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Chapter1 :Principles Of Management

1.1 Management Concepts


Management is an important element in every organization.
It is the element that coordinates currents organizational activities and plans for the future.
The management adapts the organization to its environment and shapes the organization to

make it more suitable to the organization.


4 Ms in Organization Men, Machine, Materials, Money, and leads to nothing. For efficient

and profitable functioning it is necessary that all these factors are put to work in a co- ordinate
manner.
According to Harold Koontz, Management is an art of getting things done through and with

the people in formally organized groups


1.1.1 Why Industrial Management
Industrial management knowledge prepare people to apply engineering principles to the
management of industrial and production operations.
Industrial engineers require certain management skills to increase production output and
solve problems. If an industrial engineer does not possess the necessary management skills for his
job, he might struggle to gain the support of his employees, managers and suppliers.
1.1.2 Management Vs Administration
The difference between Management and Administration can be summarized under 2 categories:
1. Functions
2. Usage / Applicability
On the Basis of Functions: -

Basis

Management

Administration

Meanin
g

Management is an art of getting things done


through others by directing their efforts
towards achievement of pre-determined goals.

It is concerned with formulation of


broad objectives, plans & policies.

Nature

Management is an executing function.

Administration is a decision-making
function.

Process

Management decides who should as it & how


should he do it.

Administration decides what is to


be done & when it is to be done.

Functio
n

Management is a doing function because


managers get work done under their
supervision.

Administration is a thinking function


because plans & policies are
determined under it.

Skills

Technical and Human skills

Conceptual and Human skills

Level

Middle & lower level function

Top level function

1.2 Types Of Management

Generally, there are Three Levels of Management,


1. Administrative or Top Level of Management.
2. Executive or Middle Level of Management.
3. Supervisory or Lower Level of Management.

Fig 1.1 Types Of Management


1.2.1 Top Level Of Management
The Top Level Management consists of the Board of Directors (BOD) and the Chief Executive
Officer (CEO).
The main role of the top level management is summarized as follows :

The top level management determines the objectives, policies and plans of the organization.
They mobilizes (assemble and bring together) available resources.
The top level management does mostly the work of thinking, planning and deciding. therefore,

they are also called as the Administrators and the Brain of the organization.
They spend more time in planning and organizing.
They prepare long-term plans of the organization which are generally made for 5 to 20 years.
The top level management has maximum authority and responsibility. They require more

conceptual skills and less technical Skills.


1.2.2 Middle Level Of Management
The Middle Level Management consists of the Departmental Heads (HOD), Branch
Managers, and the Junior Executives.
The middle level management emphasize more on following tasks :

Middle level management gives recommendations (advice) to the top level management.
It executes (implements) the policies and plans which are made by the top level management.
It co-ordinate the activities of all the departments.
They also have to communicate with the top level Management and the lower level

management.
They spend more time in co-coordinating and communicating.
They prepare short-term plans of their departments which are generally made for 1 to 5 years.
The middle Level Management has limited authority and responsibility. Require more

managerial and technical skills and less conceptual skills.


1.2.3 Lower Level Of Management
The lower level management consists of the Foremen and the Supervisors. They are selected
by the middle level management. It is also called Operative / Supervisory level or First Line of
Management.
The lower level management performs following activities :

Lower level management directs the workers / employees.

They develop morale in the workers.


It maintains a link between workers and the middle level management.
The lower level management informs the workers about the decisions which are taken by the

management. They also inform the management about the performance, difficulties, feelings,
demands, etc., of the workers.
They spend more time in directing and controlling.
The lower level managers make daily, weekly and monthly plans.
They have limited authority but important responsibility of getting the work done from the
workers. Along with the experience and basic management skills, they also require more
technical and communication skills.

1.3 Principles Of Management


Fayols14 Principles Of Management - Administrative Management
The fourteen principles given by Fayol are as under:
1. Division of Labor
Henry Fayol has stressed on the specialization of jobs.
He recommended that work of all kinds must be divided & subdivided and allotted to various

2.

persons according to their expertise in a particular area.


Subdivision of work makes it simpler and results in efficiency.
It also helps the individual in acquiring speed, accuracy in his performance.
Specialization leads to efficiency & economy in spheres of business.
Party of Authority & Responsibility
Authority & responsibility are co-existing.
If authority is given to a person, he should also be made responsible.
In a same way, if anyone is made responsible for any job, he should also have concerned

authority.
Authority refers to the right of superiors to get exactness from their sub-ordinates whereas

responsibility means obligation for the performance of the job assigned.


There should be a balance between the two i.e. they must go hand in hand.
Authority without responsibility leads to irresponsible behavior whereas responsibility without

authority makes the person ineffective.


3. Principle of One Boss
A sub-ordinate should receive orders and be accountable to one and only one boss at a time.
In other words, a sub-ordinate should not receive instructions from more than one person

because - It undermines authority


- Weakens discipline
- Divides loyalty
- Creates confusion
- Delays and chaos
- Escaping responsibilities
- Duplication of work
- Overlapping of efforts
Therefore, dual sub-ordination should be avoided unless and until it is absolutely essential.
Unity of command provides the enterprise a disciplined, stable & orderly existence.
It creates harmonious relationship between superiors and sub-ordinates.

4. Unity of Direction
Fayol advocates one head one plan which means that there should be one plan for a group of
activities having similar objectives.

Related activities should be grouped together. There should be one plan of action for them

and they should be under the charge of a particular manager.


According to this principle, efforts of all the members of the organization should be directed

towards common goal.


Without unity of direction, unity of action cannot be achieved.
In fact, unity of command is not possible without unity of direction.

Equity

Equity means combination of fairness, kindness & justice.


The employees should be treated with kindness & equity if devotion is expected of them.
It implies that managers should be fair and impartial while dealing with the subordinates.
They should give similar treatment to people of similar position.
They should not discriminate with respect to age, caste, sex, religion, relation etc.
Equity is essential to create and maintain cordial relations between the managers and sub-

ordinate.
But equity does not mean total absence of harshness.
Fayol was of opinion that, at times force and harshness might become necessary for the

sake of equity.
Order

This principle is concerned with proper & systematic arrangement of things and people.
Arrangement of things is called material order and placement of people is called social order.
Material order- There should be safe, appropriate and specific place for every article and

every place to be effectively used for specific activity and commodity.


Social order- Selection and appointment of most suitable person on the suitable job. There

should be a specific place for everyone and everyone should have a specific place so that
they can easily be contacted whenever need arises.
Discipline

According to Fayol, Discipline means sincerity, obedience, respect of authority & observance

of rules and regulations of the enterprise.


This principle applies that subordinate should respect their superiors and obey their order.
It is an important requisite for smooth running of the enterprise.
Discipline is not only required on path of subordinates but also on the part of management.

Initiative

Workers should be encouraged to take initiative in the work assigned to them.


It means eagerness to initiate actions without being asked to do so.
Fayol advised that management should provide opportunity to its employees to suggest

ideas, experiences& new method of work.


It helps in developing an atmosphere of trust and understanding.
People then enjoy working in the organization because it adds to their zeal and energy.
To suggest improvement in formulation & implementation of place.
They can be encouraged with the help of monetary & non-monetary incentives.

Fair Remuneration

The quantum and method of remuneration to be paid to the workers should be fair,

reasonable, satisfactory & rewarding of the efforts.


As far as possible it should accord satisfaction to both employer and the employees.
Wages should be determined on the basis of cost of living, work assigned, financial position of

the business, wage rate prevailing etc.


Logical & appropriate wage rates and methods of their payment reduce tension & differences
between workers & management creates harmonious relationship and pleasing atmosphere
of work.

Fayol also recommended provision of other benefits such as free education, medical &

residential facilities to workers.


10 Stability of Tenure

Fayol emphasized that employees should not be moved frequently from one job position to

another i.e. the period of service in a job should be fixed.


Therefore employees should be appointed after keeping in view principles of recruitment &

selection but once they are appointed their services should be served.
According to Fayol. Time is required for an employee to get used to a new work & succeed to

doing it well but if he is removed before that he will not be able to render worthwhile services.
As a result, the time, effort and money spent on training the worker will go waste.
Stability of job creates team spirit and a sense of belongingness among workers which

ultimately increase the quality as well as quantity of work.


11 Scalar Chain

Fayol defines scalar chain as The chain of superiors ranging from the ultimate authority to the

lowest.
Every orders, instructions, messages, requests, explanation etc. has to pass through Scalar

chain.
12 Sub-Ordination of Individual Interest to General Interest

An organization is much bigger than the individual it constitutes therefore interest of the

undertaking should prevail in all circumstances.


As far as possible, reconciliation should be achieved between individual and group interests.
But in case of conflict, individual must sacrifice for bigger interests.

13 Espirit De Corps (can be achieved through unity of command)

It refers to team spirit i.e. harmony in the work groups and mutual understanding among the

members.
Spirit De Corps inspires workers to work harder.
There should be proper co-ordination of work at all levels
Subordinates should be encouraged to develop informal relations among themselves.
Efforts should be made to create enthusiasm and keenness among subordinates so that they

can work to the maximum ability.


Efficient employees should be rewarded and those who are not up to the mark should be

given a chance to improve their performance.


Subordinates should be made conscious of that whatever they are doing is of great

importance to the business & society.


14 Centralization & De-Centralization

Centralization means concentration of authority at the top level. In other words, centralization

is a situation in which top management retains most of the decision making authority.
Decentralization means disposal of decision making authority to all the levels of the

organization. In other words, sharing authority downwards is decentralization.


According to Fayol, Degree of centralization or decentralization depends on no. of factors like

size of business, experience of superiors, dependability & ability of subordinates etc.


Anything which increases the role of subordinate is decentralization & anything which

decreases it is centralization.
Fayol suggested that absolute centralization or decentralization is not feasible. An
organization should strike to achieve a lot between the two.

1.4 Scientific Management Or Fw Taylor


1.4.1 Principles Of Scientific Management
1.PerformanceStandards

F.W. Taylor found out that there were no scientific performance standards. No one knew
exactly how much work a worker should do in one hour or in one day.

The work was fixed assuming rule of thumb or the amount of work done by an average
worker. Taylor introduced Time and Motion Studies to fix performance standards.

He fixed performance standards for time, cost, and quality of work, which lead to uniformity of
work. As a result, the efficiency of the workers could be compared with each other.

2. Differential Piece Rate System


Taylor observed that workers did as little work as possible. He felt that under existing wage
system, an efficient worker gained nothing extra. So, Taylor used the differential piece (unit) rate
system.
Under differential piece rate system, a standard output was first fixed. Then two wage rates were fixed
as follows :Low wage rate was fixed for those workers who did not produce the standard output.
Higher wage rate was fixed for those workers who produced the standard output or who produced
more than the standard output.
3. Functional Foremanship
Taylor started "Functional Foremanship". Here, 8 foremen (lower level manager or supervisor)
are required to supervise the workers. This is because one foremen cannot be an expert in all the
functions.
Taylor's functional foremanship consists of two groups of supervisors :At the Planning Level or Office Level.
At the Doing Level or Factory Level.
4. Mental Revolution
Taylor introduced the concept of "Mental Revolution". He said that the management and
workers should have a positive attitude towards each other. This will result in close cooperation
between them. This will increase productivity and profits.
5. Time Study

Time study means to record the time taken for doing each part of a job. The full job is first
observed and analyzed.

Then it is divided into different elements (parts). Later the time taken for doing each part of
the job is recorded.

This is done by using a stop clock. Time study helps the management to know exactly how
much time it will take to do a particular job.

This helps the management to fix the amount of work to be done by each worker in one hour
or in one day.

6. Fatigue and Motion Study

Frank and Lillian Gilbert (Husband and Wife) introduced fatigue and motion studies.

Fatigue and motion studies find out and remove unnecessary and wasteful movements while
doing the job.

Every motion that is removed will reduce fatigue. Using cameras, they studied workers
(masons) doing common jobs like bricklaying. They found that the workers do many wasted
motions while doing their work. This resulted in fatigue.

So, the Gilberts asked the workers to stop all unnecessary motions and to do only the
motions which were necessary for doing the job.

1.4.2 Benefits Of Scientific Management


The benefits of scientific management are:1. Replacement of traditional rule of thumb method by scientific techniques.
2. Proper selection and training of workers.
3. Incentive wages to the workers for higher production.
4. Elimination of wastes and rationalization of system of control.
5. Standardization of tools, equipment, materials and work methods.
1.4.3 Study OfFayol And Taylor
Table 1.1 Taylor vsFayol
Basis

Taylor

Fayol

Human aspect

Taylor disregards human elements


and there is more stress on
improving men, materials and
methods

Fayol pays due regards on human


element. E.g. Principle of initiative,
Espirit De Corps and Equity recognizes
a need for human relations

Status

Father of scientific management

Father of management principles

Efficiency &
administration

Stressed on efficiency

Stressed on general administration

Approach

It has micro-approach because it is


restricted to factory only

It has macro-approach and discuses


general principles of management which
are applicable in every field of
management.

Scope of
principles

These principles are restricted to


production activities

These are applicable in all kinds of


organization regarding their
management affairs

Achievement

Scientific management

Administrative management

1.5 Organization
1.5.1 Meaning OfOrganization:
Different authors have defined organization in different ways. The main definitions of organization are
as follows:

According to Chester I. Barnard, "Organization is a system of co-operative activities of two or


more persons."

According to Louis A. Allen, "Organization is the process of identifying and grouping the work
to be performed, defining and delegating responsibility and authority, and establishing
relationship for the purpose of enabling people to work most effectively together in
accomplishing objectives."

According to Mooney and Railey, "Organization is the form of every human association for the

attainment of a common purpose."


1.5.2 Types OfOrganization Structure
1.5.2.1 Line Organization
It is perhaps the oldest and the simple organizational structure. In this kind of structure every manager
exercise a direct authority over his subordinate who in turn directly reports to their superiors.

There is a hierarchical arrangement of authority.

Each department is self contained and works independently of other departments.

Lines of authority are vertical i.e. from top to bottom.

There are no staff specialists.

Advantages

Simple to establish and operate

Promotes prompt decision making.

Easy to control as the managers have direct control over their subordinates.

Communication is fast and easy as there is only vertical flow of communication.

Disadvantages

Lack of specialisation

Managers might get overloaded with too many things to do.

Failure of one manager to take proper decisions might affect the whole organisation.

1.5.2.2 Functional Organisation


The organisation is divided into a number of functional areas. This organisation has grouping
of activities in accordance with the functions of an organisation such as production, marketing,
finance,human
resource
and
so
on.
The specialist in charge of a functional department has the authority over all other employees for his
function.
Advantages

Is logical and reflection of functions

Follows principle of occupation specialisation

Simplifies training

Better control as the manger in charge of each functional department is usually an specialist

Disadvantages

Overspecialisation and narrow viewpoints of key personnel can limit the organisation growth.

Reduced coordination between functions.

Conflicts between different functions could be detrimental for the organisation as a whole.

Difficult for general managers to coordinate different departments.

However, it is much suitable for large organisations where there is ample scope for specialisation.
Once harmony and proper coordination among different functions is achieved, it could lead to sure
success for an organization
1.5.2.3 Line And Staff Organisation
It is a combination of line and functional structures. In this organisation a structure, the
authority flows in a vertical line and get the help of staff specialist who are in advisory. When the line
executives need advice, information about any specific area, these staff specialists are consulted.
For example Chief accountant has command authority over accountants and clerks in the accounts
departments but he has only advisory relationship with other departments like production or sales.
Advantages

Line managers are provided by expert advice by these specialists.

Staff managers provide specialist advice which can improve quality of decisions in various
departments.

Disadvantages
Line managers and staff managers might have conflicts on particular issues.
Line and staff managers might not be clear as to what the actual area of operations is and what is
expected of them. Co-ordination may be a problem.
Staff personnel are not accountable for the results and thus may not take tasks seriously.
However, Line and staff organisation is very suitable for large organisation.

1.5.2.4 Project Organisation


The project structure consists of a number of horizontal organisational units to complete
projects of a long duration. A team of specialists from different areas is created for each project.
Usually this team is managed by the project manager. The project staff is separate from and
independent of the functional departments.
Advantages

Special attention can be provided to meet the complex demand of the project.

It allows maximum use of specialist knowledge thus chances of failure are very less.

Project staff works as a team towards common goal which results in high motivation level for

its members.
Disadvantages
As the project staff consists of personnel from diverse fields, it might be quite challenging for the
project manager to coordinate among them.
1.5.2.5 Matrix Organisation

Matrix organisation combines two structures functional departmentation and project


structure.

Functional department is a permanent feature of the matrix structure and retains authority for
overall operation of the functional units.

Project teams are created whenever specific projects require a high degree of technical skill
and other resources for a temporary period.

Project team form the horizontal chain and functional departments create a vertical chain of
command.

Members of a particular team are drawn from the functional departments and are placed

under the direction of a project manager who has the overall responsibility of a particular
project.
Advantage

Is oriented towards end results.

Professional identification is maintained

Pinpoints product-profit responsibility

Disadvantages

Conflict in organisation authority exists.

Possibility of disunity of command exists

Requires manager effective in human relations

1.6 Elements Or Functions Of Management


For theoretical purposes, it may be convenient to separate the function of management but
practically these functions are overlapping in nature i.e. they are highly inseparable. Each function
blends into the other & each affects the performance of others.
1. Planning:

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Planning involves the formulation of what is to be done, how, when and where it is to
be done, who is to do it and what results are to be evaluated.
Planning means looking ahead, it is mental work, it is selecting from among many
choices following the procedure given below:

2. Organizing:
After determining the course and make-up of action, the next step, in order to accomplish the task, is
to distribute the necessary work among the working groups.
It is the process of by which the structure and allocation of jobs is determined.
It means, organizing people, materials, job, time etc., and establishing framework in which
responsibilities are defined and authorities and laid down
The process of organizing involves:
-Divide the work into component activities
-Assign people to task (component activities)
-Define responsibilities
-Delegate authority
-Establish structural relationship ( i.eorganization structure) to secure coordination
3.Staffing:
It is the function of manning the organization structure and keeping it manned. Staffing has
assumed greater importance in the recent years due to advancement of technology, increase in size
of business, complexity of human behavior etc. The main purpose o staffing is to put right man on
right job Staffing involves:

Manpower Planning (estimating man power in terms of searching, choose the person and

giving the right place).


Recruitment, selection & placement.
Training & development.
Remuneration.
Performance appraisal.
Promotions & transfer.

4.Directing
It is that part of managerial function which actuates the organizational methods to work efficiently for
achievement of organizational purposes. It is considered life-spark of the enterprise which sets it in
motion the action of people because planning, organizing and staffing are the mere preparations for
doing the work. Direction has following elements:

Supervision
Motivation
Leadership
Communication

Supervision- implies overseeing the work of subordinates by their superiors. It is the act of
watching & directing work & workers.
Motivation-means inspiring, stimulating or encouraging the sub-ordinates with zeal to work.
Positive, negative, monetary, non-monetary incentives may be used for this purpose.

