee gets 33⅓% (often 30%) of the time saved as bonus and the remaining 66⅔% goes to the employer.

Thus:

Total Earnings = T.T. × H.R. + 33⅓% (T.S. × H.R.)

where, T.T. = Time Taken

H.R. = Hourly Rate

T.S. = Time Saved

Incentive Scheme: Type # 3. Rowan Plan:

Grames Rowan first introduced this plan in Glasgow in 1898. Under this scheme also the worker gets his guaranteed time wages for the hours of his actual work, like Halsey Scheme. But here the premium is calculated by a different method.

If the worker can complete the job in less than the time allowed, his bonus becomes equal to his time wages for that proportion of the time taken as the time saved bears to the time allowed.

Thus, the bonus is calculated as:

and, Total Earnings = T.T × H.R. + (T.T. × H.R.) × T.S./T.A.

where, T.T. = Time Taken

H.R. = Hourly Rate

T.S. = Time Saved

T.A. = Time Allowed

The following are the main advantages of the scheme:

(i) It provides incentives to learners and slow workers.

(ii) Since the premium is proportionate to the time saved, the employers get protection if the rate is not fixed properly.

(iii) From the point of view of employer the Rowan Scheme is safer than the Halsey Scheme.

(iv) Up to 50% of the time saved, bonus under the scheme is higher than that under Halsey Scheme.

(v) As the bonus increases at a decreasing rate; the employees do not rush for rapid completion of job, hence lesser chances of wastage etc.

(vi) Due to higher output, fixed overhead per unit will be lower.

The main disadvantages are:

(i) Method is complicated.

(ii) At the level of higher production, incentive is low.

(iii) Employees are not willing to share their time savings with their employers.

Comparison between Halsey and Rowan Scheme:

(1) Up to 50% of time saved, the premium will be same under the two schemes.

(2) Under Rowan Scheme bonus rises faster than Halsey Scheme until the job performed in half than the standard time.

(3) But when the time taken to perform the work is less than half of the standard time, premium and total earnings under the Halsey Scheme are both greater than those under Rowan Scheme.

(4) On the other hand, when the time taken to perform the work is more than half of the standard time, bonus and total earning under the Rowan Scheme are both greater than those under the Halsey Scheme.

(5) The Halsey Scheme provides more incentive to speed up production but there is an automatic check under the Rowan Scheme after certain stage.

(6) Halsey Scheme proves to be costlier if more than half the time is saved, while Rowan Scheme is costlier if less than half the standard time is saved.

Incentive Scheme: Type # 4. Taylor’s Differential Piece Rate System:

This system was first introduced by F. W. Taylor, the Father of Scientific Management. This system provides no minimum guaranteed time wages.

But under the system two piece rates are fixed:

(a) A low piece rate for output below the standard is paid to the workers, and

(b) A higher rate is paid to the workers who produce equal or more than the standard. Thus, this system penalises the inefficient workers and rewards the efficient workers.

The efficiency of a worker may be determined as a percentage, either:

(i) Of the time allowed for a job to the actual time taken, or

(ii) Of actual output to the standard output, within a specified time.

Incentive Scheme: Type # 5. Merrick Differential Piece Rate Plan:

This is a slight modification of Taylor’s System and uses three rates instead of two. Under this system also day wages are not guaranteed.

The three piece rates are:

Efficiency – Piece rate applicable

Up to 83% – Normal rate

Up to 100% – 10% above normal rate

Above 100% – 20% above normal rate

The main feature of this system is that it does not penalise the workers who produce below the standard output up to 83% and the earnings increase with increased efficiency at two stages.

Incentive Scheme: Type # 6. Gantt Task and Bonus Plan:

The plan is a good combination of time-work and piecework. Under the scheme the day wages of the worker are guaranteed.

The main features of the bonus scheme are:

Output – Bonus

At 100% – 20% on the total output

Above 100% – 20% of the wages of the standard time, or High piece rate on the worker’s whole output.

This scheme protects and encourages the less efficient workers who cannot produce the standard output. It offers a good incentive to the efficient workers.

Incentive Scheme: Type # 7. Emerson’s Efficiency Plan:

This scheme is also a combination of time wage, piece rate wage and bonus plans. Under this method a standard time is set for each job, or task or volume of output is fixed as the standard. The standard efficiency is set at 66⅔ or 67%. For efficiency up to 67% the worker gets his day wage only.

If he crosses the standard task, he becomes entitled to bonus and the rate of bonus increases with the increase in efficiency. At 100% level of efficiency, the bonus becomes 20%. Again, if the efficiency exceeds 100%, bonus increases by 1% for every 1% increase of efficiency above 100%.

Incentive Scheme: Type # 8. Group Bonus Plans:

The incentive schemes explained so far are applicable to individual workers only. But, sometimes it becomes necessary to introduce Group Bonus Scheme. Under the scheme bonus is paid to the group as a whole, depending upon the performance of the group and the amount of bonus is shared by themselves equally or at an agreed proportion.

The group bonus is suitable in the following circumstances:

(a) When it is very difficult to measure the performance of individual worker, but the production through collective efforts of a group of workers can be measured.

(b) The nature of the work requires collective effort.

(c) Where it is desirable to develop a team spirit.

(d) Where both the direct and indirect workers are to be rewarded.

(e) When bonus scheme cannot be operated successfully for individual workers.

However, before introducing a group bonus scheme, following points must be considered very carefully:

(i) Well combination among the group.

(ii) The size of the group should be economic.

(iii) The group should be homogeneous.

(iv) The production of the group should be within its control.

Thus, a group bonus scheme encourages team spirit, reduces wastage, assures cooperation, lessens supervisory work and reduces overall costs.

Illustration 1:

Time allowed for a job = 5 hrs

Time taken to complete the job = 4 hrs

Rate Per hour = Rs. 1

Calculate the total earnings of a worker under the Halsey Premium Scheme.

Solution:

Total Earnings = Hours worked × Rate per hour + 50/100 × (time saved × hourly rate)

= Rs. 4 × 1 + (50/100 × 1) × 1

= Rs. (4 + 1/2) = Rs. 4.50

Illustration 2:

Time allowed for a work = 10 hrs

Time taken to complete the job = 8 hrs

Rate per hour = Rs. 2

Calculate the total earnings of a worker under the Halsey Premium Scheme.