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Leadership- may be defined as a process by which manager guides and influences the work
of subordinates in desired direction.
Communications- is the process of passing information, experience, opinion etc from one
person to another. It is a bridge of understanding.
5.Controlling
Controlling is the process of checking whether or not proper progress is being made towards the
objectives and goals and acting if necessary, to correct any deviation. According to Koontz &ODonell
Controlling is the measurement & correction of performance activities of subordinates in order to
make sure that the enterprise objectives and plans desired to obtain them as being accomplished.
Therefore controlling has following steps:

FUNCTIONS

Establishment of standard performance.

Measurement of actual performance.

Comparison of actual performance with the standards and finding out deviation if any.

Corrective action, if necessary

Follow up
Table 1.2 Functions Of Management
SUB FUNCTIONS

Planning

Forecasting, decision making, strategy formulation,


policy making, programming, scheduling,
innovation,dudgeting

Organising

Grouping of functions, Departmentation,


Delegation, Decentralization, task allocation

Staffing

Manpower planning, job analysis, Recruitment,


Selection, Training, Placement , Compensation,
promotion, appraisal, etc

Directing

Supervision , Motivation, Communication,


Leadership, etc

Controlling

Fixation of standard, recording, measurement,


reporting corrective action.

1.6.1 Planning
Definition :
Planning is deciding in advance what is to be done. It involves the selection of objectives ,
policies, procedures, and programmes from among alternatives.
Planning is the process of thinking through and making explicit the strategy, actions and relationships
necessary to accomplish an overall objective or purpose.

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Characteristics Or Features Of Planning


(i) Planning is goal-oriented:All plans arise from objectives. Objectives provide the basic guide for
planning activities. Planning has no meaning unless it contributes some positive achievement of
predetermined goals.
(ii) Planning is a primary function: Planning is the foundation of management. It is a parent
exercise in management process. It is a preface to business activities. According to Koontz, Planning
provides the basic foundation from which all future management functions arise. Terry also supported
the view, that without planning there is nothing to organize, no one to motivate and no need to
control.
(iii) Planning is all-pervasive: Planning is a function of all managers. It is needed and practiced at all
managerial levels. Planning is inherent in everything a manager does. Managers have to plan before
launching a new business. They have to plan whenever things change.
(iv) Planning is a mental exercise: Planning is a mental process involving imagination, foresight and
sound judgement. Planning compels managers to abandon guesswork and wishful thinking. It makes
them think in a logical and systematic manner.
(v) Planning is a continuous process: Planning is continuous. It is a never-ending activity. Once
plans for a specific period are prepared, they are translated into action. At the end of that period, there
is a need for a new plan to be drawn based on new situations and conditions
(vi) Planning involves choice: Planning essentially involves choice among various alternative
courses of action. If there is one way of doing something, there is no need for planning. The need for
planning arises only when alternatives are available.
(vii) Planning is forward looking: Planning means looking ahead and preparing for the future. It
means peeping into the future, analyzing it and preparing for it. Managers plan today with a view to
flourish tomorrow. Without planning, business becomes random in nature and decisions would
become meaningless, adhoc choices.
(viii) Planning is flexible: Planning is based on a forecast of future events. Since future is uncertain,
plans should be reasonably flexible. The onset of colour television sets forced many a manufacturer in
the West to abandon production of black and white television sets long back. When market conditions
change, planners have to make necessary changes in the existing plans.
Benefits Of Planning
(i) Focuses Attention on Objectives. Since all planning is directed towards achieving enterprise
objectives, the very act of planning focuses attention on these objectives. Laying down the objectives
is the first step in planning. If the objectives are clearly laid down, the execution of plans will also be
directed towards these objectives.
(ii) Ensures Economical Operation. Planning involves a lot of mental exercise, which is directed
towards achieving efficient operation in the enterprise. It substitutes joint directed effort for
uncoordinated piecemeal activity, even flow of work for uneven flow, and deliberate decisions for snap
judgements. This helps in better utilization of resources and thus minimizing costs.

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(iii) Reduces Uncertainty. Planning helps in reducing uncertainties of future because it involves
anticipation of future events. Effective planning is the result of deliberate thinking based on facts and
figures. It involves forecasting also.
(iv) Facilitates Control. Planning helps the managers in performing their function of control. Planning
and control are inseparable in the sense that unplanned action cannot be controlled because control
involves keeping activities on the predetermined course by rectifying deviations from plans.
1.6.2 Organizing
According to Koontz and O'Donnell, "Organization involves the grouping of activities
necessary to accomplish goals and plans, the assignment of these activities to appropriate
departments and the provision of authority, delegation and co-ordination."
Organization involves division of work among people whose efforts must be co-ordinated to achieve
specific objectives and to implement pre-determined strategies.
Nature Or Characteristics Of Organizing
From the study of the various definitions given by different management experts we get the following
information about the characteristics or nature of organization
(1) Division of Work:Division of work is the basis of an organization. In other words, there can be no
organization without division of work. Under division of work the entire work of business is divided
into many departments .The work of every department is further sub-divided into subworks. In this
way each individual has to do the saran work repeatedly which gradually makes that person an
expert.
(2) Coordination: Under organizing different persons are assigned different works but the aim of all
these persons happens to be the some - the attainment of the objectives of the enterprise.
Organization ensures that the work of all the persons depends on each others work even though it
happens to be differentThe work of one person starts from where the work of another person ends.
The non-completion of the work of one person affects the work of everybody.
(3) Plurality of Persons: Organization is a group of many persons who assemble to fulfill a common
purpose. A single individual cannot create an organization.
(4) Common Objectives: There are various parts of an organization with different functions to
perform but all move in the direction of achieving a general objective.
(5) Well-defined Authority and Responsibility: Under organization a chain is established between
different posts right from the top to the bottom. It is clearly specified as to what will be the authority
and responsibility of every post.
(6) Organization is a Structure of Relationship: Relationship between persons working on different
posts in the organization is decided. In other words, it is decided as to who will be the superior and
who will be the subordinate.
(7) Organization is a Machine of Management: Organization is considered to be a machine of
management because the efficiency of all the functions depends on an effective organization. In the
absence of organization no function can be performed in a planned manner.
(8) Organization is a Universal Process:Organization is needed both in business andnon-business
organizations. Not only this, organization will be needed where two or mom than two people work
jointlyTherefore, organization has the quality of universality.
(9) Organization is a Dynamic Process: Organization is related to people and the knowledge and
experience of the people undergo a change. The impact of this change affects the various functions of
the organizations.
1.6.3 Staffing

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Staffing involves filling the positions needed in the organization structure by appointing competent and
qualified persons for the job.
The staffing process encompasses man power planning, recruitment, selection, and training.
a) Manpower requirements:
Manpower Planning which is also called as Human Resource Planning consists of
putting right number of people, right kind of people at the right place, right time, doing the right things
for which they are suited for the achievement of goals of the organization. The primary function of
man power planning is to analyze and evaluate the human resources available in the organization,
and to determine how to obtain the kinds of personnel needed to staff positions ranging from
assembly line workers to chief executives.
b) Recruitment:
Recruitment is the process of finding and attempting to attract job candidates who are capable of
effectively filling job vacancies.
Job descriptions and job specifications are important in the recruiting process because they specify
the nature of the job and the qualifications required of job candidates.
c) Selection:
Selecting a suitable candidate can be the biggest challenge for any organization. The success of an
organization largely depends on its staff. Selection of the right candidate builds the foundation of any
organization's success and helps in reducing turnovers.
d) Training and Development:
Training and Developmentis a planned effortto facilitate employee learning of jobrelated behaviors in
order to improve employee performance. Experts sometimes distinguish between the terms training
and development; training denotes efforts to increase employee skills on present jobs, while
development refers to efforts oriented toward improvements relevant to future jobs. In practice,
though, the distinction is often blurred (mainly because upgrading skills in present jobs usually
improves performance in future jobs).

Objectives of staffing:
The general objective of Staffing is to contribute towards the accomplishment of the goals of
an enterprise. However, the Staffing in any working organization should have the following specific
objectives:
(i) To attain maximum individual development;
(ii) To establish desirable working relationship between employers and employees and between
groups of employees;
(iii) To mould effectively the human resources;
(iv) To ensure satisfaction of the workers so that they are freely ready to work;
(v) To provide fair wages, good working conditions and service benefits to the workers;
(vi) To ensure that every employee makes his maximum contribution to the success of the enterprise.
1.6.4 Directing
"Activating deals with the steps a manager takes to get sub-ordinates and others
to carry out plans" - Newman and Warren.
Directing concerns the total manner in which a manager influences the actions of subordinates. It is
the final action of a manager in getting others to act after all preparations have been completed.
Direction hasfollowing elements:
Supervision
Motivation
Leadership

15

Communication
(i) Supervision- implies overseeing the work of subordinates by their superiors. It is theact of watching
& directing work & workers.
(ii) Motivation- means inspiring, stimulating or encouraging the sub-ordinates with zealto work.
Positive, negative, monetary, non-monetary incentives may be used for thispurpose.
(iii) Leadership- may be defined as a process by which manager guides and influences
the work of subordinates in desired direction.
(iv) Communications- is the process of passing information, experience, opinion etc
from one person to another. It is a bridge of understanding.
Characteristics
Elements of Management
Continuing Function
Pervasive Function
Creative Function
Linking function
Management of Human Factor
Scope of Directing
Initiates action
Ensures coordination
Improves efficiency
Facilitates change
Assists stability and growth
1.6.5Controlling
Control is the process through which managers assure that actual activities conform to planned
activities.
In the words of Koontz and O'Donnell - "Managerial control implies measurement of
accomplishment against the standard and the correction of deviations to assure attainment of
objectives according to plans."
Nature & Purpose of Control
Control is an essential function of management
Control is an ongoing process
Control is forward working because pas cannot be controlled
Control involves measurement
The essence of control is action
Control is an integrated system
Control Process
a) The Establishment of Standards:
Because plans are the yardsticks against which controls must be revised, it follows logically that the
first step in the control process would be to accomplish plans. Plans can be considered as the
criterion or the standards against which we compare the actual performance in order to figure out the
deviations.
Examples for the standards
Profitability standards: In general, these standards indicate how much the company would
like to make as profit over a given time period- that is, its return on investment.
Market position standards: These standards indicate the share of total sales in a particular
market that the company would like to have relative to its competitors.
Productivity standards: How much that various segments of the organization should produce
is the focus of these standards.

16

b) Measurement of Performance:
The measurement of performance against standards should be on a forward looking basis so that
deviations may be detected in advance by appropriate actions. The degree of difficulty in measuring
various types of organizational performance, of course, is determined primarily by the activity being
measured. For example, it is far more difficult to measure the performance of highway maintenance
worker than to measure the performance of a student enrolled in a college level management
course.
c) Comparing Measured Performance to Stated Standards:
When managers have taken a measure of organizational performance, their next step in controlling is
to compare this measure against some standard. A standard is the level of activity established to
serve as a model for evaluating organizational performance. The performance evaluated can be for
the organization as a whole or for some individuals working within the organization. In essence,
standards are the yardsticks that determine whether organizational performance is adequate or
inadequate.
d) Taking Corrective Actions:
After actual performance has been measured compared with established performance standards, the
next step in the controlling process is to take corrective action, if necessary. Corrective action is
managerial activity aimed at bringing organizational performance up to the level of performance
standards. In other words, corrective action focuses on correcting organizational mistakes that hinder
organizational performance.

1.7 Types Of Ownership


When organizing a new business, one of the most important decisions to be made is choosing the
structure of a business
1.7.1 Sole Proprietorships
The vast majority of small business starts out as sole proprietorships . . . very dangerous.
These firms are owned by one person, usually the individual who has day-to-day responsibility for
running the business. Sole proprietors own all the assets of the business and the profits generated by
it. They also assume "complete personal" responsibility for all of its liabilities or debts. In the eyes of
the law, you are one in the same with the business.
1.7.1.1 Advantages
Easiest and least expensive form of ownership to organize.
Sole proprietors are in complete control, within the law, to make all decisions.
Sole proprietors receive all income generated by the business to keep or reinvest.
Profits from the business flow-through directly to the owner's personal tax return.
The business is easy to dissolve, if desired.
1.7.1.2 Disadvantages

17

Unlimited liability and are legally responsible for all debts against the business.
Their business and personal assets are 100% at risk.
Has almost been ability to raise investment funds.
Are limited to using funds from personal savings or consumer loans.
Have a hard time attracting high-caliber employees, or those that are motivated by the opportunity to
own a part of the business.
Employee benefits such as owner's medical insurance premiums are not directly deductible from
business income (partially deductible as an adjustment to income).
1.7.2 Partnerships
In a Partnership, two or more people share ownership of a single business. Like
proprietorships, the law does not distinguish between the business and its owners.
The Partners should have a legal agreement that sets forth how decisions will be made,
profits will be shared, disputes will be resolved, how future partners will be admitted to the
partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership
when needed.
1.7.2.1 Advantages
Partnerships are relatively easy to establish; however time should be invested in

developing the

partnership agreement.
With more than one owner, the ability to raise funds may be increased.
The profits from the business flow directly through to the partners' personal taxes.
Prospective employees may be attracted to the business if given the incentive to become a partner.
1.7.2.2 Disadvantages
Partners are jointly and individually liable for the actions of the other partners.
Profits must be shared with others.
Since decisions are shared, disagreements can occur.
Some employee benefits are not deductible from business income on tax returns.
The partnerships have a limited life; it may end upon a partner withdrawal or death.
1.7.3 Public Limited Company
Limited companies which can sell share on the stock exchange are Public Limited companies. These
companies usually write PLC after their names.

According to companies Act, 1956, every company both private and public limited company has to be
compulsorily registered. Public limited company is a voluntary association of members which is
incorporated and, therefore has a separate legal existence and the liability of whose members is
limited. Its main features are : The company has a separate legal existence apart from its members who compose it.

Its formation, working and its winding up, in fact, all its activities are strictly governed by laws,

rules and regulations. The Indian Companies Act, 1956 contains the provisions regarding the
legal formalities for setting up of a public limited company. Registrars of Companies (ROC)
appointed under the Companies Act covering the various States and Union Territories are
vested with the primary duty of registering companies floated in the respective states and the
Union Territories.
A company must have a minimum of seven members but there is no limit as regards the

maximum number.
The company collects its capital by the sale of its shares and those who buy the shares are
called the members. The amount so collected is called the share capital.

18

The shares of a company are freely transferable and that too without the prior consent of

other shareholders or without subsequent notice to the company.


The liability of a member of a company is limited to the face value of the shares he owns.

Once he has paid the whole of the face value, he has no obligation to contribute anything to
pay off the creditors of the company.
The shareholders of a company do not have the right to participate in the day-to-day

management of the business of a company. This ensures separation of ownership from


management. The power of decision making in a company is vested in the Board of Directors,
and all policy decisions are taken at the Board level by the majority rule. This ensures a unity
of direction in management.
As a company is an independent legal person, its existence is not affected by the death,
retirement or insolvency of any of its shareholders.

Minimum requirements:
Minimum 7 Shareholders
Minimum 3 Directors
The directors and shareholders can be same person
Minimum Share Capital shall be Rs. 500,000 (INR Five Lac)
DIN (Director Identification Number) for all the Directors
DSC (Digital Signature Certificate) for one of the Directors
1.7.3.1 Advantages

Continuity of existence

Larger amount of capital

Unity of direction

Efficient management

Limited liability

1.7.3.2 Disadvantages

Scope for promotional frauds

Undemocratic control

Scope for directors for personal profit

Subjected to strict regulations

There are lot of legal formalities required for forming a public limited company. It is costly
and time consuming.

In order to protect the interest of the ordinary investor there are strict controls and
regulations to comply. These companies have to publish their accounts.

The original owners may lose control.

Public Limited companies are huge in size and may face management problems such as

slow decision making and industrial relations problem


1.7.4 Private Limited Companies
These are closely held businesses usually by family, friends and relatives.
Private companies may issue stock and have shareholders. However, their shares do not trade on
public exchanges and are not issued through an initial public offering.

19

Shareholders may not be able to sell their shares without the agreement of the other shareholders.
Its main features are : It has an independent legal existence. The Indian Companies Act,1956contains the provisions

regarding the legal formalities for setting up of a private limited company. Registrars of
Companies (ROC) appointed under the Companies Act covering the various States and
Union Territories are vested with the primary duty of registering companies floated in the
respective states and the Union Territories.
It is relatively less cumbersome to organize and operate it as it has been exempted from
many regulations and restrictions to which a public limited company is subjected to. Some of
them are :

it need not file a prospectus with the Registrar.

it need not obtain the Certificate for Commencement of business.

it need not hold the statutory general meeting nor need it file the statutory report.

restrictions placed on the directors of the public limited company do not apply to its

directors.
The liability of its members is limited.

The shares allotted to it's members are also not freely transferable between them. These

companies are not allowed to invite public to subscribe to its shares and debentures.
It enjoys continuity of existence i.e. it continues to exist even if all its members die or desert it.

Hence, a private company is preferred by those who wish to take the advantage of limited liability but
at the same time desire to keep control over the business within a limited circle and maintain the
privacy of their business.
Minimum requirements:
Minimum 2 Shareholders
Minimum 2 Directors
The directors and shareholders can be same person
Minimum Share Capital shall be Rs. 100,000 (INR One Lac)
DIN (Director Identification Number) for all the Directors
DSC (Digital Signature Certificate) for one of the Directors
1.7.4.1 Advantages

Limited Liability: It means that if the company experience financial distress because of normal
business activity, the personal assets of shareholders will not be at risk of being seized by
creditors.

Continuity of existence: business not affected by the status of the owner.

Minimum number of shareholders need to start the business are only2.

More capital can be raised as the maximum number of shareholders allowed is 50.

Scope of expansion is higher because easy to raise capital from financial institutions and the
advantage of limited liability.

Chapter 2 :Financial Management


2.1 Introduction
The financial management means:

20

To collect finance for the company at a low cost and To use this collected finance for earning
maximum profits. Thus, financial management means to plan and control the finance of the company.
It is done to achieve the objectives of the company.
According to Richard A. Brealey, "Financial management is the process of putting the
available funds to the best advantage from the long term point of view of business objectives."
Scope of financial management:
Financial management has a wide scope. According to Dr. S. C. Saxena, the scope of
financial management includes the following five 'A's.

Anticipation : Financial management estimates the financial needs of the company. That is,

it finds out how much finance is required by the company.


Acquisition : It collects finance for the company from different sources.
Allocation : It uses this collected finance to purchase fixed and current assets for the

company.
Appropriation : It divides the company's profits among the shareholders, debenture holders,

etc. It keeps a part of the profits as reserves.