Solution:

Total Earnings = Time Taken × Hourly Rate + 33⅓ (T.S. × H.R.)

Where T.S. = Time Saved, H.R. = Hourly Rate

Total Earnings = 8 × Rs. 2 + 33⅓/100 × 2 × Rs. 2

= Rs. 16 + Rs. ⅓ × 4 = Rs. 16 + Rs. 1.33 = Rs. 17.33

Illustration 3:

Standard time is 20 hrs, Time taken is 16 hrs, Hourly Rate is Re. 0.50

Find out total earnings under Rowan Plan.

Solution:

Total Earnings = Time Taken × Hourly Rate + (Time Taken x Hourly Rate) × Time Saved/Time Taken

Time Saved = Time Allowed – Time Taken

= (20 – 16) hrs. = 4 hrs

.^.. Total Earnings = 16 × Re. 0.50 + (Re. 0.50 × 16) × 4 × Rs. 0.50/20

= Rs. 8 + Rs. 8 × 2/20 = Rs. (8 + 0.80)

= Rs. 8.80

A factory works 8 hours a day. The standard output is 10 units per hour and normal rate is Rs. 5 per hour. The factory has introduced the following differentials in the matter of wage payment:

80% of piece rate when below standard.

120% of piece rate when at or above standard.

Find out piece rate at below and above standard.

Solution:

Normal piece rate = Rs. 5/10 = 0.50

When below standard the piece rate will be = 0.50 × 80/100 = Re. 0.40

When above standard the piece rate will be = 120/100 × 0.5 = Re. 0.60

Standard Production:

80 units per week. No. of men working in the group = 10. Bonus for every 25% increase in production, a bonus of Rs. 10 will be shared prorata among the 10 members of the group.

Actual production during a week = 110 units.

Solution:

Increase in production over standard = (110 -80) units = 30 units

i.e. 30/80 × 100 or 37.5%

.^.. Bonus = Rs. 10 + 12.5/25 × Rs. 10

= Rs. 10 + 5 = Rs. 15

Each member of the group, therefore, receives = Rs. 15 ÷ 10 = Rs. 1.50

Worked-out Problems:

Problem 1:

Calculate by the Halsey Premium Plan and determine on this basis the total earnings of a worker by the given data:

Standard time for work – 20 hours

Actual time – 16 hours

Rate per hour – Rs. 2

Solution:

Total Earnings = Time taken × Rate per hour + 50% (Time saved x Rate per hour).

Standard time = 20 hours

Time taken = 16 hours

.^.. Time Saved = Standard time – Time taken i.e. 20 hours – 16 hours = 4 hours.

.^.. Total Earnings = 16 × 2 + 50/100 (4 × 2) = 32 + 4 = Rs. 36

Total Earnings under Halsey Premium Plan = Rs. 36

Problem 2:

From the following particulars, calculate the cash required for wages in a company, during the month of January 2007:

Solution:

Problem 3:

From the following calculate the total monthly remuneration of each of three workers A, B and C:

(i) Standard production per month per worker = 1,000 units

(ii) Actual production during a month: A = 890 units, B = 720 units, C = 960 units.

(iii) Piece work rate per unit of actual production = 20 paise

(iv) Dearness wages Rs. 50 per month (fixed)

(v) House Rent allowance Rs. 20 per month (fixed)

(vi) Additional production bonus at the rate of Rs. 5 for each percentage of actual production exceeding 80% of the standard.

Solution:

Working Notes:

1. Calculation of Bonus:

(i) Worker A:

Actual Production = 890 units i.e. 890/1,000 × 100 = 89% efficiency

.^.. Bonus = (89 – 80) × Rs. 5 = Rs. 45

(ii) Worker B:

Actual Production = 720 units i.e. 720/1,000 × 100 = 72% efficiency

.^.. Bonus = Nil

(iii) Worker C:

Actual Production = 960 units i.e. 960/1,000 × 100 = 96% efficiency

.^.. Bonus = (96 – 80) × Rs. 5 = Rs. 80

Problem 5:

During a certain week in September 2006, a worker manufactured 240 articles. Working hours during a week are 48 hours, standard rate Rs. 5 per hour and standard time to manufacture an article is 15 minutes.

Calculate his gross wages for the week according to (a) Piece work with guaranteed weekly wages, (b) Rowan Premium Bonus Plan, (c) Halsey Premium Bonus Plan.

Solution:

(a) Under Piece work with guaranteed weekly wages:

Actual Wages = Time Taken × Rate per hour

= 48 hours × Rs. 5 = Rs. 240

Guaranteed weekly wages = Standard Time × Rate per hour

= 60 hours × Rs. 5 = Rs. 300

Therefore, actual wages is less than guaranteed wages. So the worker will receive guaranteed wages Rs. 300 for the week.

.^.. Rate per hour = Rs. 300/48 hrs. = Rs. 6.25

Working Notes:

(i) Standard time for 240 articles = 240 × 15 minutes

= 3,600 minutes or 60 hours.

Problem 6:

From the following data ascertain the total earnings of each worker separable under (i) Halsey Scheme (50%), (ii) Rowan Scheme. Also calculate the effective hourly rate of wages of the workers under both the schemes:

Solution:

Problem 7:

From the following particulars you are required to calculate under ‘Average Wage Rate’ the labour cost chargeable to Job No. ‘A’ which was completed in 1990:

Basic Wage Rate is Rs. 2 per hour and overtime rates are:

Before or after working hours 150% of basic wage rate.

Sundays and holidays – 200% of basic wage rate.

During the year 1990 the following hours were worked:

Solution:

.^.. Average Wage Rate = 5,70,000/2,50,000 = Rs. 2.28

Now, computation of labour cost under ‘Average Wage Rate’

Items – Job No. ‘A’

Hours Spent – 3,500

Average Wage Rate – Rs. 2.28

.^.. Labour Cost Chargeable = 3,500 hours × Rs. 2.28 = Rs. 7,980

Primary distribution involves apportionment or allocation of overhead to all departments in a factory on logical and rational basis. This process of apportionment is also known as departmentalisation of overhead. It is to be carefully noted that at the time of making primary distribution, the distinction between production and service departments is ignored.