Assessment : It also controls all the financial activities of the company. Financial

management is the most important functional area of management. All other functional areas
such as production management, marketing management, personnel management, etc.
depends on Financial management. Efficient financial management is required for survival,
growth and success of the company or firm.
2.1.1Functions Of Financial Management

Estimation of capital requirements: A finance manager has to make estimation with regards to

capital requirements of the company. This will depend upon expected costs and profits and
future programmers and policies of a concern. Estimations have to be made in an adequate
manner which increases earning capacity of enterprise.
Determination of capital composition: Once the estimation have been made, the capital

structure have to be decided. This involves short- term and long- term debt equity analysis.
This will depend upon the proportion of equity capital a company is possessing and additional
funds which have to be raised from outside parties.
Choice of sources of funds: For additional funds to be procured, a company has many
choices likeo Issue of shares and debentures
o Loans to be taken from banks and financial institutions
o Public deposits to be drawn like in form of bonds.
o Choice of factor will depend on relative merits and demerits of each source and

period of financing.
Investment of funds: The finance manager has to decide to allocate funds into profitable

ventures so that there is safety on investment and regular returns is possible.


Disposal of surplus: The net profits decision have to be made by the finance manager. This
can be done in two ways:
o Dividend declaration - It includes identifying the rate of dividends and other benefits
o

like bonus.
Retained profits - The volume has to be decided which will depend upon expansional,

innovational, diversification plans of the company.


Management of cash: Finance manager has to make decisions with regards to cash
management. Cash is required for many purposes like payment of wages and salaries,
payment of electricity and water bills, payment to creditors, meeting current liabilities,
maintainance of enough stock, purchase of raw materials, etc.

21

Financial controls: The finance manager has not only to plan, procure and utilize the funds

but he also has to exercise control over finances. This can be done through many techniques
like ratio analysis, financial forecasting, cost and profit control, etc.
2.2 Source Of Finance
Business is concerned with the production and distribution of goods and services for the
satisfaction of needs of society. For carrying out various activities, business requires money. Finance,
therefore, is called the life blood of any business. The financial needs of a business can be
categorised as follows:

Fixed capital requirements: In order to start business, funds are required to purchase

fixed assets like land and building, plant and machinery, and furniture and fixtures. This is
known as fixed capital requirements of the enterprise. The funds required in fixed assets
remain invested in the business for a long period of time.
Working Capital requirements: No matter how small or large a business is, it needs

funds for its day-to-day operations. This is known as working capital of an enterprise,
which is used for holding current assets such as stock of material, bills receivables and
for meeting current expenses like salaries, wages, taxes and rent. For financing such
requirements short-term funds are needed.
Short Term And Long Term Finance

Short-term financeis needed to cover the day to day running of the business. It will be

paid back in a short period of time, so less risky for lenders.


Long-term financetends to be spent on large projects that will pay back over a longer

period of time. More risky so lenders tend to ask for some form of insurance or security if
the company is unable to repay the loan. A mortgage is an example of secured long-term
finance.
The main types of short-term finance are:

Overdraft

Suppliers credit

Working capital

The main types of long-term finance that are available for to a business are:

Mortgages

Bank loans

Share issue

Debentures

Retained profits

Hire purchase

2.2.1 Types Of Finance


sources of finance can be classified into:
Internal sources (raised from within the organisation)
External (raised from an outside source)
2.2.1.1 Internal Sources
There are five internal sources of finance:
1. Owners investment (start up or additional capital)
2. Retained profits
3. Sale of stock
4. Sale of fixed assets
5. Debt collection
1.Owners investment

22

This is money which comes from the owner/s own savings


It may be in the form of start up capital - used when the business is setting up
It may be in the form of additional capital perhaps used for expansion
This is a long-term source of finance
Advantages
Doesnt have to be repaid
No interest is payable
Disadvantages
There is a limit to the amount an owner can invest
2.Retained Profits
This source of finance is only available for a business which has been trading for more than
one year
It is when the profits made are ploughed back into the business
This is a medium or long-term source of finance
Advantages
Doesnt have to be repaid
No interest is payable
Disadvantages
Not available to a new business
Business may not make enough profit to plough back
3.Sale of Stock
This money comes in from selling off unsold stock
This is what happens in the January sales
It is when the profits made are ploughed back into the business
This is a short-term source of finance
Advantages
Quick way of raising finance
By selling off stock it reduces the costs associated with holding them
Disadvantages
Business will have to take a reduced price for the stock
4.Sale of Fixed Assets
This money comes in from selling off fixed assets, such as:
a piece of machinery that is no longer needed
Businesses do not always have surplus fixed assets which they can sell off
There is also a limit to the number of fixed assets a firm can sell off
This is a medium-term source of finance
Advantages
Good way to raise finance from an asset that is no longer needed
Disadvantages
Some businesses are unlikely to have surplus assets to sell
Can be a slow method of raising finance
5.Debt Collection
A debtor is someone who owes a business money
A business can raise finance by collecting the money owed to them (debts) from their debtors
Not all businesses have debtors ie those who deal only in cash
This is a short-term source of finance
Advantages
No additional cost in getting this finance, it is part of the businesses normal operations

23

Disadvantages
There is a risk that debts owed can go bad and not be repaid
2.2.1.2 External Sources
There are five internal sources of finance:
1. Bank Loan or Overdraft
2. Additional Partners
3. Share Issue
4. Leasing
5. Hire Purchase
6. Mortgage
7. Trade Credit
8. Government Grants
1.Bank Loan
This is money borrowed at an agreed rate of interest over a set period of time
This is a medium or long-term source of finance
Advantages
Set repayments are spread over a period of time which is good for budgeting
Disadvantages
Can be expensive due to interest payments
Bank may require security on the loan
2.Bank Overdraft
This is where the business is allowed to be overdrawn on its account
This means they can still write cheques, even if they do not have enough money in the
account
This is a short-term source of finance
Advantages
This is a good way to cover the period between money going out of and coming into a
business
If used in the short-term it is usually cheaper than a bank loan
Disadvantages
Interest is repayable on the amount overdrawn
Can be expensive if used over a longer period of time
3.Additional Partners
This is sources of finance suitable for a partnership business
The new partner/s can contribute extra capital
Advantages
Doesnt have to be repaid
No interest is payable
Disadvantages
Diluting control of the partnership
Profits will be split more ways
4.Share Issue
This is sources of finance suitable for a limited company
Involves issuing more shares
This is a long-term source of finance
Advantages
Doesnt have to be repaid
No interest is payable

24

Disadvantages
Profits will be paid out as dividends to more shareholders
Ownership of the company could change hands
5.Leasing
This method allows a business to obtain assets without the need to pay a large lump sum up
front
It is arranged through a finance company
Leasing is like renting an asset
It involves making set repayments
This is a medium-term source of finance
Advantages
Businesses can have the use of up to date equipment immediately
Payments are spread over a period of time which is good for budgeting
Disadvantages
Can be expensive
The asset belongs to the finance company
6.Hire Purchase
This method allows a business to obtain assets without the need to pay a large lump sum up
front
Involves paying an initial deposit and regular payments for a set period of time
The main difference between hire purchase and leasing is that with hire purchase after all
repayments have been made the business owns the asset
This is a medium-term source of finance
Advantages
Businesses can have the use of up to date equipment immediately
Payments are spread over a period of time which is good for budgeting
Once all repayments are made the business will own the asset
Disadvantages
This is an expensive method compared to buying with cash
7.Mortgage
This is a loan secured on property
Repaid in instalments over a period of time typically 25 years
The business will own the property once the final payment has been made
This is a long-term source of finance
Advantages
Business has the use of the property
Payments are spread over a period of time which is good for budgeting
Once all repayments are made the business will own the asset
Disadvantages
This is an expensive method compared to buying with cash
If business does not keep up with repayments the property could be repossessed
8.Trade Credit
Trade credit is summed up by the phrase:
buy now pay later
Typical trade credit period is 30 days
This is a short-term source of finance
Advantages
Business can sell the goods first and pay for them later

25

Good for cash flow


No interest charged if money is paid within agreed time
Disadvantages
Discount given for cash payment would be lost
Businesses need to carefully manage their cash flow to ensure they will have money available
when the debt is due to be paid
9.Government Grants
Government organisations such as Invest NI offer grants to businesses, both established and
new
Usually certain conditions apply, such as where the business has to locate
Advantages
Dont have to be repaid
Disadvantages
Certain conditions may apply eg location
Not all businesses may be eligible for a grant
2.3 Investment
Meaning of Investment

In simple terms, Investment refers to purchase of financial assets. While Investment Goods
are those goods, which are used for further production.

Investment implies the production of new capital goods, plants and equipments. John
Keynes refers investment as real investment and not financial investment.

Investment is a conscious act of an individual or any entity that involves deployment of money
(cash) in securities or assets issued by any financial institution with a view to obtain the target
returns over a specified period of time.

2.3.1

Types Of Investment

Different types or kinds of investment are discussed in the following points


1.Autonomousinvestment:

Investment which does not change with the changes in income level, is called as Autonomous
or Government Investment.

Autonomous Investment remains constant irrespective of income level. Which means even if
the income is low, the autonomous, Investment remains the same. It refers to the investment
made on houses, roads, public buildings and other parts of Infrastructure. The Government
normally makes such a type of investment.

2. Induced Investment:

Investment which changes with the changes in the income level, is called as Induced
Investment.

26

Induced Investment is positively related to the income level. That is, at high levels of income
entrepreneurs are induced to invest more and vice-versa. At a high level of income,
Consumption expenditure increases this leads to an increase in investment of capital goods,
in order to produce more consumer goods.

3. Financial Investment:

Investment made in buying financial instruments such as new shares, bonds, securities, etc.
is considered as a Financial Investment.

However, the money used for purchasing existing financial instruments such as old bonds, old
shares, etc., cannot be considered as financial investment. It is a mere transfer of a financial
asset from one individual to another. In financial investment, money invested for buying of
new shares and bonds as well as debentures have a positive impact on employment level,
production and economic growth.

4. Real Investment:

Investment made in new plant and equipment, construction of public utilities like schools,
roads and railways, etc., is considered as Real Investment.

Real investment in new machine tools, plant and equipments purchased, factory buildings,
etc. increases employment, production and economic growth of the nation. Thus real
investment has a direct impact on employment generation, economic growth, etc.

5. Planned Investment:

Investment made with a plan in several sectors of the economy with specific objectives is
called as Planned or Intended Investment.

Planned Investment can also be called as Intended Investment because an investor while
making investment make a concrete plan of his investment.

6. Unplanned Investment:

Investment done without any planning is called as an Unplanned or Unintended Investment.

In unplanned type of investment, investors make investment randomly without making any
concrete plans. Hence it can also be called as Unintended Investment. Under this type of
investment, the investor may not consider the specific objectives while making an investment
decision.

7. Gross Investment:

Gross Investment means the total amount of money spent for creation of new capital assets
like Plant and Machinery, Factory Building, etc.

It is the total expenditure made on new capital assets in a period.

27

8. Net Investment:

Net Investment is Gross Investment less (minus) Capital Consumption (Depreciation) during a
period of time, usually a year.

It must be noted that a part of the investment is meant for depreciation of the capital asset or
for replacing a worn-out capital asset. Hence it must be deducted to arrive at net investment.

2.4 Evaluation Of Investment / Capital Budgeting


Let's take a look at four of the most common models for evaluating business investments.
1. Accounting rate of return
2. Payback
3. Net present value
4. Internal rate of return
While each of these models has its benefits and drawbacks, sophisticated financial managers
prefer the net present value and the internal rate of return methods. There are two reasons why these
models are favored: (a) all of the cash flows over the entire length of the project are considered, and
(b)the future cash flows are discounted to reflect the time value of money.

Fig 2.1
1.Accounting rate of return
Average profits after tax and after depreciation are calculated & then it is divided by the total
original investment (or) average investment of the project.

afterdepreciationtaxes

ARR =
averageprofits

Average investment may be calculated by the following formula,


Average investment=

value of investment beginning+value of investment at end


2

28

The value of investment at the end of the project life is 0 we take

1
2

of original investment as

average investment.
Accept (or) reject criterion:

Minimum rate of return is fixed by the management.


Any project below this rate will be straight away rejected.
Highest rate will be accepted.

Advantages:

It is very simple to understand & easy to calculate.


It uses the entire earning of a project.
This method is based upon the well known concept of profit.

Disadvantages:

It ignores time value of money (interest factor).


It does not take consideration real cash flows of the project.
This method cannot be applied to a situation where investment in project is to be made in

parts.
2. PAY-BACK PERIOD METHOD:
It represents the period in which the total investment in a project is reserved by way of return (cash
flow) from the project.
a. When annual cash flows are even:
Payback period =

originalinvestment
annualcashflows

b. When annual cash flows are uneven:


i.
Calculate annual cash inflows earnings after tax before depreciation.
Find the cumulative values of the annual cash inflows.
Accept (or) reject rule:
For accepting (or) rejecting a project under this method, first consider the cut-off period.
The cut-off period is the period within which the management would like to get back the

original investment.
A project whose actual pay-back period is more than the cut-off period, the project will be

straight away rejected.


The project having the shortest pay-back period will be preferred.

Advantages of payback period are:

Payback period is very simple to calculate.


It can be a measure of risk inherent in a project. Since cash flows that occur later in a

project's life are considered more uncertain, payback period provides an indication of how
certain the project cash inflows are.
For companies facing liquidity problems, it provides a good ranking of projects that would

return money early.


Disadvantages:
It does not take into account the cash inflows earned after the pay-back period.
Does not consider time value of money.
Difficult to determine the minimum acceptable pay-back period.
Full life of the asset is not considered under the pay-back period.
3. Net Present Value Method:
Determine the cut-off rate (or) the rate that should be selected as minimum required rate of
return.
Normally for this purpose, the cost of capital is considered to be minimum required rate of
return. This rate is called discounting rate.

29

The difference between the total present value of the future cash inflows & the cost of
investment is net present value (or) excess present value.
NPV (or) EPV = total present value of the future cash inflows cost of original investment
T1r =

A1
1+r

A2
2

(1+r )

A3
3

(1+r )

+...+

An
(1+r )n

Accept (Or) Reject Rule:

If the NPV (or) EPV is positive, the project may be considered.


If the NPV is negative the project is straightway rejected.

Advantages:

It will give the correct decision advice assuming a perfect capital market. It will also give
correct ranking for mutually exclusive projects.

NPV gives an absolute value.

NPV allows for the time value fo the cash flows.

Disadvantages:

It is very difficult to identify the correct discount rate.

NPV as method of investment appraisal requires the decision criteria to be specified


before the appraisal can be undertaken.

4. Internal Rate Of Return (IRR):


IRR is the rate at which the sum of discounted cash inflow equals the sum of discounted cash
flows.

present value of cash inflows


cash outflows( o .investment )

=1

Accept (or) reject rule:


If the calculated IRR is less than the cost of capital, the project is straightway rejected.
If the IRR is greater than the cost of capital, the project may be considered.
The project having highest of IRR will be accepted.
Advantages :
1. Perfect Use of Time Value of Money Theory
2. All Cash Flows are Equally Important
3. Uniform Ranking
4. Maximum profitability of Shareholder
5. Not Need to Calculate Cost of Capital
Disadvantages :
1. To understand IRR is difficult
2. Unrealistic Assumption.

2.5 Preparation Of Balance Sheets

30

Balance sheet is a list of the accounts having debit balance or credit balance in the ledger. On
one side it shows the accounts that have a debit balance and on the other side the accounts that have
a credit balance. The purpose of a balance sheet is to show a true and fair financial position of a
business at a particular date.
ASSETS means all the things and properties under the ownership of the business i.e. building,
plant, furniture, machinery, stock, cash etc. Assets also include anything against which money or
service will be received i.e.
Types of assets:
A. Current assets:
It can be converted into cash within a short time frame (ie., 1 year or less).
E.g., cash in hand, cash in bank, notes receivable, investment, Debtors, accounts
receivable, funds in checking accounts.
B. Fixed assets:
Fixed assets have relatively existence & are not readily converted into cash.
Fixed assets are held for the purpose of earning income & they are not sold in the
cause of trading.
E.g., land, building, equipment & machinery, furniture.
C. Other assets:
Do not fall under either current assets or fixed assets
E.g., patents, copyrights, franchises, goodwill, investment in bond sinking funds.
Liabilities means our dues to others or anything against which we are to pay money or render
service, i.e. creditors, outstanding expenses, amount payable to the owner of the business (capital)
etc.
Types Of Liabilities

Fixed Liability: the liability which is to be paid of at the time of dissolution of firm is called
fixed liability. Examples are Capital, Reserve and Surplus.

Long-term liability: The liability which is not payable within the next accounting period is
called long-term liability. Examples are Debentures of a company, Mortgage Loan etc.

Current Liability: The liability which is to be paid of in the next accounting period is current
liability.. Examples: Sundry, creditors, Bills Payable and Bank overdraft etc.

Trade Liability: Liability which is incurred for goods and services supplied or expenses
incurred is called trade liability. Example; Bill payable and Sundry period.

Financial liability: Liability which is incurred for financial purposes is called financial liability.
Example: Bank overdraft, load taken for a short period.

31

Contingent liability: A contingent liability is one which is not an actual liability but which will
become an actual one on the happening of some event which is uncertain. Examples: Bills
discounted before maturity, Liability of a case pending in the court.

PRO-FORMA OF A BALANCE SHEET IS AS FOLLOWS:


BALANCE SHEET OF ABC LTD AS ON 31ST DECEMBER 2005:

Fig 2.2 Balance Sheet


Features of balance sheet:
Balance sheet has the following features:
1.
2.
3.
4.

It is the last stage of final accounts


It is prepared on the last day of an accounting year.
It is not an account under the double entry system - it is a statement only.
It has two sides - left hand side known as asset side and right hand side known as liabilities
side.
5. The total of both sides are always equal.
6. The balances of all asset accounts and liability accounts are shown in it. No expense
accounts and revenue accounts are shown here.
7. It discloses the financial position and solvency of the business.
8. It is prepared after the preparation of trading and profit and loss account because the net
profit or net loss of a concern is included in it through capital account.
2.6 Profit & Loss Account
The account through which annual net profit or loss of a business is ascertained, is called
profit and loss account.
Definition Of Profit And Loss Account
Profit and loss account is that part of final account is made for calculating the net profit or net
loss. In the debit side of this account, we show all indirect loss and expenses and in the credit side of
this account, we show all indirect incomes. After matching debit and credit side of profit and loss

32

account, we can find net profit or loss of business. If organisation is company, we transfer this balance
to profit and loss appropriation account, otherwise, we transfer this balance to capital account.
Explanation Of Profit And Loss Account
A) Debit Side of Profit and loss account
1. Gross loss transferred fromtrading account
2. All indirect expenses like sale expenses, office expenses and legal expenses. If
credit side is more than debit side, we show net profit in debit side
B) Credit Side of Profit and Loss account
1. Gross profit transferred from trading account
2. Indirect Incomes like rent, commission, discount received .If debit side is more than
credit side, we show net loss in credit side.
Items Comes Under Profit And Loss Account

Sequence of Expenses in Profit and Loss Account:


o

There is no hard and fast rule as to the order in which the items of expenses are
shown in profit and loss account. Generally, the items of expenses are shown in the
following sequence:

Office and Administration Expenses:


o

These are the expenses with the management of the business e.g. salaries of
manager, accountant and office clerks, office rent, office stationary, office electric
charges, office telephone etc.

Selling and Distribution Expenses:


o

These are the expenses which are directly or indirectly connected with the sale of
goods. These expenses vary with the sales i.e. they increase or decrease with the
increase or decrease of sale of goods. Examples are advertisements, carriage
outward, salesmen's salaries and commission, discount allowed, traveling expenses,
bad debts, packaging expenses, warehouse rent etc.

Financial and Other Expenses:


o

All other expenses excepting those mentioned above are considered under this class.

Features of Profit and Loss Account:

This account is prepared on the last day of an account year in order to determine the net
result of the business.

33

It is second stage of the final accounts.


Only indirect expenses and indirect revenues are shown in this account.
It starts with the closing balance of the trading account i.e. gross profit or gross loss.
All items of revenue concerning current year - whether received in cash or not - and all
items of expenses - whether paid in cash or not - are considered in this account. But no
item relating to past or next year is included in it.

Profit and Loss Account for the year ended .....


DEBIT

CREDIT
$

Trading A/C

$
Trading A/C

Gross loss (transferred)

-----

Gross profit (transferred)

-----

Office and Administration


Expenses:

-----

Interest received

-----

Salaries

-----

Rent received

-----

Rent, rates, taxes

-----

Discount received

-----

Postage & telegrams

-----

Dividend received

-----

Office electric charges

-----

Bad debts recovered

-----

Telephone charges

-----

Provision for discount on


creditors

-----

Printing and stationary

-----

Miscellaneous revenue

-----

Net loss - transferred to capital


A/C

-----

Selling and Distribution


Expenses:
Carriage outward

-----

Advertisement
Salesmen's salaries

---------

Commission

-----

Insurance

-----

Traveling expenses

-----

Bad debts

-----

Packing expenses

-----

Financial and Other Expenses:


Depreciation
Repair

---------

Audit fee

-----

Interest paid

-----

Commission paid

-----

Bank charges

-----

Legal charges

-----

Net profit - transferred to capital


A/C

-----

34

If credit side exceeds the debit side

= Net profit

If debit side exceeds the credit side

= Net loss

Uses Of The Profit And Loss Account:


The main use is to monitor and measure profit. This assumes that the information

recording is accurate. Significant problems can arise if the information is inaccurate,


either through incompetence or deliberate fraud.
Once the profit (loss) has been accurately calculated, this can then be used for
comparison or judging how well the business is doing compared to itself in the past,
compared to the managers plans and compared to other businesses.

2.7 Working Capital


Working capital refers to a firms investment in short term assets-cash, short term securities,
accounts receivable & inventories.
It is the minimum amount of investment in raw materials, work in process inventory, finished goods,
stores & spares, accounts receivable & cash balance which a firm is required to have in order to carry
on a desirable level of business activity.
Sources Of Working Capital:
1. Funds from business operations
2. Other incomes such as dividends, transfer fees, donations, etc.,
3. Sale of non-current assets such as useless & obsolete plant & machinery.
4. Long term borrowings
5. Issue of additional equity capital or preference share capital.
6. Net income,
7. Long-termloans,
8. Sale Of Capital Assets, And
9. Injection of funds by stockholders.
Uses Of Working Capital:
1. Loss from business operations would decrease the working capital.
2. The purchase of non-current assets generally causes a decrease in current assets, therefore
it should appear as the use of funds.
3. Retirement of long-term liabilities such as payment to preference shareholders & debenture
holders involves the use of cash.
4. Dividend to shareholders.
5. Interest to Lenders.
Gross working capital: To the firms total investment in capital assets.
Net working capital: current assets current liabilities.
Factors To Be Considered While Selecting Working Capital Management
The working capital needs of a firm are influenced by numerous factors. The important ones
are:
Nature of business: The working capital requirement of a firm is closely related to the nature
of its business. A service firm, like an electricity undertaking or a transport corporation, which has a
short operating cycle and which sells predominantly on cash basis, has a modest working capital
requirement. On the other hand, a manufacturing concern like a machine tools unit, which has a long
operating cycle and which sells largely on credit, has a very substantial working capital requirement.
Seasonality of Operations: Firms which have marketed seasonally in their operations
usually have highly fluctuating working capital requirements. To illustrate, consider a firm
manufacturing ceiling fans. The sale of ceiling fans reaches a peak during the summer months and
drops sharply during the winter period. The working capital need of such a firm is likely to increase

35

considerably in summer months and decrease significantly during the winter months. Electric bulbs,
tubes and CFL lamps have fairly even sales round the year, tends to have stable working capital
needs.
Production Policy: A firm marketed by pronounced seasonal fluctuations in its sales may
pursue a production policy which may reduce the sharp variations in working capital requirements. For
example, a manufacturer of ceiling fans may maintain a steady production throughout the year rather
than intensify the production activity during the peak business season. Such a production policy may
dampen the fluctuations in working capital requirements.
Market conditions: The degree of competition prevailing in the market-place has an
important bearing on working capital needs. When competition is intense, a larger inventory of
finished goods is required to promptly serve customers who may be inclined to wait because other
manufacturers are ready to meet their needs. Further, generous credit terms may have to be offered
to attract customers in a highly competitive market. Thus, working capital needs tend it be high
because of greater investment in finished goods inventory and accounts receivable.
If the market is strong and competition is weak, a firm can manage with smaller inventory of
finished goods, because customers can be supplied with some delay. Further, in such a situation the
firm can insist on cash payment and avoid lock-up of funds in accounts receivable it can even ask
for advance, partial or total.
Conditions of Supply: The inventory of raw materials, spares and stores depends on the
conditions of supply. If the supply is prompt and adequate, the firm can manage with small inventory.
However, if the supply is unpredictable and scant, then the firm, to ensure continuity of production
would have to acquire stocks as and when they are available and carry larger inventory on an
average. A similar policy may have to be followed when the raw material is available only seasonally
and production operations are carried out round the year.
Need to hold inventories: Some businesses need to hold substantial inventories to meet
customer needs e.g. retailers and distributors
Production lead time: A product that is made and sold within a short time (e.g. fresh food)
requires much less inventory than one where the production process takes a long time (e.g.
production of mature cheese!)
Lean production: Businesses that successfully implement lean production techniques find
that they need to hold significantly less inventory
Expected credit period by customers: In some industries it is expected that a long credit
period can be taken before trade debtors need to settle their invoices which means that higher
working capital is required
Effectiveness of the credit control function: A poorly managed credit control department
will allow customers to take too much credit and take too long to settle their bills which will mean
higher trade debtors and higher working capital
Credit period offered by suppliers: The longer the credit offered by suppliers, the better for
cash flow and working capital.
Types Or Classification Of Working Capital

36

1. Gross working capital: Total or gross working capital is that working capital which is used for all
the current assets. Total value of current assets will equal to gross working capital. In simple words, it
is total cash and cash equivalent on hand. But remember, we do not account of current liabilities in
gross working capital.
2. Net Working Capital: Net working capital is the excess of current assets over current liabilities.
Net Working Capital = Total Current Assets Total Current Liabilities
This amount shows that if we deduct total current liabilities from total current assets, then balance
amount can be used for repayment of long term debts at any time. It also measure of both
a company's efficiency and its short-term financial health.
3. Permanent Working Capital
There is always a minimum amount of working capital which is continuously required by the
enterprise to carry out its normal business operations. This is usually called as permanent or fixed
working capital. Thus, fixed working capital is the minimum amount of working capital required to
ensure effective use of fixed assets and support the normal business operation. It is that part of
capital which is permanently blocked in current assets.
Permanent working capital is divided into two-initial working capital and regular working capital.
(a) Initial or reserve working capital:
The working capital which is needed in the initial stage of project is called initial
working capital. It is the capital with which the project is started.
(b) Regular Working Capital:
It is the amount needed for continuous operation of the project. It is the amount of
working capital required after the project has been established as a going concern. It is the
minimum amount of the liquid capital to keep up the circulating capital from cash to
inventories, to receivables and back again to cash.
4.Variable or temporary Working Capital
It is the working capital which varies with volume of business. This is the additional capital needed to
meet seasonal and special needs. Variable working capital is divided into seasonal working capital
and special working capital.
(a)

Seasonal Working Capital:

It is the working capital which is needed during the particular season. It is the
additional working capital required during busy seasons.
(b)

Special Working Capital:

It is the extra working capital to be maintained to meet unforeseen contingencies or to


finance special operations. It may be required to carry on a special sales campaign financing
slow moving stock or financing a period of strike, lock out, etc.

37

2.8 Accounting
Accounting is the process of identifying, measuring, recording and communicating the
economic events (business transactions) of an organization.
Objectives Of Accounting
The following are the various objectives of accounting.
1. Maintenance of records of business.
2. Finding out the results of business activities during a period by preparing profit and loss
account.
3. Knowing the financial position of the business as on a particular date by preparing the
balance sheet.
4. Maintaining control over the assets.
5. Supplying information to the government agencies and tax authorities.
6. Deciding future plans in respect of cash by preparing cash budgets.
2.8.1 Types Of Accounting
Accounting has the following branches:
1. Financial Accounting: This is the branch of accounting which is related to preparation of
profit and loss account and balance sheet.
2. Cost Accounting: This is the branch of accounting which is related to finding out the cost
of a product or job or service.
3. Management Accounting: This is the branch of accounting which is related to supply
information to the management for the purpose of planning, control and decision making.
A.Financial Accounting
Financial accounting gathers and summarizes financial data to preparefinancial reports such
as balance sheet and income statement for the organization'smanagement, investors, lenders,
suppliers, taxauthorities, and other stakeholders.
The art of recording, classifying & summarizing in a significant manner and in terms of money,
transactions & events which are in part at least of a financial character & interpreting the results there
of.
Objectives / significance/ importances:

To know the results of the business


To ascertain the financial position of the business
To ensure control over the assets
To facilitate proper management to cash
To provide requisite information

Functions of financial accounting:


(a) Book-Keeping Function : Financial accounting is the scientific process of recording
financial data of the business. Human memory is short; therefore it is not possible to remember the
numerous transactions of the business. Accounting is supportive and supplementary to human
memory. Business transactions are recorded in journal, subsidiary books and ledger.
(b) Classification Of Information : The data of one particular type is classified into one
segment. This is done in the form of ledger accounts. The transactions of different activities are
collected in one place. Full information about specific items is shown under separate heads in the
ledger.
(c) Preparation Of Financial Statements : Business transactions are summarised by
preparing the principal statements of the business i.e., profit and loss account and the balance sheet.
These statements are the indicators of operational efficiency and financial position of an enterprise.
(d) Segregating Financial Transactions : The economic transactions relating to a business
are measured in terms of money. Financial accounting is concerned with transactions which are

38

measureable in monetary terms. Any information of the business which cannot be expressed in terms
of money is not considered. It is a basic concept of accounting called money measurement concept.
(e)Interpretation Of Financial Data: The management interprets the financial data for
decision making. The various parties concerned with the enterprise such as shareholders, creditors,
bankers and other agencies are facilitated because of the interpretation of financial data provided in
various contexts and they may draw their own conclusions.
(f) Reporting Of Information: Financial accounting not only records data but also
communicates data by way of profit and loss account and the balance sheet to all concerned at
frequent intervals.
(g) Providing Accurate And Reliable Information: Yet another important function of
accounting is to provide accurate, reliable and useful information. This function is performed by
following established accounting standards. Moreover the accounting policies are consistently
practised to maintain uniformity and accuracy.
B. Cost accounting
Cost accounting is a branch of accounting that determines the actual cost of operations that
the company indulges in. For instance all the processes as well as products and departments and the
analysis of the profitability and the social application of the funds of the company are determined by
the cost accountant.
Objectives of cost accounting :

To aid in the development of long range plans by providing cost data that acts as a

basis for projecting data for planning.


To ensure efficient cost control by communicating essential data costs at regular

intervals and thus minimize the cost of manufacturing.


Determine cost of products or activities, which is useful in the determination of selling

price or quotation.
To identify profitability of each product, process, department etc of the business
To provide management with information in connection with various operational

problems by comparing the actual cost with standard cost, which reveals the
discrepancies or variances.
Function of cost accounting:
(1) Ascertaining Cost: This is a basic function of coat accounting. The cost of products,
processes, jobs and services is ascertained under each element of cost and for all the major activities
of a firm.
(2) Fixation Of Selling Price: Determining the selling price of products and services is of
paramount importance. Cost accounting provides all the necessary coat and other related data and
helps in fixing selling prices.
(3) Cost Control: Controlling costs is the most important function of cost accounting.
Predetermined costs are developed through standards and budgets to achieve this objective.
Managerial action based upon variances in performance from the standards or budgets results in cost
control.
(4)Cost Reduction:Cost control aims at maintaining at a predetermined level. Cost reduction
aims at reducing cost by means of reducing wastage, effective utilisation of labour time, reducing idle
time, value analysis and fixation of standards.
(5) Evaluation Of Performance: Cost accounting constantly evaluates performance as a part
of cost control efforts. Actual performance is compared with predetermined performance. Any
deviations are noted and analysed for causes. In this process individual performance is automatically
assessed.
C. Management Accounting:

39

(1) Providing Financial Information: The main emphasis of management accounting is to


provide financial information to management. The information is provided in a manner suitable to
various levels of management for reviewing policies and decision making.
(2) Cause And Effect Analysis: Financial accounting confines itself to presentation of p&l
account and balance sheet. Management accounting analyses the cause and effect of the facts and
figures thereon. If there is loss causes for the losses are investigated. If there is profit the variable
affecting the profit are also analysed. The amount of profit is compared with expenditure, sales,
capital employed, etc., to draw appropriate conclusions relating to the effect of those items on profit.
(3) Use Of Special Techniques And Concepts: Management accounting employs special
techniques like standard costing,budgetary control, marginal costing, fund flow, cash flow, ratio
analysis, responsibility accounting. Etc. To make accounting data more useful and helpful to the
management. Each of these techniques or concepts is a useful tool for specific purpose in analysis
and interpretation of data, establishing control over operations, etc.
(4) Decision Making: Main objective of management accounting is to provide relevant
information to management to take various important decisions. Historical information provides a base
on which the future impact is predicted, alternatives are developed and decisions are made to select
to select the most beneficial course of action
(5) No Fixed Conventions :Financial accounting has various established principles and rules
in preparing the financial accounts. Management accounting has no such fixed rules. The tools or
techniques applied by the management accounting are same but application of these techniques
various from concern to concern and situation to situation. Interpretation of analysed data depends on
the person using it the conclusions derived from application of a technique depend on the intelligence
and experience of the management account. The presentation of information depends on the
requirements of the concern. Every concern has its its own was of application of the techniques to
suit its needs.
(6) Achievement Of Objectives: Management accounting is helpful in realising the
enterprise objectives. Based on the historical information and with adjustments for predicate future
changes, objectives are laid down. Actual performance is recorded. Comparison of actual with
predetermined results is made. If there are deviations of actuals from the predetermined results,
corrective action is taken predicted objectives are achieved. This becomes possible with the help of
management accounting techniques of standard costing and budgetary control.
(7) Improving Efficiency:The purpose of accounting is to provide information to increase
efficiency. The efficiency of departments, and divisions can be improved by fixation of targets or goals
for a specific period. The actual performance is compared with that of targets. Positive deviations are
reviewed the negative deviations are probed to ascertain the causes. The ways and means tackle the
causes are analysed and targets are achieved. The process of fixing and achieving the targets leads
to gradual improvement in overall efficiency.
(8) Forecasting: Management accounting is concerned with taking decisions for future
implementation. This involves prediction and forecasting of future. It is helpful in planning and laying
down of objectives.
(9) Providing Of Information And Not Decisions: Management accounting provides
financial information and not the decisions. That is why it is said that management accounting
depends on the efficiency of the management in using information and taking effective decisions.
Advantages Of Management Accounting:
1. It increases efficiency of business operations
2. It ensures efficient regulation of business activities
3. It ensures utilization of available resources and thereby increase the return on capital
employed.

40

4. It ensures effective control of performance


5. It helps in evaluating the efficiency of the companys business policies
2.9 Costs
Introduction:There are several types of costs that a firm may consider relevant under various
circumstances. Such costs include future costs, accounting costs, opportunity costs, implicit costs,
fixed costs, variable costs, semi variable costs, private costs, social costs, common costs, etc.
For the purposes of decision-making, it is essential to know the fundamental difference
between the main cost concepts along with the conditions of their use in decision-making.
2.9.1 Total Cost
Fixed cost (FC): the cost of all fixed inputs in a production process. Another way of saying this:
production costs that do not change with the quantity of output produced.
Variable cost (VC): the cost of all variable inputs in a production process.
Variable cost, on the other hand, does depend on the quantity the firm produces. Variable
cost rises when quantity rises, and it falls when quantity falls.
Total cost (TC): the total cost of producing a given amount of output.
TC = FC + VC
Note: the total cost curve has the same shape as the variable cost curve because total costs
rise as output increases.
2.9.2 Average Cost Or Average Total Cost:
Average cost (AC), also known as average total cost (ATC), is the average cost per unit
of output. To find it, divide the total cost (TC) by the quantity the firm is producing (Q).
Average cost (AC) or average total cost (ATC): the per-unit cost of output.
ATC = TC/QSince we already know that TC has two components, fixed cost and variable cost,
thatmeans ATC has two components as well: average fixed cost (AFC) and average variable
cost (AVC). The AFC is the fixed cost per unit of output, and AVC is the variable cost
per unit of output.
ATC = AFC + AVCAFC = FC/QAVC = VC/Q
2.9.3 Marginal Cost:
Often, we are interested in knowing what happens to a firms costs if output is increasedby
just a small amount. This is not the same as the average cost, because the next unit ofoutput the firm
produces might be more or less costly to produce than previous units.
Marginal cost (MC): the additional cost that results from increasing output by one unit.
Another way of saying this: the additional cost per additional unit of output.We use the symbol
D (the Greek letter delta) to designate the change in a variable. Forinstance, if total cost (TC) rose
from 75 to 100, we would say DTC = 100 - 75 = 25.Using this symbol, we can write the mathematical
formula for marginal cost:
MC = DTC/Q
Notice that we divide by the change in quantity (DQ). Often, we set DQ = 1, becausemarginal
cost is defined as the additional cost from one more unit of output. Butsometimes we dont know how
much the added cost from just one more unit is, so wecalculate marginal cost for a larger change in
quantity.
Total cost is variable cost and fixed cost combined.
TC=VC+FC
Now divide total cost by quantity of output to get average total cost.