Following points should be considered for primary distribution of items of overheads:

(i) Basis for distribution should be equitable and practicable;

(ii) Method adopted for distribution should not be time-consuming;

(iii) Overhead expenses should be distributed among different departments on the basis of benefits received by departments;

For the purpose of primary distribution, a departmental distribution summary is prepared in the following way:

Basis of Apportionment of Factory Overhead:

Expenses:

1. Lighting, heating, rent, rates and taxes, depreciation on building, repair cost of building, caretaking etc.
2. Insurance on Plant and Machinery, Building; Depreciation on Plant and Machinery; Maintenance of Plant and Machinery.
3. Insurance on tools and fixtures, power, repairs and maintenance cost etc.
4. Canteen subsidy or expenses, pension, medical expenses, personnel department expenses, cost of recreational facilities. Expenses of wage department
5. Cost of supervision.

Base:

1. Floor area occupied by each department. Light points for lighting.
2. Capital values of Assets.
3. Direct Labour hours or Machinery hours.
4. Number of employees or workers.
5. Time devoted.

Apportionment of Overhead

Secondary Distribution:

In a factory a product does not pass through Service department (S), but service department renders service to production departments for carrying on production function. It is, therefore, logical that the product cost should bear the equitable share of cost of service department. Under this backdrop, the second step is to distribute the total cost of service departments among the production departments.

The process of redistributing the cost of service departments among production departments is known as secondary distribution. Here, the cost of service department means the apportioned overheads plus direct materials plus direct labour and direct expenses of concerned service department.

Bases for Secondary Distribution:

Service Department Costs:

(i) Employment department

(ii) Maintenance department

(iii) Purchase department

(iv) Store keeping

(v) Canteen, welfare and recreation

Basis of Redistribution:

(i) Rate of labour-turnover or number of employees.

(ii) Hours worked for each department.

(iii) No. of purchase orders or value of materials purchased.

(iv) No. of requisitions.

(v) No. of employees of each department.

(i) Direct Redistribution Method:

Under this method, service department’s costs are apportioned to production depart­ments only ignoring service rendered by one service department to another. When this method is followed, the number of secondary distribution will be equal to number of secondary department.

(ii) Step Method:

This method of redistribution gives cognizance to the service rendered by one service department to another service department. The cost of service department which renders service to the largest number of other departments is distributed first.

After this is done, the cost of service department serving the next largest number of department is apportioned. This process continues till the cost of last service department is apportioned. The cost of last service department is apportioned among production departments only.

(iii) Reciprocal Distribution Method:

There may be two or more service departments in a factory and they may render service to each other. In that situation it is logical to give weight to inter-departmental services while distributing the expenses of service departments.

There are three methods for dealing with the distribution of inter-departmental services:

(A) Trial and Error Method

(B) Repeated Distribution Method

(C) Simultaneous Equation Method.

A cost sheet is a statement prepared at periodical intervals of time, which accumulates all the elements of the costs associated with a product or production job. It is used to compile the margin earned on a product or job and forms the basis for the setting of prices on similar products in the future.

Objects of Cost Sheet

1. For determining the selling price

A cost sheet helps in determination of selling price of a product or of a service. Cost sheet ascertains cost at each stage of the product and also the total cost of the product, where a margin of profit is added and thus the selling price is ascertained.

2. Facilitating in managerial decision making

Preparation of cost sheet helps managers at various levels in their decision-making process such as

• To produce or buy a component,
• What price of goods to quote in the tender,
• Whether to retain or replace an existing machine,
• How to reduce costsand maximize profit.
• Identify and make decisions whether they need to continue with the product or not.

3. Preparation of budgets

Organizations can prepare a budget with the help of a cost sheet. We can prepare the budget by using the current or previous year’s data.

Elements of Cost

Prime Cost: It comprises of direct material, direct wages, and direct expenses. Alternatively, the Prime cost is the cost of material consumed, productive wages, and direct expenses.

Factory Cost: Factory cost or works cost or manufacturing cost or production cost includes in addition to the prime cost the cost in indirect material, indirect labor, and indirect expenses. It also includes amount or units of WIP or incomplete units at the end of the period.

Cost of Production: When Office and administration cost at the end of the period are added to the Factory cost, we arrive at the cost of production or cost of goods sold. Here, we make an adjustment for opening and Closing finished goods.

Total Cost: Total cost or alternatively cost of sales is the cost of production plus selling and distribution overheads.

• A Cost Sheet depicts the following facts:
• Total cost and cost per unit for a product.
• The various elements of cost such as prime cost, factory cost, production cost, cost of goods sold, total cost, etc.
• Percentage of every expenditure to the total cost.
• Compare the cost of any two periods and ascertain the inefficiencies if any.
• Information to management for cost control
• Calculate and summarize the total cost of the product.

Proforma of a Cost Sheet

	PARTICULARS	AMOUNT	AMOUNT
			TOTAL
	DIRECT MATERIAL-PURCHASED
ADD	OP STOCK OF RAW MATERIAL
LESS	CL STOCK OF RAW MATERIAL
	MATERIAL CONSUMED
ADD	DIRECT WAGES
ADD	DIRECT EXPENSES
	PRIME COST
ADD	WORKS OR FACTORY OVERHEADS
	Factory Overheads
ADD	OP STOCK OF WIP
LESS	CL STOCK OF WIP
	WORK COST
ADD	ADMINISTRATION OR OFFICE OVERHEADS
	COST OF PRODUCTION
ADD	SELLING AND DISTRIBUTION OVERHEADS
ADD	OP STOCK OF FG
LESS	CL STOCK OF FG
	COST OF SALES
ADD	PROFIT MARGIN
	SELLING PRICE

Method of Preparation of Cost Sheet

Step I	Prime Cost =  Direct Material Consumed + Direct Labour + Direct Expenses Direct Material= Material Purchased + Opening stock of raw material-Closing stock of raw material.
Step II	Works Cost = Prime Cost + Factory Overheads (Indirect Material + Indirect Labour + Indirect Expenses)+opening Work in progress-Closing Work in progress
Step III	Cost of Production = Works Cost + Office and Administration overheads + Opening finished goods-Closing finished goods
Step IV	Total Cost = Cost of Production + Selling and Distribution Overheads
Profit	Sales – Total Cost

Inter-firm comparison is a natural outcome of uniform costing system. Uniform costing is the foundation stone over which the structure of IFC is developed and adopted in a large scale. Inter-firm comparison can be defined as the technique of evaluating the relative performance, efficiency, costs and profits of firms in a given industry’. The meaning of IFC can be easily explained by considering the main object of the system.