41

ATC=TC/Q
Marginal cost is a concept that's a bit harder for people grasp. The "margin" is the end or the
last. The marginal unit is the last unit. Think of marginal cost as the cost of the last unit, or what it
costs to produce one more unit. It's hard to find exactly what the cost of the last unit is, but it's not
hard to find the average cost of a group of a few more units. To find this, simply take the change in
costs from a previous level divided by the change in quantity from the previous level.
MC = Change in TC / Change in Q
2.10 Break Even Analysis
In simple words, the break-even point can be defined as a point where total costs
(expenses) and total sales (revenue) are equal. Break-even point can be described as a point where
there is no net profit or loss. The firm just breaks even.
Any company which wants to make abnormal profit, desires to have a break-even point.
Graphically, it is the point where the total cost and the total revenue curves meet.
The break-even point is the point at which the income from sales will cover all costs with no
profits. The business owner or manager usually considers several factors when studying break-even
analysis:
1. The capital structure of the company.
2. Fixed expenses such as rent, insurance, heat, and light.
3. Setup of the organization.
4. Variable expenses.
5. The inventory, personnel, and space required to operate properly.
6. Profit:
Sales>variable expense+ fixed expense
Break-even point:
Sales= variable expense+ fixed expense
Loss:
Sales<variable expense+ fixed expense
CALCULATION (FORMULA) FOR BEP

Break-even point is the number of units (N) produced which make zero profit.

42

Revenue Total costs = 0

Total costs = Variable costs * N + Fixed costs

Revenue = Price per unit * N

Fig 2.3Break Even Analysis

Price per unit * N (Variable costs * N + Fixed costs) = 0

So, break-even point (N) is equal

N = Fixed costs / (Price per unit - Variable costs)

Advantages Of Break-Even Analysis


1) It is simple to conduct and understand.
2) It shows profit and loss at different levels of output.
3) It can cope with changing circumstances. e.g. the following changes in the business
environment can be shown in a break even chart.
Table 2.1 Break Even Analysis
Factor

Cause

Effect

Employing extra sales staff

Fixed costs rise, so total costs rise and beak-even point


rises.

Internal

Price increase
Automation replaces direct
labour
Recession cuts demand

Revenue rises more steeply, break-even point falls.


Fixed costs rise while direct costs fall, effect on breakeven point unclear.
Break-even point unaffected, though safety margin is
reduced.

Externa
l

Price war forces price cut


Inflation pushes up direct
costs.

Revenue line rises less steeply, break-even point rises.


Direct and total cost line rise more steeply, break-even
point rises.

43

Chapter 3 :Production And Materials Management


3.1 Introduction

Production management means planning, organizing, directing and controlling of production

activities.
Production management deals with converting raw materials into finished goods or products.

It brings together the 6M's i.e. men, money, machines, materials, methods and markets to
satisfy the wants of the people.
Production management also deals with decision-making regarding the quality, quantity, cost,

etc., of production. It applies management principles to production.


Production management is a part of business management. It is also called "Production

Function." Production management is slowly being replaced by operations management.


The main objective of production management is to produce goods and services of the right

quality, right quantity, at the right time and at minimum cost. It also tries to improve the
efficiency. An efficient organization can face competition effectively. Production management
ensures full or optimum utilization of available production capacity.
3.2 Types Of Production
Production systems can be classified as

Job Shop,
Batch,
Mass and
Continuous Production Systems

3.2.1 Job Shop Production


Job shop production are characterized by manufacturing of one or few quantity of products
designed and produced as per the specification of customers within prefixed time and cost. The
distinguishing feature of this is low volume and high variety of products.

44

A job shop comprises of general purpose machines arranged into different departments.
Each job demands unique technological requirements, demands processing on machines in a certain
sequence.
Characteristics
The Job-shop production system is followed when there is:
1. High variety of products and low volume.
2. Use of general purpose machines and facilities.
3. Highly skilled operators who can take up each job as a challenge because of uniqueness.
4. Large inventory of materials, tools, parts.
5. Detailed planning is essential for sequencing the requirements of each product, capacitiesfor each
work centre and order priorities.
Advantages
Following are the advantages of job shop production:
1. Because of general purpose machines and facilities variety of products can be produced.
2. Operators will become more skilled and competent, as each job gives them learning
opportunities.
3. Full potential of operators can be utilised.
4. Opportunity exists for creative methods and innovative ideas.
Limitations
Following are the limitations of job shop production:
1. Higher cost due to frequent set up changes.
2. Higher level of inventory at all levels and hence higher inventory cost.
3. Production planning is complicated.
3.2.2 Batch Production
Batch production is defined by American Production and Inventory Control Society (APICS)
asa form of manufacturing in which the job passes through the functional departments in lotsor
batches and each lot may have a different routing. It is characterised by the manufactureof limited
number of products produced at regular intervals and stocked awaiting sales.
Characteristics
Batch production system is used under the following circumstances:
1. When there is shorter production runs.
2. When plant and machinery are flexible.
3. When plant and machinery set up is used for the production of item in a batch and
change of set up is required for processing the next batch.
4. When manufacturing lead time and cost are lower as compared to job order production.
Advantages
Following are the advantages of batch production:
1. Better utilisation of plant and machinery.
2. Promotes functional specialisation.
3. Cost per unit is lower as compared to job order production.
4. Lower investment in plant and machinery.
5. Flexibility to accommodate and process number of products.
6. Job satisfaction exists for operators.
Limitations
Following are the limitations of batch production:
1. Material handling is complex because of irregular and longer flows.
2. Production planning and control is complex.
Work in process inventory is higher compared to continuous production.

45

4. Higher set up costs due to frequent changes in set up.


3.2.3 Mass Production
Manufacture of discrete parts or assemblies using a continuous process are called mass
production.This production system is justified by very large volume of production. The machines are
arranged in a line or product layout. Product and process standardisation exists and all outputs follow
the same path.
Characteristics
Mass production is used under the following circumstances:
1. Standardisation of product and process sequence.
2. Dedicated special purpose machines having higher production capacities and output rates.
3. Large volume of products.
4. Shorter cycle time of production.
5. Lower in process inventory.
6. Perfectly balanced production lines.
7. Flow of materials, components and parts is continuous and without any back tracking.
8. Production planning and control is easy.
9. Material handling can be completely automatic.
Advantages
Following are the advantages of mass production:
1. Higher rate of production with reduced cycle time.
2. Higher capacity utilisation due to line balancing.
3. Less skilled operators are required.
4. Low process inventory.
5. Manufacturing cost per unit is low.
Limitations
Following are the limitations of mass production:
1. Breakdown of one machine will stop an entire production line.
2. Line layout needs major change with the changes in the product design.
3. High investment in production facilities.
4. The cycle time is determined by the slowest operation.
3.2.4 Continuous Production
Production facilities are arranged as per the sequence of production operations from the first
operations to the finished product. The items are made to flow through the sequence of operations
through material handling devices such as conveyors, transfer devices, etc.
Characteristics
Continuous production is used under the following circumstances:
1. Dedicated plant and equipment with zero flexibility.
2. 2. Material handling is fully automated.
3. 3. Process follows a predetermined sequence of operations.
4. 4. Component materials cannot be readily identified with final product.
5. 5. Planning and scheduling is a routine action.
6. Advantages
Following are the advantages of continuous production:
1. Standardisation of product and process sequence.
2. Higher rate of production with reduced cycle time.
3. Higher capacity utilisation due to line balancing.
4. Manpower is not required for material handling as it is completely automatic.
5. Person with limited skills can be used on the production line.
6. Unit cost is lower due to high volume of production.
Limitations

46

Following are the limitations of continuous production:


1. Flexibility to accommodate and process number of products does not exist.
2. Very high investment for setting flow lines.
3. Product differentiation is limited.
3.3 Process Planning
A process is defined as a group of actions instrumental to the achievement of the output of an
operation system in accordance with a specified measure of effectiveness.
Process planning is the systematic determination of the methods by which a product is to be
manufactured, economically and competitively.
Process planning has been defined as the subsystem responsible for the conversion of
design data to work instruction.
It is also defined as the function within a manufacturing facility which establishes the the
processes and process parameters to be used in order to convert a piece-part from its initial form that
is predetermined on detailed drawing.
3.3.1 Process Planning Procedure
1. Preparation Of Work Drawings

It is a document complete in itself to manufacture a component or product. It contains

dimensions, tolerances, kind of treatment etc.,


The tooling department uses them to plan the tooling that is required for manufacturing
The drawings should be in standard form
All the particulars about the should be included in the drawing
Notes on drawing should be shown on in a standard panel on the drawing pro-forma

2. Make Or Buy Decisions


The reasons for make or buy decisions are

Idle facilities
Product quality
Patents
Skills and materials
Number of outside suppliers
Reliability of outside sources
Seasonal demands
Long term considerations

3. Process Selection

Major technological change existence of technology, availability of more technologies,

licensing of technology, innovation o technology etc.,


Minor technological change deciding the combination of processes in terms of cost and

the total operation process can be difficult


Specific component choice type of equipment, degree of replacing the human labour,

using of CAM and industrial robots


Process flow choice analysis of product flow lead to re-sequencing, combining or

eliminating operation in order to reduce material handling and storage costs


4. Machine Capacity

Machine capacity may be defined as the time- available for work at a machine expressed

in machine hours.
It has to be calculated for per day or week or month

5.Process And Equipment Selection Procedure

Prepare a general statement on the manufacturing operations to be performed


Establish a provisional process to provide each individual feature identified by the product

designer
Develop a list of alternative process

47

Compare the alternatives with each other


Select the best alternative
Communicate the same to all the departments ( production, industrial, plant and

maintanence, industrial relations, finance department )to Perform detailed processing


6. Selection Of Material, Jigs Etc

The material should be of right quality and chemical composition as per product

specification
The shape and size of the material should restrict the scrap
The jigs, fixtures and other special attachments should give higher production rate and

should reduce cost of production per piece


The selection of cutting tools and inspection gauges should reduce production time and

inspection
7. Process Analysis

It means the study of overall process in a factory.


It analyses each step of manufacturing process and aims at improving the industrial

operations.
It aids in finding better methods of doing a job by eliminating unproductive and

unnecessary elements of the process or through modified layout of facilities.


The process is analyzed with the help of process charts of flow diagrams.

8. Process Chart
A chart may be a diagram or a graph which gives an overall view of the situation say
a process. It records graphically or diagrammatically , in sequence , the operation connected
with a process. It helps visualizing various possibilities of alteration or improvement.
9. Operation Planning And Tooling Requirements
It is concerned with planning the details of the method to be used to complete each
operation as its chosen work centre and with designing the necessary tooling.
The operations are divided into work elements. It is recorded in the operation sheet. It is
prepared for each part, assembly and sub-assembly.
10. Manual / Automated Process Planning
The process planner tries to select the best set of processes and machines either manually or
by using computers.
3.4 Process Scheduling
Kimball and Kimballdefine scheduling as the determination of the time that should be
required to perform each operation and also the time necessary to perform the entire series as routed,
making allowances for all factors concerned.
Objectives Of Scheduling
Ensure maximum utilization of plant at minimum cost
Ensure the requirements of manpower is optimum and is evenly distributes, there being

no peaks and valleys.


Keep yourself abreast of hiring, dismissals, retrenchments, holidays, leave etc., of the

work force.
Possess up-to-date information regarding availability of materials, expected date of

delivery, materials rejection, shortages, purchase orders cancelled etc.,


Update with data on each machine regarding its availability of spares, frequency of

breakdowns, servicing and overhauling schedules, replacement schedules etc.,


Have complete information on performance standards and their revisions, method

revisions, changes in materials and machines etc.


Obtain quick feedback from machine regarding delays and interruptions which may held
up production activity.

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3.4.1 Types Of Scheduling


Types of scheduling can be categorized as forward scheduling and backward scheduling.
1. Forward scheduling: is commonly used in job shops where customers place their orders on
needed as soon as possible basis.

Forward scheduling determines start and finish times of next priority job by assigning it

the earliest available time slot and from that time, determines when the job will be finished
in that work centre.
Since the job and its components start as early as possible, they will typically be

completed before they are due at the subsequent work centers in the routing.
The forward method generates in the process inventory that are needed at subsequent

work centers and higher inventory cost.


Forward scheduling is simple to use and it gets jobs done in shorter lead times, compared

to backward scheduling.
2. Backward scheduling : is often used in assembly type industries and commit in advance to
specific delivery dates. Backward scheduling determines the start and finish times for waiting jobs
by assigning them to the latest available time slot that will enable each job to be completed just
when it is due, but done before. By assigning jobs as late as possible, backward scheduling
minimizes inventories since a job is not completed until it must go directly to the next work centre
on its routing. Forward and backward scheduling methods are shown in the following figure.

Fig 3.1 Forward and backward scheduling


3.4.2 Scheduling Methodology
1. Charts and boards,
2. Priority decision rules, and
3. Mathematical programming methods.
1. Gantt Charts and Boards: Gantt charts and associated scheduling boards have been
extensively used scheduling devices in the past, although many of the charts are now drawn by

49

computer. Gantt charts are extremely easy to understand and can quickly reveal the current or
planned situation to all concerned. They are used in several forms, namely,
a. Scheduling or progress charts, which depicts the sequential schedule;
b. Load charts, which show the work assigned to a group of workers or machines; and
c. Record a chart, which are used to record the actual operating times and delays of workers and
machines.
GANTT CHART
WEEK - 1
WEEK - 2
WEEK- 3
WEEK - 4
SECTION - A
SECTION B
SECTION C
Fig 3.2
Advantages

It is simple and easy to understand


It can be kept running
It involves less cost
It can be maintained by non-technical staff
A certain percentage of total weekly capacity can be allotted for rush orders

Disadvantages

It provides only overall picture


It does not give detailed information

2. Priority Decision Rules: Priority decision rules are simplified guidelines for determining the
sequence in which jobs will be done. In some firms these rules take the place of priority planning
systems such as MRP systems. Following are some of the priority rules followed.
Symbol

Priority rule

FCFS

First come, first served

EDO

Earliest due date

LS

Least slack(time due less processing time)

SPT

Shortest processing time

LPT

Longest processing time

PCO

Preferred customer order

RS

Random selection

2. Mathematical Programming Methods: Scheduling is a complex resource allocation problem.


Firms process capacity, labor skills, materials and they seek to allocate their use so as to

50

maximize a profit or service objective, or perhaps meet a demand while minimizing costs.
The following are some of the models used in scheduling and production control.
a. Linear programming model:Here all the constraints and objective functions are formulated as a
linear equation and then problem is solved for optimality. Simplex method, transportation methods
and assignment method are major methods used here.
b. PERT/CPM network model: PERT/CPM network is the network showing the sequence of
operations for a project and the precedence relation between the activities to be completed.
3.5 Routing
Routing may be defined as the selection of path which each part of the product will follow
while being transformed from raw materials to finished products. Path of the product will also give
sequence of operation to be adopted while being manufactured. In other way, routing means
determination of most advantageous path to be followed from department to department and machine
to machine till raw material gets its final shape, which involves the following steps:

Type of work to be done on product or its parts.

Operation required to do the work.

Sequence of operation required.

Where the work will be done.

A proper classification about the personnel required and the machine for doing the work.

For effective production control of a well-managed industry with standard conditions, the routing plays
an important role, i.e., to have the best results obtained from available plant capacity. Thus routing
provides the basis for scheduling, dispatching and follow-up.
Techniques of routing:
1. Route card: This card always accompanies with the job throughout all operations. This
indicates the material used during manufacturing and their progress from one operation to
another. In addition to this the details of scrap and good work produced are also recorded
2. Work sheet: It contains
a. Specifications to be followed while manufacturing.
b. Instructions regarding routing of every part with identification number of machines
and This sheet is made for manufacturing as well as for maintenance
3. Route sheet: It deals with specific production order. Generally made from operation sheets.
One sheet is required for each part or component of the order. This includes the following:
a. Number and other identification of order.
b. Symbol and identification of part.
c. Number of pieces to be made.
d. Number of pieces in each lot if put through in lots.
e. Operation data which includes:
i.
List of operation on the part.
ii.
Department in which operations are to be performed.
iii.
Machine to be used for each operation.
iv.
Fixed sequence of operation, if any.
4. Move order: Though this is document needed for production control, it is never used for
routing system. Move order is prepared for each operation as per operation sheet. On this the

51

quantity passed forward, scrapped and to be rectified are recorded. It is returned to planning
office when the operation is completed.
Factors affecting routing procedure:
1.Types of manufacture: Layout of the plant depends on the type of production. In case of product
layout, routing is built into production line and the flow of materials is virtually automatic.
2.Characteristics of individual machine: Machines do differ in age, condition, degree of precision,
capacity of range, speed, tooling and such other traits such a list should also include the
conveyors, cranes, containers and other equipment which may be available in one section of the
plant but not in another.
3.Availability of alternative routing::Machines may breakdown (or) an operator may be absent, in
such situation routing selection must readily have an alternative routing to substitute the standard
route.
4.Human factors: Personnel vary in various characteristics. For eg., there is a different between
operators regarding experience and capability relating to visual exactness, manual dexterity,
physical limitations, intelligence and emotional stability.
3.6 Functions And Objects Of Materials Management
Materials Management
Materials management is defined as the function responsible for the coordination of planning,
sourcing, purchasing, moving, storing and controlling materials in an optimum manner so as to
provide a pre-decided service to the customer at a minimum cost.
Material management is the management of the flow of materials into an organisation to the
point, where, those materials are converted into the firms end products.
The fundamental objectives of the Materials Management function ,often called the famous 5
Rs of Materials Management

Of the right quality


In the right quantity
At the right time
From the right source
At the right price

Functions Or Scope Of Materials Management


1. Materials planning and control: Based on the sales forecast and production plans, the
materials planning and control is done. This involves estimating the individual requirements of
parts, preparing materials budget, forecasting the levels of inventories, scheduling the orders
and monitoring the performance in relation to production and sales.
2. Purchasing: This includes selection of sources of supply finalization in terms of purchase,
placement of purchase orders, follow-up, maintenance of smooth relations with suppliers,
approval of payments to suppliers, evaluating and rating suppliers.
3. Stores management or management: This involves physical control of materials,
preservation of stores, minimization of obsolescence and damage through timely disposal and
efficient handling, maintenance of stores records, proper location and stocking. A store is also
responsible for the physical verification of stocks and reconciling them with book figures. A
store plays a vital role in the operations of a company.
4. Inventory control or management: Inventory generally refers to the materials in stock. It
is also called the idle resource of an enterprise. Inventories represent those items, which are
either stocked for sale or they are in the process of manufacturing or they are in the form of

52

materials, which are yet to be utilized. The interval between receiving the purchased parts
and transforming them into final products varies from industries to industries depending upon
the cycle time of manufacture. It is, therefore, necessary to hold inventories of various kinds
to act as a buffer between supply and demand for efficient operation of the system. Thus, an
effective control on inventory is a must for smooth and efficient running of the production cycle
with least interruptions.
3.7 Stores Management
Stores play a vital role in the operations of company. It is in direct touch with the user
departments in its day-to-day activities. The most important purpose served by the stores is to provide
uninterrupted service to the manufacturing divisions. Further, stores are often equated directly with
money, as money is locked up in the stores.
Store keeping may be defined as a function of receiving, storing and issue of materials,
bought out parts and components, spare parts, tools, consumables, supplies, stationary items etc.
Objectives Of Storekeeping

It offers protection against fire, damage, deterioration, theft, losses.


To facilitate a balanced and smooth flow of raw materials, components, tools and any other

items necessary to meet production


To maintain optimum stock of materials to compensate for irregular supplies by suppliers.
To achieve efficient utilization of storage space.
To reduce usage of materials handling equipments.
To enable flexibility in production schedules.
To facilitate quantity purchases at discount prices.
It must allow for easy, quick and sure receipt, storage and disbursement of material when

properly authorized.
It is an organized store and as such it must provide means for identifying and quickly locating

articles and any contents. For this purpose it has the device of indexing, identification marks
and labels.
Minimum investment in inventories can be assured

3.7.1 Functions Of Stores


The functions of stores can be classified as follows:

To receive raw materials, components, tools, equipments and other items and account for

them.
To provide adequate and proper storage and preservation to the various items.
To meet the demands of the consuming departments by proper issues and account for the

consumption.
To minimise obsolescence, surplus and scrap through proper codification, preservation and

handling.
To highlight stock accumulation, discrepancies and abnormal consumption and effect control

measures.
To ensure good housekeeping so that material handling, material preservation, stocking,

receipt and issue can be done adequately.


To assist in verification and provide supporting information for effective purchase action.
Efficient and orderly record-keeping of all materials into storage
Storage of material in safe and convenient locations
Issue of purchase requisition as per instruction of production controllers to the purchasing

agent.
Issuing (disbursement) of materials to the operators and/or foremen against written authority.
Conduct of physical inventory control
Timely intimation to proper authorities regarding out-of-stock conditions of items

53

Custodian of goods against losses, damages, unauthorized use, pilfering. Standard items
often invite theft and are stolen for resale. Such thefts should be prevented.

3.7.2 Codification:
It is one of the functions of stores management. Codification is a process of representing each item by
a number, the digit of which indicates the group, the sub-group, the type and the dimension of the
item.

Many organizations in the public and private sectors, railways have their own system of

codification, varying from eight to thirteen digits.


The first two digits represents the major groups, such as raw materials, spare parts, sub-

contracted items, hardware items, packing material, tools, oil, stationery etc.
The next two digits indicate the sub-groups, such as, ferrous, non-ferrous etc.
Dimensional characteristics of length, width, head diameter etc. constitute further three digits

and the last digit is reserved for minor variations.


Whatever may be the basis, each code should uniquely represent one item.
It should be simple and capable of being understood by all.
Codification should be compact, concise, consistent and flexible enough to accommodate

new items.
The groupings should be logical, holding similar parts near to one another. Each digit must be

significant enough to represent some characteristic of the item.


Objectives Of Codification
The objectives of a rationalized material coding system are:

Bringing all items together.


To enable putting up of any future item in its proper place.
To classify an item according to its characteristics.
To give an unique code number to each item to avoid duplication and ambiguity.
To reveal excessive variety and promote standardization and variety reduction.
To establish a common language for the identification of an item.
To fix essential parameters for specifying an item.
To specify item as per national and international standards.
To enable data processing and analysis.

Advantages Of Codification

As a result of rationalized codification, many firms have reduced the number of items.
It enables systematic grouping of similar items and avoids confusion caused by long

description of items since standardization of names is achieved through codification, it serves


as the starting point of simplification and standardization.
It helps in avoiding duplication of items and results in the minimisation of the number of items,

leading to accurate record.


Codification enables easy recognition of an item in stores, thereby reducing clerical efforts to

the minimum.
If items are coded according to the sources, it is possible to bulk the items while ordering.
To maximise the aforesaid advantages, it is necessary to develop the codes as concerned,

namely, personnel from design, production, engineering, inspection, maintenance and


materials.
Working of the stores:
The store may have functional sections to look after principal functions and follow set policy and
procedure.
1. Receiving Section: The store in a plant has four kinds of inventories to be received:

Raw materials
Stores and supplies (materials consumed in operations)

54

Tools and components (to keep the machines and plant running)
Materials-in-process of manufacturing (semi-manufactured goods)

Procedure for receiving materials or inventories has the following steps:

Receiving incoming materials,


Checking and inspection of these materials
Recording the incoming goods in Goods Received Book
Preparing and sending goods inward not to the purchasing section
Intimating purchasing section regarding damages, losses, defective goods, surplus or deficit

supplies etc. along with rejection forms or notes.


Returning defective or damaged goods to the supplier as per direction of purchase

department.
Depositing the materials to the appropriate store locations for storage When finished products

are received for the storage, the warehouse keeper will issue an acknowledgement and
intimation to the sales organisatoin that such and such goods are ready for sale.
2. Storage Section: The stockrooms are in charge of storage, safety, care and disbursement of
materials. There are separate stockrooms for each class of inventories. Also multiple stockrooms
located at different places in the plant in addition to general or main store.
The storekeeper has to receive the materials for actual storage, classify the materials, provide easy
identifications to facilitate quick location, keep all goods at appropriate places, maintain up-to-date
inventory records and accounts and issue materials as per written instructions. Each article must have
label and identifying mark-stamping, embossing, colour coding writing or painting. Location of any
article can be easily found out by such devices.
3. Accounting Section: Proper and up-to-date records and accounting can facilitate inventory control
as well as financial checks. This section is called upon to keep on a daily basis compare records of
receipts and issue of materials. It is also in charge of continuous stock taking and inventory
valuation. The chief activity of this section is inventory control.
4. Issue Section
The storekeeper is a commodity banker. He must take necessary precautions and actions in both
cases, viz. incoming goods flow and outgoing goods flow. Items are issued or supplied for direct use
or merely on loan. Goods are issued against material requisition slip (written authority). All particulars
of issue must be duly posted on the Bin Cards and on Stock Control Cards.
3.7.3 Stores Accounting
The accounts in a stores ledger are really detailed analyses of general Purchase and Issue.
The theoretical aspect is that the records which form the basis of the entry in the stores ledger
incidentally enable cost accounts to be prepared.
The scheme requires that goods received from suppliers delivery notes be entered in stores day book
(stores received or goods inward book) and that issues of materials may only be made in exchange
for authenticated Requisitions/Issue Notes, and that these again be either entered into a stores day
book (stores issued or goods outward book) or after interposition of the issue notes written out by the
storekeeper on supplying the materials requested.
The stores received and stores issued books form from carbon duplicates of these books obtained by
having the pages arranged in appropriate fashion. The other alternative is for the requisition/issue
notes or carbon copies thereof, to be sent to office for postings direct to the stores ledger.
Quite apart from the desirability of keeping the stock records up-to-date, a good system is necessary
for certain other purposes listed below:
1. Where accurate cost account is a must
2. Where complete income and expenditure accounts are kept

55

3. Where management wants to know facts about good or bad buying, apparently from the stores
accounts
4. Where indications, as to the quantity and value of the stores without stock taking, are necessary
5. Where ascertainment of the ordering level without actual inspection of the stock, is also a precondition to efficient buying.
Many of the advantages mentioned above might almost be termed as necessities in an up-to-date
accounting organization. The idea, however, is mainly to show a host of highly desirable information,
at any rate, the hints for economy which such as recording system will automatically provide and this
must not be overlooked in any case.
3.7.4 Stock Verification
It is the process of physically counting, measuring or weighing the entire range of items in the
stores and recording the results in a systematic manner. The purposes served by stock verification
are as follows:
To reconcile the stock records and documents for their accuracy and usefulness.
To identify areas which require more disciplined document control
To back up the balance sheet stock figures, and
To minimize pilferage and fraudulent practices.
Stock verification is usually carried out by the materials audit department, reporting to either the
materials manager or the internal audit. One person is usually given the exclusive responsibility with
adequate facilities and authority. Physical verification can be carried out periodically or on continuous
basis.
3.8 Inventory Control Or Management
Meaning of Inventory: Inventory generally refers to the materials in stock. It is also called the idle
resource of an enterprise. Inventories represent those items which are either stocked for saleor they
are in the process of manufacturing or they are in the form of materials, which are yet tobeutilised.
The interval between receiving the purchased parts and transforming them into final products varies
from industries to industries depending upon the cycle time of manufacture. It is, therefore, necessary
to hold inventories of various kinds to act as a buffer between supply and demand for efficient
operation of the system. Thus, an effective control on inventory is a must for smooth and efficient
running of the production cycle with least interruptions.
Meaning of Inventory Control: Inventory control is a planned approach of determining what to order,
when to order, how much to order and how much to stock so that costs associated with buying and
storing are optimal without interrupting production and sales.
Reasons for keeping inventories:
1. To stabilise production: The demand for an item fluctuates because of the number of factors,
e.g., seasonality, production schedule etc. The inventories (raw materials and components) should be
made available to the production as per the demand failing which results in stock out and the
production stoppage takes place for want of materials. Hence, the inventory is kept to take care of this
fluctuation so that the production is smooth.
2. To take advantage of price discounts: Usually the manufacturers offer discount for bulk buying
and to gain this price advantage the materials are bought in bulk even though it is not required
immediately. Thus, inventory is maintained to gain economy in purchasing.
3.To meet the demand during the replenishment period: The lead time for procurement of
materials depends upon many factors like location of the source, demand supply condition, etc. So
inventory is maintained to meet the demand during the procurement (replenishment) period.

56

4. To prevent loss of orders (sales): In this competitive scenario, one has to meet the delivery
schedules at 100 per cent service level, means they cannot afford to miss the delivery schedule which
may result in loss of sales. To avoid the organizations have to maintain inventory.
5. To keep pace with changing market conditions: The organizations have to anticipate the
changing market sentiments and they have to stock materials in anticipation of non-availability of
materials or sudden increase in prices. Sometimes the organizations have to stock materials due to
other reasons like suppliers minimum quantity condition, seasonal availability of materials or sudden
increase in prices.
Standards in inventory control:
There are four important quantity standards in inventory control.
1. The Maximum Level: It indicates the upper limit of the level of stocks or inventory. It points out the
largest quantity to be normally kept in the store in the interest of economy.
2. The Minimum Level: It indicates the lower limit of the level of stocks of inventory which is really a
maximum reserve or margin of safety. This level of safety may be used only in an emergency. It is the
level acting as a safety value. it is the minimum level of stocks which must be always on hand. It is the
minimum reserve of the dealer.
3. The Standard Order: It is quantity of stocks to be requisitioned for purchase at any one time. A
repeat order for a commodity is always of the same quantity until conditions change, necessitating a
revision of the standard order. The purchase requisition given the quantity for replenishment of stocks.
4. The Ordering Point: It is the quantity of stock necessary to protect against the exhaustion of the
stock during the gap between the date of order and the date of actual receipt. When the level of
stocks or the balance on hand reaches this level, it is an indication that a new order must be placed at
once. The time necessary to secure the stock of required articles after requisitioning must be carefully
calculated and sufficient margin must be provided for contingent delays or bottlenecks in transport.
3.8.1 Inventory Model Or Techniques
a) ECONOMIC ORDER QUANTITY (EOQ): The EOQ refers to the quantity ordered to be
purchased at the lowest cost. The economic order quantity is also known as economic lot size.
Here the cost of procurement and cost of carrying are equal.
EOQ FORMULA:

Fig(3.3)
S = Annual Usage (sales) in units
O = Order cost per order
C = The carrying cost per unit per period
Q = The order quantity
Economic order quantity (EOQ) is that size of the order which gives maximum economy in purchasing
any material and ultimately contributes towards maintaining the materials at the optimum level and at
the minimum cost.
In other words, the economic order quantity (EOQ) is the amount of inventory to be ordered at one
time for purposes of minimizing annual inventory cost.
The quantity to order at a given time must be determined by balancing factors: (two 1) the cost of
possessing or carrying materials and (2) the cost of acquiring or ordering materials. Purchasing larger
quantities may decrease the unit cost of acquisition, but this saving may not be more than offset by
the cost of carrying materials in stock for a longer period of time.

57

b) ECONOMIC BATCH QUANTITY: When a firm is producing its own inventory rather than
purchasing it, it is called Economic batch quantity. Here the ordering costs are replaced by
manufacturing set-up costs. Set-up costs are of fixed nature and represent the one-time costs for
machine adjustments, paper work, scheduling, etc. In determining EBQ the following are considered.
Annual demand of a particular item of article
Total set up cost of the machine
Set up cost per piece = Quantity in batch
Cost of storage.

Chapter 4 :Sales And Marketing


4.1 Introduction:
Marketing is the process of communicating the value of a product or service to customers, for
the purpose of selling that product or service.
Definition of marketing:

Marketing is the process of planning and executing the conception, pricing, promotion,

and distribution (4 Ps) of ideas, goods and services to create exchanges (with customers)
that satisfy individual and organizational objectives.
Bringing together the needs and wants of the consumer with the products and services

that match them.


A Few Relevant Terms On Marketing
Market: Normally people understand the term market as a place where goods are bought and
sold. But, in the context of Marketing, it refers to a group of buyers for a particular product or
service.
Marketer:It refers to the person who organizes the various marketing activitiessuch as market
research, product planning, pricing, distribution etc.
Seller: It refers to a person or organization who is directly involved in the process
ofexchange of goods and services for money. This includes the wholesaler, retailer etc.
Buyer: A buyer is one who is directly involved in the process of purchase of goodsand
services. He/she is one who selects the goods, makes payment and takes thedelivery.

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Consumer: One who actually uses the product or service. For example, you boughta shirt
and gifted it to your friend who uses it. Here your friend is the consumer you are a buyer.
However, a consumer can also be the buyer.
Customer : A customer usually refers to the person who takes the buying decision.
For example, in a family, father decides on the brand of the toothpaste to be used by his
children. Here, the children are the consumers and the father is the customer. A customer can
also be the consumer. Similarly, the buyer may be different from the customer or one can be
the customer as well as the buyer.
4.2 Concepts Of Marketing
Marketing is a social and managerial process by which individuals and groups obtain what
they need and want through creating, offering and exchanging products of value with others.
The above definition of marketing rests on the following concepts: needs, wants and
demands; products; value, cost and satisfaction; exchange, transactions, and relationships; markets;
and marketing and marketers. Needs wants and demands are a part of basic marketing principles
A product can be differentiated on the basis of whether it satisfies a customers needs, wants
or demands.
4.2.1 Needs
Human needs are the basic requirements and include food clothing and shelter. Without these
humans cannot survive. An extended part of needs today has become education and healthcare.
Generally, the products which fall under theneeds category of products do not require a push.
Instead the customer buys it themselves. But in todays tough and competitive world, so many brands
have come up with the same offering satisfying the needs of the customer, that even the needs
category product has to be pushed in the customers mind.
Physical needs: This types of need is related to food, clothing and shelter.
Safety needs :Under this need, people want protection from physical harm and economic threat.
Social needs: Under this need, they want love, friendship and belongingness.
Ego needs: Under this need, they want status recognition and self-esteem.
Self development needs: They want knowledge, achievement and creativity.

4.2.2 Wants
Wants are a step ahead of needs and are largely dependent on the needs of humans
themselves. For example, you need to take a bath. But i am sure you take baths with the best soaps.
Thus Wants are not mandatory part of life. You DONT need a good smelling soap. But you will
definitely use it because it is your want. In the above image, the baby needs milk but it WANTS candy
Example:A consumer in the United States needs food but may want a hamburger. French
fries and soft drinks. A person in Mauritius needs food but may want a mango, rice, lentils, and beans.
Wants are shaped by our society.
4.2.3 Demands
You might want a BMW or a Mercedes for a car. You might want to go for a cruise. But can
you actually buy a BMW or go on a cruise? You can provided you have the ability to buy a BMW or go
on a cruise. Thus a step ahead of wants is demands. When an individual wants something which is
premium, but he also has the ability to buy it, then these wants are converted to demands. The basic
difference between wants and demands is desire. A customer may desire something but he may not
be able to fulfill his desire.
Example of demands Cruises, BMWs, 5 star hotels etc.

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The needs wants and demands are a very important component of marketing because they
help the marketer decide the products which he needs to offer in the market. Thus the flow is like this.
Market >> Identify needs wants and demands >> Offer products to satisfy either needs wants
or demands.
4.2.4 Functions Performed In Marketing
You have learnt that marketing is the performance of those business activities that directthe
flow of goods and services from producers to consumers or users. Let us now learn
what those activities are? These are briefly discussed hereunder.
1. Marketing Research
Marketing research involves collection and analysis of facts relevant to various aspectsof
marketing. It is a process of collecting and analysing information regarding customerneeds and buying
habits, the nature of competition in the market, prevailing prices,distribution network, effectiveness of
advertising media, etc. Marketing researchgathers, records and analyses facts for arriving at rational
decisions and developingsuitable marketing strategies.
2. Product Planning and Development
As you know marketing starts much before the actual production. The marketers gather
information regarding what are the needs of the consumers and then decideupon what to produce.
So, the task of marketing begins with planning and designing aproduct for the consumers. It can also
be done while modifying and improving analready existing product. For example, now-a-days we find
much better soaps anddetergent powders than we used to get earlier. Similarly, we have many new
productsintroduced almost on a regular basis.
3.Buying and Assembling
Buying and assembling activities as a part of marketing refer to buying and collectionof
required goods for resale. This function of marketing is primarily relevant to
thosebusinessorganisations that are engaged in trading activities. In the context
ofmanufacturingorganisations, buying and assembling involves buying raw materials andcomponents
required for production of finished goods.
4. Packaging
Packaging involves putting the goods in attractive packets according to the convenienceof
consumers. Important considerations to be kept in view in this connection are thesize of the package
and the type of packaging material used. Goods may be packagedin bottles (plastic or glass), boxes
(made of tin, glass, paper, plastic), cans or bags.
The size of the package generally varies from a few grams to a few kilograms,
5. Standardisation and Grading
Standardisation refers to development of standards for production of goods with respectto
shape, design, colour and other characteristics. If products are standardised,customers are able to
identify a product and its characteristics very well. So goodscan be sold by sample or description.
Standardisation helps in promoting the sale ofthe product by increasing consumers confidence in the
product quality.Grading involves separating products into different classes on the basis of
certainpredetermined standards relating to size and quality. Grading is required in case ofagricultural,
forest and mineral products such as cotton, sugar cane, iron ore, coal,timber, etc
6. Branding
Branding means giving an attractive name, symbol or identity mark to the product tomake a
product different from others so that it is known by that name or symbol ormark. For example, Surf is
the brand name of a detergent powder produced byHindustan Unilever Limited (HUL). Similarly, you
must be familiar with brands likeColgate for toothpaste, Lux for soap and so on.