In other words IFC consists of following procedure:

(a) Data are collected from participating organization or firm by their trade organization or centre of inter-firm comparison.

(b) The management of an organisation is provided with information which will allow them to determine the efficiency being achieved, measured by comparing the performances of other business.

(c) An attempt is made to show why results vary from one business to another, i.e., any weakness is highlighted.

(d) Extensive use is made of financial and cost ratios.

Objects of Inter Firm Comparison:

The main purpose of IFC is improvement of efficiency by showing the management of participating firm its present achievements and possible weaknesses. These firms have to contribute their data to the central body which acts as a neutral body. This central body ensures confidence and it gives report regarding comparisons only to participants.

Following are important objectives of inter-firm comparison:

(a) IFC analyses costs of different firms with a view to spot out relative efficiency.

(b) IFC provides aid to management in enforcing and reviewing budgetary control and standard costing. These techniques enforced in one firm are compared with those in other firms making more efficient use of the same. Inadequacies of standard costing and budgetary control are located by making inter-firm comparisons and remedial measures are introduced.

(c) IFC helps to prepare a comprehensive and detailed plan for firms or units to obtain optimum use of human and material resources.

The main objection of IFC is the improvement of efficiency and identification of weak points. IFC is a scheme consisting of exchange of information with regard to cost, profit, productivity and efficiency between the participating firms through a central organisation. IFC focuses the remedial measure of a number of problems related to profit, sales and production.

In inter-firm comparison coordinated and monitored through an apex body or central organisation, attention is usually concentrated on the following major important are:

(i) Is profit adequate?

(ii) How efficient is selling?

(iii) How efficient is production?

Organisation of IFC:

The organisational set up for inter firm comparison may be in the form of either a trade association or a Government department or centre for inter-firm comparison. There may be a trade association of participating firms. Firms submit their required information to the association. Trade association analyses the information collected from firm and presents report to each member firm.

The job of coordinating and analyzing of data provided by firms of an industry may be entrusted to a Government Department. The main objective of such organisation structure of IFC is to exercise price control and regulation of firms.

In UK, the British Institute of Management had set up centre for Inter-firm comparison in association with British Productivity council. The centre was established just to meet the demands of trade and industry for an expert body for inter-firm comparison. Such a type of organisation has to prepare schemes for inter firm comparison. In India also there is need of such centre. Thus there should be a central body to coordinate and monitor inter-firm comparison.

Method or Approach for Inter-Firm Comparison:

Firms wishing to obtain the benefits of inter-firm comparison have to approach the central body or apex body constituted for IFC. A fee may be charged for carrying out comparisons. The method of approach adopted by the central body will be governed by the type of industry or trade and the problems and circumstances present.

The possible procedure may be as below:

1. Firms which are to participate in an inter-firm comparison have to submit their data to the central body. These figures are compiled on the basis of uniform definitions of terms, procedures, methods and accounting periods.
2. After all necessary steps have been taken to ensure that the participating firms can benefit from the comparison, a number of ratios are compiled. These ratios are shown in a summary form distinguishing.

(a) Ratios for the group of firm participating in the inter-firm comparison.

(b) Ratios for a single firm.

Each firm is given a report compiled along these lines.

3. The ratios for the group and the ratios for the single firm are compared one by one.
4. Once any significant deviation from the norm (average return on capital employed) is established, the possible reasons for this deviation may be located by examining other ratios.

Ratios of Inter-Firm Comparison:

Ratios used in the inter-firm comparison are of four types:

(i) Primary Ratios

(ii) Supporting Ratios

(iii) General Explanatory Ratios

(iv) Specific Explanatory Ratios

All the ratios can be taken together to form a pyramid as given below:

In addition to above ratios, some other ratios may be used for the purpose of systematic analysis of operational results. These cover all aspects of business activities and are meant for measurement of effectiveness of the resources.

These additional ratios are briefly explained below:

(A) Ratios of Performance Measurement:

1. Value of Direct Material/Value of Production
2. Cost of Materials/Quantity Produced
3. Cost of Scrap / Cost of Raw Material
4. Quantity of Scrap / Quantity of Raw Material
5. Cost of Rejection / Cost of Production
6. Total Output / No. of Workers
7. Cost of Production/Machine Hours or Labour Hours
8. P.V. Ratio i.e., Contribution x 100/Sales
9. Contribution / Labour Hours
10. Wages/No. of Workers
11. Total Fringe Benefits/No. of Workers
12. Idle Time / Total Time
13. Overtime Hours / Total Labour Hours
14. Standard Hours for Actual Production / Actual Hours
15. Actual Hours / Budgeted Hours
16. Power Cost / Machine Hours
17. Repair and Maintenance Cost / Cost of Production
18. Advertising Cost / Selling Cost

(B) Ratios to Judge Profitability:

These ratios show how profitable are company’s operations.

1. Gross Profit Ratio i.e., (GP/Sales) ×100
2. Net Profit Ratio i.e., (NP / Sales) × 100

GP ratio indicates manufacturing or trading efficiency while NP ratio shows overall profitability

3. Return on capital employed i.e., Profit / Capital employed

ROLE indicates overall performance from the stand point of profitability. It is primary ratio in the pyramid of ratios

(C) Ratios related to Turnover:

Turnover Ratio show how efficiently company is managing current assets.

1. Stock turnover ratio i.e., cost of sales/Average stock

This ratio shows the efficiency of inventory management. Average stock is average of opening and closing stock

2. Debtors Turnover Ratio i.e., Debtors * Days or Months in a year / Annual Credit Sales

Debtor’s turnover measures the efficiency in collection of debts

3. Creditors Turnover Ratio i.e., (Creditors x No. of days of months in a year)/Annual Credit Purchases.

This ratio measures the efficiency of purchase department in realizing credit facilities

(D) Liquidity Ratios:

These ratios show the liquidity position of the company to meet its day to day needs of working capital

1. Current Ratio i.e., Current Assets/Current Liabilities

Current Ratio shows the ability of the company to meet its maturing current liabilities. An ideal ratio is 2:1 but it may differ due to nature of business.

2. Quick Ratio or Acid Test Ratio i.e., Quick Assets i.e., Current Assets excluding inventory/ Current Liabilities

Quick Ratio indicates ability of the company to meet its immediate current liabilities out of readily realizable current assets.

Reporting:

The central body collects and analysis the data supplied by participating firm, calculates relevant ratios and prepares report to be sent to individual member firm. Normally code numbers are used in place of names of the firms so that information may remain confidential. The results and interpretations are presented in the report in such a way that individual firm data could not be identified.

On receipt of the comparative data and report of inter-firm comparison, it is the job of the management of the firm to compare operating and other results and the corresponding ratios with ratio furnished by the central body of IFC.

Advantages of Inter-Firm Comparison:

1. Under IFC the weakness of participating firms are revealed and the management will be guided to remedial actions.
2. The firm will come to know the trend of sales, profit and cost of an industry or trade as shown by different ratios. If all firms are suffering from falling sales, it will be indicated by sales to capital or asset employed ratio. When an individual firm compares its own ratio with the ratio of the group, it will see that there are general reduction sales.
3. Management of participating firm are provided with most significant facts on the basis of ratios carefully selected by the central body. The firm will have to do only the study of the ratios and the necessary action.
4. Whether firm is doing better or worse than other firms is made known through the ratios. The firm can take positive steps to improve efficiency.
5. The experience of the central body is at the disposal of participating firms. This knowledge can be very valuable in the analysis of performance and profitability of the firm.
6. Participating firm provide information willingly knowing that this remains confidential.
7. IFC develops cost consciousness among participating firm.
8. IFC leads to avoidance of unfair competition. It guides in the direction of proper and positive efforts towards improvement of performances.
9. Inter-firm comparisons and related data help in representing the problem of the industry to regulating authorities and the Government in an effective and convincing matter. Information regarding entire industry can be presented before the Government and not the isolated problem of individual firm.
10. Collective information provided under IFC can help the industry in its negotiations with trade unions.

Limitations of IFC:

It is obvious that inter-firm comparison is useful in improving productivity, efficiency and profitability. But benefits are obtained only when ratios are properly calculated and impartially used. The limitations of ratio analysis should be taken into consideration. It should be noted that a single ratio is of a limited value and their trend is most important. Moreover the limitation of uniform costing should also be taken into consideration because uniform costing provides the very basis of inter-firm comparison

It should also not be ignored that certain extraneous factors such as prolonged strike, power shortage may also adversely affect the performance of the industry in a particular period. Limitations and short comings of annual returns and data may also affect the reliability of conclusions.

It can also be pointed out that there are practical limitation in the formation and maintenance of an independent central agency for inter-firm comparisons. The cost of introducing uniform costing may make the management of firm reluctant to participate in a scheme of inter-firm comparison.

Managers exercise strategic control when they work with the part of the organisation they have influence over to ensure that it achieves the strategic aims that have been set for it. To do this effectively, the managers need some decision making freedom: either to decide what needs to be achieved or how best to go about achieving the strategic aims. Such decision making freedom is one of the characteristics that differentiate strategic control from other forms of control exercised by managers (e.g. Operational control – the management of operational processes).

Strategic controls take into account the changing assumptions that determine a strategy, continually evaluate the strategy as it is being implemented, and take the necessary steps to adjust the strategy to the new requirements. In this manner, strategic controls are early warning systems and differ from post-action controls which evaluate only after the implementation has been completed.

Important types of strategic controls used in organizations are:

1. Premise Control: Premise control is necessary to identify the key assumptions, and keep track of any change in them so as to assess their impact on strategy and its implementation. Premise control serves the purpose of continually testing the assumptions to find out whether they are still valid or not. This enables the strategists to take corrective action at the right time rather than continuing with a strategy which is based on erroneous assumptions. The responsibility for premise control can be assigned to the corporate planning staff who can identify key asumptions and keep a regular check on their validity.
2. Implementation Control: Implementation control may be put into practice through the identification and monitoring of strategic thrusts such as an assessment of the marketing success of a new product after pre-testing, or checking the feasibility of a diversification programme after making initial attempts at seeking technological collaboration.
3. Strategic Surveillance: Strategic surveillance can be done through a broad-based, general monitoring on the basis of selected information sources to uncover events that are likely to affect the strategy of an organisation.
4. Special Alert Control: Special alert control is based on trigger mechanism for rapid response and immediate reassessment of strategy in the light of sudden and unexpected events called crises. Crises are critical situations that occur unexpectedly and threaten the course of a strategy. Organisations that hope for the best and prepare for the worst are in a vantage position to handle any crisis.

Process of Strategic Control

Strategic control processes ensure that the actions required to achieve strategic goals are carried out, and checks to ensure that these actions are having the required impact on the organisation. An effective strategic control process should by implication help an organisation ensure that is setting out to achieve the right things, and that the methods being used to achieve these things are working.

Regardless of the type or levels of strategic control systems an organization needs, control may be depicted as a six-step feedback model:

1. Determine What to Control: The first step in the strategic control process is determining the major areas to control. Managers usually base their major controls on the organizational mission, goals and objectives developed during the planning process. Managers must make choices because it is expensive and virtually impossible to control every aspect of the organization’s
2. Set Control Standards: The second step in the strategic control process is establishing standards. A control standardis a target against which subsequent performance will be compared. Standards are the criteria that enable managers to evaluate future, current, or past actions. They are measured in a variety of ways, including physical, quantitative, and qualitative terms. Five aspects of the performance can be managed and controlled: quantity, quality, time cost, and 

Standards reflect specific activities or behaviors that are necessary to achieve organizational goals. Goals are translated into performance standards by making them measurable. An organizational goal to increase market share, for example, may be translated into a top-management performance standard to increase market share by 10 percent within a twelve-month period. Helpful measures of strategic performance include: sales (total, and by division, product category, and region), sales growth, net profits, return on sales, assets, equity, and investment cost of sales, cash flow, market share, product quality, valued added, and employees productivity.

Quantification of the objective standard is sometimes difficult. For example, consider the goal of product leadership. An organization compares its product with those of competitors and determines the extent to which it pioneers in the introduction of basis product and product improvements. Such standards may exist even though they are not formally and explicitly stated.

Setting the timing associated with the standards is also a problem for many organizations. It is not unusual for short-term objectives to be met at the expense of long-term objectives. Management must develop standards in all performance areas touched on by established organizational goals. The various forms standards are depend on what is being measured and on the managerial level responsible for taking corrective action.