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7. Pricing the Product


Pricing involves decisions regarding fixation of product prices, keeping in view theproduct
costs, the capacity of customers to pay, and the prices of the competitiveproducts. It is an important
decision as it influences the sales and so also the profits.So pricing has to be done very carefully.
8. Promotion of the Product
Promotional activities include advertising, personal selling, sales promotion and publicity.All
promotional activities involve communication with the existing and prospectivecustomers whereby
they are made aware of the product, its distinctive features, price,availability etc. The objective of
promotional activities is to motivate the customerstobuy the product.
9. Distribution
Distribution refers to those activities that are undertaken for sale of products to then
customers and the physical transfer thereof. The first aspect i.e., sale of product involvesuse of
middlemen such as wholesalers and retailers whose services are used for makingthe products
available at convenient points and helping in their sale to the ultimateconsumers. The second aspect
i.e., physical transfer involves warehousing andtransportation of goods from the point of production to
the point of sale or the consumer.96 Senior Secondary
10. Selling
Selling is an important function of marketing whereby the ownership of goods andservices is
transferred from the seller to the buyer for a consideration known as price.To initiate and complete the
process of selling, the seller has to inform the prospectivebuyer about availability of goods, the nature
and uses of products, their prices and theneeds of the customers that may be effectively satisfied by
the product. In the process,
he arouses customers interest in the product and persuades them to buy it.
11. Storage and Warehousing
Storage refers to holding and preserving goods from the time of their procurement
orproduction till the time of their sale. In other words storage involves making suitablearrangements
for preserving the goods till they are bought by the consumersanddelivered to them. Warehousing is
synonymous to storage but is normally used forlarge-scale storage facility for goods and commodities.
You must have seen cold storagewhere vegetables like tomato, cabbage, potato etc. are stored to be
consumedthroughout the year. In marketing it is essential to store raw material and finishedgoods to
be used later by the company for production or for resale.
12. Transportation
Transportation refers to the physical movement of goods from one place to another.
Inmarketing, transport as an activity refers to physical movement of raw materials aswell as finished
goods from the place of production to place of consumption. Goodsare transported through various
means like railways, roadways, waterwaysandairways. For heavy and bulky goods, the railways and
waterways are the best. Forother goods, it depends upon the demand, cost involved, urgency, nature
of the goodsetc. to decide about a suitable means of transportation.
4.3 Marketing Vs Selling
Table 4.1 Marketing Vs Selling
S.N
Marketing
Selling
o
1. Marketing includes selling and other
Selling is confined to persuasion of
activities
consumers to buy firms goods and
like various promotional measures,
services.
marketing research, after sales service,
etc.
2. It starts with research on consumer needs,
Focus is on earning profit through
wants, preference, likes, dislike etc., and
maximisation of sales.

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3.
4.

5.

6.

continues even after the sales have taken


place.
Focus is on earning profit through
maximisation of customers satisfaction
Customers need is the central point
around
whom all marketing activities revolve
It is an integrated approach to achieve long
term goals like creating, maintaining and
retaining the customers.
Stresses on needs of buyer.

Focus is on earning profit through


maximisation of sales.
Fragmented approach to achieve short- term
gain
All activities revolve around the product
that has been produced.
Stresses on needs of the seller.

7. Marketing is more pullthan push

Selling involves push strategy

8. Marketing starts with the buyer and focuses


constantly on buyers needs.

Selling starts with the seller and is


preoccupied all the time with the sellers
needs.
Seeks to convert products into cash

9. Seeks to convert customer needs into


products.
10.It is a broad composite and worldwide
concept, more so in this era of globalisation
11. The main job is to find the right product for
your customer
12.It assumes:let the seller beware
13.Customer statisfaction is a prime motive

It narrow concept related to product,sellerand


sales activity.
The main job is to find the customer for your
products.
It assumes:let the buyer beware
Sales is a prime motive

4.4 Marketing Mix


Marketing mix prefers to one of the major concept in modern marketing according Philip kotler
marketing mix is a set of controllable marketing variables that the firm blends to produce the
response it wants in the target market.
It is the combination of four controllable variables which constitutes the companies marketing
system .the four controllable variables are

The product
The price structure
The promotional activities
The distribution system

These elements are inter related and inter dependent since decisions in one area usually actions
in other area
Principles of marketing mix:
Marketing mix prefers to one of the major concept in modern
marketing according Philip kotler marketing mix is a set of controllable marketing variablesthat the
firm blends to produce the response it wants in the target market.
The principle ingredients of marketing mix are:Marketing mix (Price, Place, Promotion, Product)
When marketing their products firms need to create a successful mix of :
1. the right product
2. sold at the right price
3. in the right place

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4. using the most suitable promotion.


Product is the actual offering by the company to its targeted customers which also includes value
added stuff. Product may be tangible (goods) or intangible (services).
While formulating the marketing strategy, product decisions include:

What to offer?
Brand name
Packaging
Quality
Appearance
Functionality
Accessories
Installation
After sale services
Warranty

Price:
Price includes the pricing strategy of the company for its products. How much customer
should pay for a product? Pricing strategy not only related to the profit margins but also helps in
finding target customers. Pricing decision also influence the choice of marketing channels. Price
decisions include:

Pricing Strategy (Penetration, Skim, etc)


List Price
payment period
Discounts
Financing
Credit terms

Using price as a weapon for rivals is as old as mankind. but its risky too. Consumers are often
sensitive for price, discounts and additional offers. Another aspect of pricing is that expensive
products are considered of good quality.
Place (placement):
It not only includes the place where the product is placed, all those activities performed by
the company to ensure the availability of the product tot he targeted customers. Availability of the
product at the right place, at the right time and in the right quantity is crucial in placement decisions.
Placement decisions include:

Placement
Distribution channels
Logistics
Inventory
Order processing
Market coverage
selection of channel members

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Promotion:
Promotion includes all communication and selling activities to pursuade future prospects to
buy the product. Promotion decisions include:

Advertising
Media Types
Message
Budgets
Sales promotion
Personal selling
Public relations
Direct marketing

As these costs are huge as compared to product price, So its good to perform a break-even
analysis before allocating the budget. It helps in determining whether the new customers are worth of
promotion cost or not.
It often takes time and requires market research to develop a successful marketing mix. You
should not depend on one mix always try new mixes. While designing the mix, make changes to all
mixes in such a way that all conveys the same message. Dont confuse your customers by just
changing one variable and keeping the rest same.
4.5 Product
Anything that is offered to the market for attention, acquisition, use or consumption that
satisfies a want or a need
4.5.1 Product Life Cycle
A new product passes through set of stages known as product life cycle. Product life cycle
applies to both brand and category of products. Its time period vary from product to product.
Modern product life cycles are becoming shorter and shorter as products in mature stages are being
renewed by market segmentation and product differentiation.
4.5.1.1 Stages Of Product Life Cycle
Product life cycle comprises four stages:
o
o
o
o
1.

Introduction stage
Growth stage
Maturity stage
Decline stage

Introduction stage
Product is introduced in the market with intention to build a clear identity and heavy promotion
is done for maximum awareness. Before actual offering of the product to customers, product passes
through product development, involves prototype and market tests. Companies incur more costs in
this phase and also bear additional cost for distribution. On the other hand, there are a few customers

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at this stage, means low sales volume. So, during introductory stage companys profits shows a
negative figure because of huge cost but low sales volume.
At introduction stage, the company core focus is on establishing a market and arising demand
for the product. So, the impact on marketing mix is as follows:
Product
Branding, Quality level and intellectual property and protections are obtained to stimulate consumers
for the entire product category. Product is under more consideration, as first impression is the last
impression.
Price:
High(skim) pricing is used for making high profits with intention to cover initial cost in a short period
and low pricing is used to penetrate and gain the market share. company choice of pricing strategy
depends on their goals.
Place:
Distribution at this stage is usually selective and scattered.
Promotion:
At introductory stage, promotion is done with intention to build brand awareness.Samples/trials are
provided that is fruitful in attracting early adopters and potential customers. Promotional programs
are more essential in this phase. It is as much important as to produce the product because it
positions the product.
2.

Growth Stage
In this stage, companys sales and profits starts increasing and competition also begin to increase.
The product becomes well recognized at this stage and some of the buyers repeat the purchase
patterns. During this stage, firms focus on brand preference and gaining market share. It is market
acceptance stage. But due to competition, company invest more in advertisement to convince
customers so profits may decline near the end of growth stage.
Affect on 4 Ps of marketing is as under:
Product:
Along with maintaining the existing quality, new features and improvements in product quality may be
done. All this is done to compete and maintain the market share.
Price:
Price is maintained or may increase as company gets high demand at low competition or it may be
reduced to grasp more customers.
Distribution:
Distribution becomes more significant with the increase demand and acceptability of product. More
channels are added for intensive distribution in order to meet increasing demand. On the other hand
resellers start getting interested in the product, so trade discounts are also minimal.

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Promotion:
At growth stage, promotion is increased. When acceptability of product increases, more efforts are
made for brand preference and loyalty.
3.

Maturity stage
At maturity stage, brand awareness is strong so sale continues to grow but at a declining rate as
compared to past. At this stage, there are more competitors with the same products. So, companies
defend the market share and extending product life cycle, rather than making the profits, By offering
sales promotions to encourage retailer to give more shelf space to the product than that of
competitors. At this stage usually loyal customers make purchases.
Marketing mix decisions include:
Product:
At maturity stage, companies add features and modify the product in order to compete in market and
differentiate the product from competition. At this stage, it is best way to get dominance over
competitors and increase market share.
Price:
Because of intense competition, at maturity stage, price is reduced in order to compete. It attracts the
price conscious segment and retain the customers.
Distribution:
New channels are added to face intense competition and incentives are offered to retailers to get shelf
preference over competitors.
Promotion
Promotion is done in order to create product differentiation and loyalty. Incentives are also offered to
attract more customers.

4.

Decline stage
Decline in sales, change in trends and unfavorable economic conditions explains decline
stage. At this stage market becomes saturated so sales declines. It may also be due technical
obsolescence or customer taste has been changed.
At decline stage company has three options:

Maintain the product, Reduce cost and finding new uses of product.
Harvest the product by reducing marketing cost and continue offering the product

to loyal niche until zero profit.


Discontinue the product when theres no profit or a successor is available. Selling
out to competitors who want to keep the product.

At declining stage, marketing mix decisions depends on companys strategy. For example, if
company want to harvest, the product will remain same and price will be reduced. In case of
liquidation, supply will be reduced dramatically.

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Limitations Of Product Life Cycle (Plc):


Product life cycle is criticized that it has no empirical support and it is not fruitful in special
cases. Different products have different properties so their life cycle also vary. It shows that product life
cycle is not best tool to predict the sales. Sometimes managerial decisions affect the life of products in
this case Product Life Cycle is not playing any role. product life cycle is very fruitful for larger firms and
corporations but it is not hundred percent accurate tool to predict the life cycle and sales of products
in all the situations.

4.6 Pricing
Price goes by a variety of names. Rent is paid for apartment, tuition fee is paid for education
and a consultation fee is paid for doctor. Price is a factor that creates value for the product.
price is the amount of money charged for a product or service. It may be the sum of the
values that consumers exchange for the benefits of having or using the product or service PHILIP
KOTLER
4.6.1 Pricing Policies
1)Competitive Pricing:
Competitive pricing means setting prices relative to competitors. For example, a new
neighborhood restaurant might use the prices of entrees at other restaurants in the area to inform
pricing decisions. Companies may choose to set prices slightly below those offered by competitors to
attract more customers. Competitive pricing can potentially result in a price war, in which competitors
repeatedly slash prices in an attempt to undercut one another.
2)Cost-Based Pricing Or Break Even Pricing:
Cost-based pricing is a strategy that uses the cost of production as a baseline to inform
pricing decisions. For instance, a company that sells office supplies might set prices that are 10
percent higher than production costs to ensure that it covers its expenses. Similarly, a company that
sells T-shirts could simply charge a $5 markup over the production costs of all of its products. Costbased pricing is a relatively straightforward strategy since it doesn't take consumer demand or
competition into account.
3)Value Pricing:
Setting prices based on the benefit or value consumers derive from products is called value
pricing. In other words, value-based pricing seeks to set prices based on what consumers are willing
to pay. A business pursuing value-based pricing might charge prices that are significantly higher than
competitors if it believes its products are more valuable to consumers than those offered by
competitors or if wishes to establish itself as a luxury brand. Value-based pricing requires managers to
have a deep understanding of customer needs and preferences.
4)Mark-Up Pricing:
Mark-up is the difference between the costs of producing and selling a product (fixed costs
plus variable costs) and the market selling price of the product. It is the difference between what you
spend to produce the product and what the customer spends to purchase it.

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It is calculated as follows:

Fixed Cost per unit = Total Fixed Cost / Units Produced

Variable Cost per unit = Total Variable Costs / Units Produced

Selling Price = Fixed Cost per unit Variable Cost per unit Desired Profit
Margin

5)Target Return Pricing:


Using this strategy, a business first determines what level of demand there is for the product
and then identifies the desired profit the business would like to make from the product. The price is
calculated by dividing the total desired profit by the expected level of sales. Therefore, by meeting the
level of expected sales, a certain amount of profit will be received.
6)Going-Rate Pricing:
In the situation where the business is in a competitive market, the business charges the
average price of what its competitors are charging for a similar or the same product. This may be the
case where there is only a small amount of competition and the product is a necessity. It is sometimes
in a business's best interest to not compete by undercutting their competition
4.6.2 Methods Of Pricing

Odd pricing: It means setting prices that end in odd numbers. Here the consumer is

impressed with the accuracy of the price set on the product. It is adopted generally by the
seller of specialty or convenience goods.
Psychological pricing: It tries to overcome consumers psychological barrier in respect of

price. The price under this method fixed at a full number.


Customary pricing: These are fixed by customs. When a company sells goods and

services and seeks to maintain them over an extended period of time, customary prices are
changed. Even when cost increases price is not changed. Organization may reduce
package size, and change ingredients in order to absorb increases in cost.
Pricing at a prevailing prices: The marketer fixes the price of his product at the price

prevailing in the market. So, it is also known as pricing at the market. A price above the
current price will bring down the sales. This kind of pricing tries to avoid price competition
and price wars. Where the marketer is not able to differentiate this offering that of the
competitor, he chooses the prevailing prices.
Prestige pricing: It is based on the assumption that consumers do not buy goods or

services at prices they consider to be too low.


Price lining: It is quite common with retailers. This is closely related to psychological and

customary prices. It is selling products at a range of prices with each price representing a
distinct level of quality. It involves two decisions:
Dual pricing: It means selling the same product at two different prices. This is also known as

discriminatory pricing. Example: railway fares differ for each class.


Administered pricing: It is not governed by cost of the product, competitive pressure, laws
of demand and supply, etc., It is dependent solely upon the policy decisions of the seller. It
remains constantly fairly over a long period.

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Monopoly pricing: In monopoly, the market consists of one seller. This happens while

introducing a new product. The seller is free to price at what the market can beat. However,
he does not always charge the full price for a number of reasons.
Skimming pricing; It is related to a new product. Initially, high price is charged for a new

product. Then price is gradually reduced as competitors enter the market.


Penetration pricing: A low price is charged in the initial stage or until the product gains the

acceptance of the buyers.


Mark up pricing: Middlemen like wholesalers and retailers follow mark up pricing. It add a
certain percentage to the manufacturers price in order to determine the retail price.

4.7 Channels Of Distribution


A channel of distribution or trade channel is defined as the path or route along which goods
move from producers or manufacturers to ultimate consumers or industrial users. In other words, it is
a distribution network through which producer puts his products in the market and passes it to the
actual users. This channel consists of :- producers, consumers or users and the various middlemen
like wholesalers,selling agents and retailers(dealers) who intervene between the producers and
consumers. Therefore,the channel serves to bridge the gap between the point of production and the
point of consumption thereby creating time, place and possession utilities.
A channel of distribution consists of three types of flows:

Downward flow of goods from producers to consumers

Upward flow of cash payments for goods from consumers to producers

Flow of marketing information in both downward and upward direction i.e. Flow of information
on new products, new uses of existing products,etc from producers to consumers. And flow of
information in the form of feedback on the wants,suggestions,complaints,etc from
consumers/users to producers.

These channels of distribution are broadly divided into four types:

Producer-Customer:- This is the simplest and shortest channel in which no middlemen is

involved and producers directly sell their products to the consumers. It is fast and economical
channel of distribution. Under it, the producer or entrepreneur performs all the marketing
activities himself and has full control over distribution. A producer may sell directly to
consumers through door-to-door salesmen, direct mail or through his own retail stores. Big
firms adopt this channel to cut distribution costs and to sell industrial products of high value.
Small producers and producers of perishable commodities also sell directly to local
consumers.
Producer-Retailer-Customer:- This channel of distribution involves only one middlemen

called 'retailer'. Under it, the producer sells his product to big retailers (or retailers who buy
goods in large quantities) who in turn sell to the ultimate consumers.This channel relieves the
manufacturer from burden of selling the goods himself and at the same time gives him control
over the process of distribution. This is often suited for distribution of consumer durables and
products of high value.
Producer-Wholesaler-Retailer-Customer:- This is the most common and traditional channel
of distribution. Under it, two middlemen i.e. wholesalers and retailers are involved. Here, the
producer sells his product to wholesalers, who in turn sell it to retailers. And retailers finally
sell the product to the ultimate consumers. This channel is suitable for the producers having

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limited finance, narrow product line and who needed expert services and promotional support
of wholesalers. This is mostly used for the products with widely scattered market.
Producer-Agent-Wholesaler-Retailer-Customer:- This is the longest channel of distribution

in which three middlemen are involved. This is used when the producer wants to be fully
relieved of the problem of distribution and thus hands over his entire output to the selling
agents. The agents distribute the product among a few wholesalers. Each wholesaler
distribute the product among a number of retailers who finally sell it to the ultimate
consumers. This channel is suitable for wider distribution of various industrial products.
4.8 Sales Promotion
Sales promotion, in a specific sense, refers to those sales activities that supplement both
personal selling and advertising and coordinate them and help to make them effective, such as
displays, shows, and the expositions, demonstrations and other non-recurrent selling efforts not in the
ordinary routine AMERICAN MARKETING ASSOCIATION
4.8.1 Types Of Sales Promotion
It can be divided into three types
1. Consumer sales promotion
2. Dealer sales promotion
3. Sales force promotion
1. Consumers sales promotion:
Activities aimed at reaching the customer at his office or at home may be called as consumer
sales promotion. It is aimed to inform or educate the consumers and to stimulate the consumers.
Success in sales depends on consumers cooperation. It increases the use of product by the
consumers, attract new customers. The following are various sales promotion schemes used at
consumer level
a. Sampling: Free samples are given to consumers to increase their interest in the product.
They are also given to introduce a new product and expand the market. It increases the sales
volume when the product is new one. It is an effective device when the product is purchased
often. It is the method of demand creation. It gives the chance to customers to compare the
products with other substitutes.
The samples may be door delivered, sent by mail, picked up in a store, attached to
another product etc. it is most effective way to introduce the product. It is the most expensive
method. It is costly to distributors also.
b. Coupons :Coupons are supplied along with a product. It is a certificate that reduces prices.
Coupons can be mailed, enclosed in packets or printed in the advertisements. The purchase
is to attract the customers and bring them to a particular shop to increase the sales of a
particular brand.
The coupons are used to introduce new products, to increase the sale of an
established product, to sell new and larger size of a product, and to encourage the repeated
sales. It is a short run stimulus.
c. Demonstration: It is the instructions to educate the consumers in the manners of using the
product. It is the promotional tool to attract the attention of the consumers. When the products
are complex and are of a technical nature, demo is necessary. It is done in front of the
customers.
d. Contests : These are conducted to attract new customers or to introduce the new products.
The consumers are asked to state in a few words why they prefer that product. To enter into
the contest, the consumers must purchase a product and submit the evidence with the entry
form for the contest. To take part in the contest the consumers must be interested in the
product. This stimulates the sales at the retail level. Entry forms correctly filled are submitted
to panel of judges. They will select the best and prices will be given to winners.