3. Measure Performance: Once standards are determined, the next step is measuring performance. The actual performance must be compared to the standards. Many types of measurements taken for control purposes are based on some form of historical standard. These standards can be based on data derived from the PIMS (profit impact of market strategy)program, published information that is publicly available, ratings of product / service quality, innovation rates, and relative market shares standings.

Strategic control standards are based on the practice of competitive benchmarking – the process of measuring a firm’s performance against that of the top performance in its industry. The proliferation of computers tied into networks has made it possible for managers to obtain up-to-minute status reports on a variety of quantitative performance measures. Managers should be careful to observe and measure in accurately before taking corrective action.

4. Compare Performance to Standards: The comparing step determines the degree of variation between actual performance and standard. If the first two phases have been done well, the third phase of the controlling process – comparing performance with standards – should be straightforward. However, sometimes it is difficult to make the required comparisons (e.g., behavioral standards). Some deviations from the standard may be justified because of changes in environmental conditions, or other reasons.
5. Determine the Reasons for the Deviations: The fifth step of the strategic control process involves finding out: “why performance has deviated from the standards?” Causes of deviation can range from selected achieve organizational objectives. Particularly, the organization needs to ask if the deviations are due to internal shortcomings or external changes beyond the control of the organization. A general checklist such as following can be helpful:

• Are the standards appropriate for the stated objective and strategies?
• Are the objectives and corresponding still appropriate in light of the current environmental situation?
• Are the strategies for achieving the objectives still appropriate in light of the current environmental situation?
• Are the firm’s organizational structure, systems (e.g., information), and resource support adequate for successfully implementing the strategies and therefore achieving the objectives?
• Are the activities being executed appropriate for achieving standard?

6. Take Corrective Action: The final step in the strategic control process is determining the need for corrective action. Managers can choose among three courses of action: (1) they can do nothing (2) they can correct the actual performance (3) they can revise the standard.

When standards are not met, managers must carefully assess the reasons why and take corrective action. Moreover, the need to check standards periodically to ensure that the standards and the associated performance measures are still relevant for the future.

The final phase of controlling process occurs when managers must decide action to take to correct performance when deviations occur. Corrective action depends on the discovery of deviations and the ability to take necessary action. Often the real cause of deviation must be found before corrective action can be taken. Causes of deviations can range from unrealistic objectives to the wrong strategy being selected achieve organizational objectives. Each cause requires a different corrective action. Not all deviations from external environmental threats or opportunities have progressed to the point a particular outcome is likely, corrective action may be necessary.

To conclude, strategic control is an integral part of strategy. Without properly placed controls the strategy of the company is bound to fail. Strategic control is a tool by which companies check their internal business process and environment and ascertain their progress towards their goal.

The type of business strategy you pursue is a key to whether or not your company will have long-term growth and success. The challenge, however, is that it’s difficult to assess if the strategy you’ve chosen is the right one or if you need to make adjustments. That process is made easier if you use the four common types of strategic control to analyze the strategy you’ve put in place to determine its effectiveness, and to find areas of strength and weakness. Without strategic control, your company will fail to adapt to any external changes in your industry that require immediate and corrective action.

Testing the Validity of Assumptions

The business strategy you’ve chosen was likely based on some assumptions you made about what you believed would happen several years in the future. Whether those assumptions are about your target audience, your competitors, or product development, premise control lets you test those assumptions to see if they’re still valid. For example, if you own a skateboard company, you may have assumed that your ideal buyers were Millennials, but you may discover that premise was flawed after premise control measures reveal that the fastest-growing skateboard consumers are actually an entire generation younger.

Strategic Surveillance Control

It’s impossible for you to anticipate every external threat that could impact the success of your business, which is why strategic surveillance control lets you identify information sources that monitor these external forces. Examples of these information sources are financial journals, trade magazines, newspapers, economic forums, and industry conferences. These sources are often the first to identify the potential challenges that businesses in your industry will face, and may even offer potential responses to these challenges.

Special Alert Control

At some point in time, your company will go through a rough patch that’s triggered by some kind of unexpected occurrence that impacts your business in a negative way. This could include a sudden crash in the U.S. stock market, a domestic terrorist attack, or even a natural disaster that affects your customers’ buying habits. Special alert control helps your business respond to these events without having to change your entire strategy to deal with this new event. For example, after the September 11, 2001, terrorist attacks in the U.S., many commercial airlines were forced to adopt stricter safety protocols to account for the intense fears that passengers had about flying on a plane.

Implementation Control Measures

As you begin to implement a business strategy, you must use implementation control measures to assess whether or not your plan needs adjustment. Common types of implementation control include setting performance standards, measuring actual performance, analyzing the reasons your staff failed to meet specific performance standards, and developing a plan to correct performance deviations. Implementation control also includes things such as budgets, schedules, and milestones that the company is trying to achieve.

These terms typically relate to banking activities. The revenue that banks get out of their lending activities is fund based income, i.e. they borrow from depositors through fixed deposits/ savings accounts and lend to borrowers at a higher interest rate, the difference is their interest margins, i.e. fund based income.

In a fund based income it is more dynamic and relates to the fund’s performance.

As per your question I assume it is something to do with mutual fund. SO taking this assumption into consideration, in a fee based system it’s fixed fee for the investment you make. Whereas on the fund based, the income would be based on the fund’s performance.

On the other hand, banks make money out of services, such as selling mutual funds and insurance products to their customers, this income is called fee based income. Even banking services which do not involve lending, such as issue of demand drafts or guarantees, transfer of funds, etc. give the bank fee based income.

In a fee based income it’s a more straight forward like for this much this is the fee/charge kind of thing.

Fund Based Financial Services

Involve provision of funds against assets, bank deposits, etc.

Fund based income comes mainly from interest spread (the difference between the interest earned and interest paid), lease rentals, income from investments in capital market and real estate

Major part of the income is earned through fund-based activities. At the same time, it involves a large share of expenditure also in the form of interest and brokerage.

Examples of Fund Based Financial Services

• Underwriting shares, debentures, bonds, etc. of new issue
• Equipment Leasing
• Hire Purchase
• Bill discounting
• Venture capital
• Housing finance
• Insurance services
• Factoring

(i) Equipment leasing

A lease is an agreement under which a company or a firm acquires a right to make use of a capital asset like machinery, on payment of a prescribed fee called „rental charges‟. Long-term.

(ii) Hire Purchase

Hire purchase is a mode of financing the price of the goods to be sold on a future date. In a hire purchase transaction, the goods are let on hire, the purchase price is to be paid in installments and hirer is allowed an option to purchase the goods by paying all the installments.

(iii) Bills Discounting

Bill discounting is a short tenure financing instrument for companies willing to discount their purchase / sales bills to get funds for the short run and as for the investors in them, it is a good instrument to park their spare funds for a very short duration.

(iv) Accounts Receivable Financing / Factoring

A type of asset-financing arrangement in which a company uses its receivables – which is money owed by customers – as collateral in a financing agreement. The company receives an amount that is equal to a reduced value of the receivables pledged.

Factoring is similar to the above with the only difference that the factoring firms purchase the receivables outright taking ownership of the receivables. The entire responsibility of collecting the book debts passes on to the factor.

(v) Venture Capital

Venture capital (VC) is financial capital provided to early- stage, high-potential, high risk, growth startup companies.

The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc.

(vi) Housing Finance

Housing finance refers to providing finance to an individual or a group of individuals for purchase, construction or related activities of house/flat etc.

Housing loan is extended by way of term loans; for a number of years (5-20) at a certain rate of interest and against some.

(vii) Insurance Services

Insurance is a form of risk management in which the insured transfers the cost of potential loss to another entity in exchange for monetary compensation known as premium

(viii) Mutual Funds.

A mutual fund refers to a fund raised by a financial service company by pooling the savings of the public. It is invested in a diversified portfolio with a view to spreading and minimizing the risk.

Free Based Financial Services

Fee based income does not involve much risk. But, it requires a lot of expertise on the part of a financial company to offer such fee-based services.

Examples of Free Based Financial Services

• Corporate advisory services
• Bank guarantees
• Merchant banking
• Issue management
• Loan syndication
• Credit rating
• Stock Broking
• M & A, Capital restructuring

(i) Merchant banking

A merchant banker is a financial intermediary who helps to transfer capital from those who possess it to those who need it.

Merchant banking includes a wide range of activities such as management of customer securities, portfolio management, project counseling and appraisal, underwriting of shares and debentures, loan syndication, acting as banker for the refund orders, handling interest and dividend warrants etc.

(ii) Loan Syndication

• Similar to consortium financing.
• Taken up by the merchant banker as a lead manager.
• It refers to a loan arranged by a bank called lead manager for a borrower who is usually a large corporate customer or a government department.
• It also enables the members of the syndicate to share the credit risk associated with a particular loan among themselves.

(iii) Credit Rating

Evaluates the credit worthiness of a debtor, especially a business (company) or a government. It is an evaluation made by a credit rating agency of the debtors ability to pay back the debt and the likelihood of default. Some credit rating agencies; ICRA, CRISIL, S & P, Moody’s.

With increasing frequency, companies in the financial-services industry are pooling resources, expertise, and capabilities to create market utilities focused on specific functions such as client services and on-boarding, trading and execution, and cash and collateral management. We define a market utility as follows: a multiparty commercial cooperative that fulfills a common need in a mutually beneficial way based on the capabilities that each party brings to the cooperative and the role that each plays.

More than 40 market utilities have been founded in the financial-services industry over the past several years, and in some cases multiple utilities have sprung up to perform the same function for example, trading and execution, or data management. Many of our clients have pondered whether the formation of these utilities is a fad, and if not, whether they need to participate and in what capacity. It is our opinion that market utilities are going to be a permanent fixture in the industry. The formation of cooperative functions is a necessary response to the massive structural changes  regulatory as well as macroeconomic that are sweeping the industry and creating a common set of needs in areas such as liquidity, compliance, and data sharing. Companies can tackle these needs more efficiently if they work as part of a consortium rather than on their own.

Therefore, it is critical for industry participants to decide which market utilities they will participate in and what roles they will play. Should they team up with others to start and control their own utility? Should they join an existing utility with the idea of exerting some influence over its direction? Should they collaborate by offering expertise to a utility without concern for exerting control? Or should they simply use the facility and not worry about contributing capabilities or controlling its direction? For each organization, the answer will depend on the utility’s function, the level of control the company wants to exert, and the capabilities it will bring to the table.

We believe that in the near future, most financial-services industry firms will play different roles in several market utilities, and will thus need to manage a “portfolio” of market utilities in which they participate. With this in mind, we have developed a series of screening questions for executives to consider to determine if a particular activity done in-house is better suited to a utility and, if so, what role the organization should play in that utility.

Which activities are right for a utility?

With market utilities addressing more and more components of the value chain, executive teams need a set of criteria to determine which current functions are candidates for moving to a utility. Cost savings are an important consideration; however, a decision based solely on anticipated cost savings may ultimately disappoint. The decision about whether to participate in a utility should be grounded in the organization’s competitive strategy.

To identify the functions within the enterprise that might be better suited to a utility, we have developed several questions that an executive team should consider about internal functions.

Does the activity create a competitive advantage? If the answer to this question is yes meaning that the executive team believes that the activity is differentiating for the organization and creates a true competitive advantage then the organization should probably keep the function in-house and not participate in a utility. If the answer is no meaning the activity is non-differentiating and can be shared without a loss of competitive advantage then the activity is suited to a utility.

Does the activity address a common need of many industry participants? If the answer is yes, then the activity is suited for a utility; the high demand for a common solution is likely to promote collaboration and engagement. If the answer is no, or if a common solution could create disagreement and rivalry, then the activity is better suited to an internal shared service.

Does the activity have critical mass or global reach across many industry participants? Here again, if the answer is yes, then the function is suitable for a utility; the critical mass/global reach will encourage quick adoption and thus more rapid economic benefits. If the answer is no, or if a lack of scale or global reach would distort the economic value proposition, then the activity is better addressed by a technology solution or internal shared service.

Does the activity meet the common need in a mutually agreed-upon way? If the answer is yes, then a utility is appropriate. By agreeing on a standardized solution, individual players aren’t inclined to customize their own solutions. If the answer is no, and this lack of agreement among individual players would lead to customization, then the activity is better served by outsourcing providers.

Is the need met by a combination of capabilities that can be provided by collaboration? Once again, if the answer is yes, then the function is a candidate for a utility. There is a powerful incentive for players to cooperate if they recognize that cooperation will result in a solution superior to any individual solution. But if the answer is no, or if a single industry player could offer its own solution, then the activity is better served by an outsourcing provider.

Conclusion: Managing a utility portfolio

Market utilities have been heralded by some as the solution to the industry’s stagnant ROE, providing a level of scale and efficiency unachievable by any single participant’s transformational efforts. However, although we believe utilities offer a massive opportunity for cost savings, they should not be thought of solely as an extension of the shared-services model. Rather, they are an opportunity to address common industry needs through cooperation and capability sharing.

As the market utility landscape develops, firms must carefully consider their own roles given the utility’s purpose, the capabilities required to make the utility successful, and the level of control necessary for the firm to execute on its own strategy. As more of the value chain comes into play and more utilities are formed, executives will need to manage a portfolio of utilities and strike the right balance of roles based on business priorities and resources.

It is the presence of financial services that enables a country to improve its economic condition whereby there is more production in all the sectors leading to economic growth.

The benefit of economic growth is reflected on the people in the form of economic prosperity wherein the individual enjoys higher standard of living. It is here the financial services enable an individual to acquire or obtain various consumer products through hire purchase. In the process, there are a number of financial institutions which also earn profits. The presence of these financial institutions promote investment, production, saving etc.

Hence, we can bring out the Significance of financial services in the following points:

Significance of Financial Services are:

1. Promoting investment

The presence of financial services creates more demand for products and the producer, in order to meet the demand from the consumer goes for more investment. At this stage, the financial services comes to the rescue of the investor such as merchant banker through the new issue market, enabling the producer to raise capital.

The stock market helps in mobilizing more funds by the investor. Investments from abroad is attracted. Factoring and leasing companies, both domestic and foreign enable the producer not only to sell the products but also to acquire modern machinery/technology for further production.

2. Promoting savings

Financial services such as mutual funds provide ample opportunity for different types of saving. In fact, different types of investment options are made available for the convenience of pensioners as well as aged people so that they can be assured of a reasonable return on investment without much risks.

For people interested in the growth of their savings, various reinvestment opportunities are provided. The laws enacted by the government regulate the working of various financial services in such a way that the interests of the public who save through these financial institutions are highly protected.

Financial Services offered by various financial institutions

• Factoring
• Leasing
• Forfaiting
• Hire Purchase Finance
• Credit card
• Merchant Banking
• Book Building
• Asset Liability Management
• Housing Finance
• Portfolio Finance
• Underwriting
• Credit Rating
• Interest & Credit Swap
• Mutual Fund

3. Minimizing the risks

The risks of both financial services as well as producers are minimized by the presence of insurance companies. Various types of risks are covered which not only offer protection from the fluctuating business conditions but also from risks caused by natural calamities.

Insurance is not only a source of finance but also a source of savings, besides minimizing the risks. Taking this aspect into account, the government has not only privatized the life insurance but also set up a regulatory authority for the insurance companies known as IRDA, 1999 (Insurance Regulatory and Development Authority) .

4. Maximizing the Returns

The presence of financial services enables businessmen to maximize their returns. This is possible due to the availability of credit at a reasonable rate. Producers can avail various types of credit facilities for acquiring assets. In certain cases, they can even go for leasing of certain assets of very high value.

Factoring companies enable the seller as well as producer to increase their turnover which also increases the profit. Even under stiff competition, the producers will be in a position to sell their products at a low margin. With a higher turnover of stocks, they are able to maximize their return.

5. Ensures greater Yield

As seen already, there is a subtle difference between return and yield. It is the yield which attracts more producers to enter the market and increase their production to meet the demands of the consumer. The financial services enable the producer to not only earn more profits but also maximize their wealth.

Financial services enhance their goodwill and induce them to go in for diversification. The stock market and the different types of derivative market provide ample opportunities to get a higher yield for the investor.

6. Economic growth

The development of all the sectors is essential for the development of the economy. The financial services ensure equal distribution of funds to all the three sectors namely, primary, secondary and tertiary so that activities are spread over in a balanced manner in all the three sectors. This brings in a balanced growth of the economy as a result of which employment opportunities are improved.

The tertiary or service sector not only grows and this growth is an important sign of development of any economy. In a well developed country, service sector plays a major role and it contributes more to the economy than the other two sectors.

7. Economic development

Financial services enable the consumers to obtain different types of products and services by which they can improve their standard of living. Purchase of car, house and other essential as well as luxurious items is made possible through hire purchase, leasing and housing finance companies. Thus, the consumer is compelled to save while he enjoys the benefits of the assets which he has acquired with the help of financial services.

8. Benefit to Government

The presence of financial services enables the government to raise both short-term and long-term funds to meet both revenue and capital expenditure. Through the money market, government raises short term funds by the issue of Treasury Bills. These are purchased by commercial banks from out of their depositors’ money.

In addition to this, the government is able to raise long-term funds by the sale of government securities in the securities market which forms apart of financial market. Even foreign exchange requirements of the government can be met in the foreign exchange market.

The most important benefit for any government is the raising of finance without offering any security. In this way, the financial services are a big boon to the government.

9. Expands activities of Financial Institutions

The presence of financial services enables financial institutions to not only raise finance but also get an opportunity to disburse their funds in the most profitable manner. Mutual funds, factoring, credit cards, hire purchase finance are some of the services which get financed by financial institutions.

The financial institutions are in a position to expand their activities and thus diversify the use of their funds for various activities. This ensures economic dynamism.

10. Capital Market

One of the barometers of any economy is the presence of a vibrant capital market. If there is hectic activity in the capital market, then it is an indication of the presence of a positive economic condition. The financial services ensure that all the companies are able to acquire adequate funds to boost production and to reap more profits eventually.

In the absence of financial services, there will be paucity of funds which will adversely affect the working of companies and will only result in a negative growth of the capital market. When the capital market is more active, funds from foreign countries also flow in. Hence, the changes in capital market is mainly due to the availability of financial services.

11. Promotion of Domestic and Foreign Trade

Financial services ensure promotion of domestic as well as foreign trade. The presence of factoring and forfaiting companies ensures increasing sale of goods in the domestic market and export of goods in the foreign market. Banking and insurance services further contribute to step up such promotional activities.

12. Balanced Regional development

The government monitors the growth of economy and regions that remain backward economically are given fiscal and monetary benefits through tax and cheaper credit by which more investment is promoted. This generates more production, employment, income, demand and ultimately increase in prices.

The producers will earn more profits and can expand their activities further. So, the presence of financial services helps backward regions to develop and catch up with the rest of the country that has developed already.