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e. Money refund offers: If the purchaser is not satisfied with the product, a part or all of the
purchasers money will be refunded. It is stated on the package. It will create new users and
strengthen the brand royalty. Sometimes the money will be refunded if 10 top covers or 10
empty packages are sent back to the manufacturers.
f. Premium offers: It is a temporary price reduction which increases the instinct of the buyers.
Products are offered free or at a reduced cost as an inducement for purchasing. It is offered to
consumers for some of consumer goods like soaps, brush etc.
There are many types of premium offers. They are

Direct premium: A with-pack premium accompanies the product inside or outside

the package.
A reusable container: It is a container which can be reused after the product is

used.
Free in Mail Premium: Premium items are sent by the companies by mail to

consumers who are requested to send the proof of their purchase.


A Self-liquidating premium: it is an item sold below its normal retail price to

consumers. The cost of the additional product is collected from the buyer at a
concessional rates.
Trading stamps: it is given for purchasing the product in a particular shop. It is a

premium given to the consumer by the seller in the forms of stamps. These
stamps are redeemable at the stamp redemption centres.
g. Price off offer: It stimulates sales during a slump season. It gives a temporary discount to
the consumers. That is the goods are offered at a rate less than the labeled rate. Fans are
sold at a reduction rate in rainy season.
h. Consumer sweepstakes: Consumers submit their names for inclusion in a list of prize
winning contest. A ticket is given to the consumer of a specific time, lots will be drawn. The
prize winner gets the prize.
i. Buy back allowance: Allowance is given following a previous trade deal. That is, trade deal
offers a certain amount of money for new purchases based on the purchased quantities. It
prevents decline in post trade deal.
j. Free trials: It consists of inviting prospective purchasers to try the product without cost, in the
hope that they will buy the product. Thus, buyers are encouraged by free trial to stimulate
purchase interest.
k. Discount vouchers a voucher (like a money off coupon).
l. Free gifts a free product when buy another product.
m. Point of sales materials e.g. posters, display stands ways of presenting the product in its
best way or show the customer that the product is there.
n. Free-standing insert (FSI): A coupon booklet is inserted into the local newspaper for
delivery.
o. On-shelf couponing: Coupons are present at the shelf where the product is available.
p. Checkout dispensers: On checkout the customer is given a coupon based on products
purchased.
q. On-line couponing: Coupons are available on line. Consumers print them out and take them
to the store.
2. Dealers Sales Promotion:

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The other name for dealer promotion is trade promotion. Manufacturers use a number of
techniques to secure the co operation of wholesalers, retailers, or the middlemen. These activities
increases the enthusiasm of the dealers and distributors. Following are the dealers sales
promotion devices:
a) Buying allowance: It is an offer of money off or temporary reduction to dealers for
purchasing in stipulated period of time. It is an very effective to introduce new products in the
market to introduce new products. It encourages the dealers to buy a quantity that they will
not buy in ordinary time. This buying allowance gives them immediate profit and price
redemption.
b) Merchandise allowance: An advertising allowance is given to the dealers for advertising the
features of the manufacturers product. A display allowance is given to them for arranging
special displays for the product. After verifying the promotional work of the dealer, the
manufacturers will give a certain amount of money for promotional activities. They hope that
additional efforts will be taken to increase the sales at retail level. Some manufacturers, as an
encouragement, offer additional quantities of merchandise.
c) Price deals: Apart from the regular discount, special discounts are also allowed to the
dealers for a specified quantity of purchase. This special discount is over and above the
regular discount.
d) Push money or premium: Manufacturers may offer push money. It is a payment in cash or
gifts given to dealers or to their sales force to push the manufacturers product. To push this
brand, the manufacturer will offer free specialty items that carry companys name such as
pens, pencils, calendars etc. this is a device for aggressive selling.
e) Co-operative Advertising: Dealers spend money in advertising manufacturers product with
the consent of the manufacturers. The dealer can claim an allowance by giving the proof of
the advertisement. This is an indirect advertising for the manufacturer. It will increase the
sales of the product.
f) Dealers Sales contest: This is an indirect way of boosting the sales. This type of contest is
conducted at the level of retailers and wholesalers. This is an form of window display, store
display, sales etc. Prize is awarded to the outstanding achievements. This method is aimed at
stimulating and motivating distributors, dealers etc.
g) Dealers listed promotion: Listing dealer is an advertisement. It gives a list of dealers or
retailers who stock the product who are engaged in its promotion. This method introduces the
dealers to stock the products and the consumer are encouraged to buy the products.
3. Sales Force Promotion:
As dealer and consumer promotion, the sales force promotion also is a necessary one. The
activities of sales force must be induced. In the channel of distribution the role of salesman is very
important. The idea of sales force promotion is to make the salesmans effect more effective. The
tools for sales force promotion are,
I.
Bonus to sales force: The manufacturer sets a target of sales for a year. If the sales force
sell the products above the targeted sales, bonus is offered to them. This is an
encouragement incentive given to the sales people to sell more products.
II.
Sales force contest: To increase the interest and efforts of sales by sales force over a
specified time, these contests are announced. The prices are given to the salesman who
secures the maximum sales in sales contest. Thus it stimulates the salesmen to sell more
products.
III.
Salesmen Meetings and Conferences: The idea behind these is to educate, inspire and
reward salesmen. Encouragement is given to them during the discussion. New selling
techniques are described to them and discussed in the conference.

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How sales promotion differ from advertising:

Whereas advertising is mostly an indirect and subtle approach towards persuading

consumers to buy a product, sales promotion is a direct and almost open inducement to
the consumer to immediately try the product
While advertising normally has long term objectives like building brand awareness or

building consumer loyalty or repositioning a brand, sales promotion performs an


immediate task of increasing current sales.
While advertising helps sales by adding some value to the product, sales promotion aids
selling by merely changing the price-value relationship of the product

4.9 Advertising
Advertising is a paid form of non personal presentation and promotion of ideas, goods or services by
an identified sponsor American Marketing Association
Advertising is a mass communication of information intended to persuade buyers as to maximize
profits Littlefield.
Advertising consists of all the activities in presenting to a group, a non-personal, oral or visual, openly
sponsored message regarding a product, service or idea - Stanton
To give public notice or to announce publicly Webster
4.9.1Advantages Of Advertising:
Advantages To Manufacturers
Increased sales volume: Advertising increases the sales volume of the product thereby
reducing unit production costs. The manufacturer undertakes mass production of goods and
reaps the benefits of large scale production.
Increased net profit: Ad makes price reduction possible. When prices are lower, goods are
widely demanded by customers. This leads to increased sales of the products or services.
When sales increases profit increases.
Stability in sales volume: The market is always highly competitive. Large number of players
are selling similar goods. Modern technology makes possible product differentiation. Every
marketer is striving to retain his market share.
Control over price: Most of the advertisements carry the product price. So, the retailers
cannot charge a price higher than that printed on the product label.
New market: Ad creates new market for the product advertised. New crop of customers
perceive the product favourably. So, the advertiser can go in for market expansion. He can
also become the market leader.
Creating goodwill: Ad carries a message about the product and its manufacturer. So, it
creates a favourable climate for selling the product. It builds the product image and goodwill of
the manufacturer.
Wide information: Ad broadens the buyers knowledge. The purpose of ad is to convey the
product information. Any change in quality, or price can be immediately brought to the
attention of buyers.
Advantages To Salesman
Favourable climate for selling: Ad creates a favouralbe climate for the job of salesman.
Even before the salesman approaches the customers, they have background knowledge of the
product. When salesman contacts customers, they receive the product well.
Simplifies salesman job: Ad are salesmanship in print. Ad is more effective way of
establishing contact with customers. it attempts to persuade people to purchase foods. The
aim of ad and salesmanship is therefore the same.

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Least effort:Ad easily reaches the masses. Customers gain adequate amount of knowledge of
the product. So, the salesman need not explain every minute product details.
Product awareness: Ad creates a product awareness among the buyers. Buyers become
familiar with the new and improved products available in the market. Since, ad are attractive,
they create an customers awareness
Advantages To Wholesalers And Retailers
Increased turnover: Ad has mass appeal. It reaches target customers and creates an
awareness among them. People gather sufficient information about the product by going
through the advertisement. They are motivated to buy the product.
Attracts customers: A customer cannot shy away from the influence of advertisements.
These are released for all products. They have become the order of life. Ad catches the
peoples attention and induces customers.
Increases reputation: A dealer is respected on the products strength range he carries. Ad
popularizes the product. Product popularizes the dealers.
Publicity: Dealers earn p0rofit without spending advertisements. Ads are paid for by the
manufacturers. Thus, wholesalers get publicity for the product they deal in.
Advantages To Customers
Wise purchase: Ads has educative value. It interprets the product features in terms of
customers needs and wants. It gives the useful information about the product to buyers. Some
ads compare the products features advertised with those of substitute and rival products.
Providing link: Ads provide a link between the buyers and manufacturers. They speak the
language of potential customers. Manufacturers reach the message to the target audience.
Reduced prices: Ads increases the sales volume thereby reducing unit product cost. As it
enables mass production, production cost is reduced.
Educative value: Ads inform customers about the release of improved version of new products.
They explain as to how the new product is an improved version over the earlier ones.
Mail order business: Ads plays a crucial role in mail order business. On seeing the ads,
people can directly buy from mail order houses. People living in villages and remote places can
buy goods through mail.
4.9.1 Types Of Advertisement Media
Media
Television

Advantages

Disadvantages

Offers mass coverage.

Offers low selectivity.

High level of reach combined impact of

Short span of

sight, sound & motion, prestige value.

Low cost per exposure. Attracts attention.

message life.

High cost.

High production costs.

Creates Advertising
Clutter.

Radio

Local Coverage.

Wastage coverage.
Only audio.

Lower Cost.

Noise.

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Newspaper
s

Magazines

Outdoor

Direct Mail

Internet

High Frequency,

Focused Segment Selection.

Low Production Costs.

Message short lived.

Mass Coverage,

Short life of

Low Cost, Large Space,

Short Lead time for ad placing.

Low Attention getting.

Ad position choice possible,

Poor Production

Good for current ads,

Reader controls exposure,

Coupons can be inserted.

Potential for focused segmentation.

Very good production quality.

Longevity of message.

Only Visual.

High information content.

Low frequency.

More readers per copy.


Good for specific location.

Lack of flexibility.

Short exposure time.

High repetition.

Short message.

High visibility.
High level of selectivity.

Poor image.
High cost per contact

Reader controls exposure.

Clutter often thrown as

High information content.

Opportunity for repeat exposures.


User controlled.

Increased attention and involvement.

Low on attention
getting.

advertisement Clutter.

Quality.

Selective Exposure.

Long lead time for ad


placing.

joint mail.

Limited creative
capabilities.

4.10 Marketing Research


Marketing research is the systematic gathering, recording and analyzing of data about marketing
problems to facilitate decision-making Cundiff and Still
The systematic gathering, recording and analyzing of data about problems relating to the marketing
of goods and services. Such research may be undertaken by impartial agencies or by business firms
or their agencies for the solution of their marketing problems and the inclusive term which embrace all
research activities carried on in connection with the management of marketing work American
Marketing Association.
Objectives Of Marketing Research

Study the economic factors affecting the sales volume and their opportunities
Study the competitive position of rival products
Study the price trends prevailing in the market
Examine the system of distribution
Study the relative advantages and limitations of the product offered for sale
Find new methods of packaging
Analyse the market size of the existing companies

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Estimate future sales of the product


Solve the problems in marketing of goods and services

Advantages of marketing research:

Supply the data to be used in selling salesman quota and territorial quotas and in planning

production
Supply the facts for fixing the budget
Supply materials for sales talks
Ascertain the consumers like and dislikes
Find the dealers reactions to given policies
Furnish data for fixing dealers territories and quota
Measure the purchasing capacity of a given territory

Limitations of marketing research:

Expensive
Time consuming
May not be accurate
Very difficult to measure the effectiveness of marketing research

4.10.1 Steps In The Marketing Research Process


Step: 1- Problem Definition: The first step in research is formulating a research problem. It is the
most important stage in applied research as poorly defined problems will not yield useful results. It is
rightly said that a problem well defined is half solved. Poorly defined problems cause confusion and
do not allow the researcher to develop a good research design.
In order to define a problem properly, we should determine the research nature. Then a preliminary
analysis may be carried out applying the techniques viz.,

Situation analysis: It means the circumstances under which the research is being

conducted. It is useful take note of the factors affecting the marketing operations in a
business organization.
Informal investigation: It refers to the discussion with a few selected customers,

dealers, top management personnel of the company, and other parties concerned
with the problem. It may be designated as the pilot survey
Step: 2 - Research Design: After having defined the problem, the next step is to formulate the
objectives of research plan, which will specify the ways of achieving research objectives. A research
design specifies the methods and procedures for conducting a particular study. The researcher
should specify the approach he intends to use with respect to the proposed study. The research
design can be grouped into three categories.

Exploratory research: It focuses on the discovery ideas and is generally based on

secondary data. It isa preliminary investigation which does not have rigid design.
Descriptive research: It is undertaken when the researcher wants to know the

characteristics of certaingroups such as age, educative level, income, occupation etc. In


contrast, descriptive studies are well structured.
Casual research: It is undertaken when the researcher is interested in knowing the

cause and effect relationship between two or more variables. Such studies are based on
reasoning along well tested lines.
Step: 3 - Data Collection: There are two types of data sources namely:
Primary data: It does not exist already in records and publication. The researcher has to gather
primary data a fresh for the specific study undertaken by him. Original data collected specifically for a
current research are known as primary data. It can be collected from customer, retailers, distributors
etc.
Methods of collecting primary data:

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Experiment method: It is employed to collect primary data. It involves controlled experiment


which stimulates the real market situation. The manufacturer carries out a small experiment and
gets valuable information. It will be of great help in designing large scale marketing programme.
Observation method: In this, researcher data are collected by observing the respondents in a
marketing situation. The customer may be observed while buying a particular product. Then he
may be asked why he preferred this type of product. The actions of a customer are watched
personally or mechanically. The buyer is not aware of his being observed. So, his actions are
natural and not pre determined.
Survey method: In this, information is gathered directly from individual respondents either
throughpersonal interview or through mail questionnaires or telephone interviews.
Secondary data:It refers to those data which are gathered for some other purpose and are
already available in the firms internal records and commercial, trade or govt., publications.
Step: 4 - Research Instrument: In survey method, questionnaire is the instrument most frequently
used. In observation method instruments like cameras, tapes, etc are used.
Sampling plan: The research must decide the sampling unit (who is to be surveyed) the sample size
(how many units to be surveryed) the sampling procedure (how to conduct the survey) and contact
method (media).
Field work: The actual data collection operation is called fieldwork. It is the most expensive of all the
steps. The common problems during a field work are not at homes, refusal to cooperate, interviewer
or respondent bias etc.
Step: 5- Data Analysis:Data analysis and interpretation are possible only when data is processed.
Data processing implies data reduction namely editing, tabulating, analyzing and interpretation.

Editing: It is a kind of verifying the answers are consistent and logical


Tabulation: It implies data arrangement as to classes and weightages
Coding: It is a must when data is fed to electronic data processing units
Analysis: The researcher examines the tables so designed, compares them, use

statistical techniques
Interpretation: It is a minute and meticulous work involving the use of mental facilities of

sound judgement and clear vision to reach a cut-off point.


Step:6 - Report Presentation:When the analysis and interpretation are over, the researcher has to
prepare the report. The researcher has to prepare the report with great care keeping the following
points in mind.
4.11 Sales Forecasting
Sales forecasting is estimating what a company's future sales are likely to be based on sales
records as well as market research. The information used in them must be well organized and may
include information on the competition and statistics that affect the businesses' customer base.
Companies try to forecast sales in hopes of identifying patterns so that revenue and cash flow can be
maximized.
4.11.1 Sales Forecast Methods
Qualitative Method-it based on judgments-expert/collective.
a) Experts opinion method Simplest method used in commercial organisation for forecasting
future demand of product/service. Marketing professionals/channel members and professional bodies
(market consumers) are asked to give their opinion method works in 2 days.
1) Seasoned industries.
2) Group of industries

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Discussion takes place based on key executive sub their op. and discussion is done based on it and
consensus is reached.
b) Delphi Method: - Improvement over expert opinion method forecast is based on likely time period
of occurrence of certain future Group of exp and a Delphi coordinator. Gives their opinion include to
co-ordinate. The co-or processes, complies, refers then back to the panel member. (Process is on for
at least 3 rounds) Process stops when consensus is obtained and deviant opinion given with reason.
Coordinator carries out stats analysis of the response, deriving average answers, variability etc. Only
coordinator is aware of the members present in the team and access to all responses. Delphi for is
median forecast-Method widely used
c) Sale force composite method Sales people come up with forecast. Since people in direct
contact like sales people/ channel members are better informed about the trends and demand for the
product. Ind forecast is combined with over all demand forecast.
Results can be affected by the staffs biases, lack of interest in the process, eg. About economic
changes and trends. This method is used to generate forecast for industrial equipment manufacturing
industries.
Eg: - PET mach/ Printing machinery.
d) Survey of buyers expectation- Buyers intention and market test sample of potential buyers
information about product performance etc.
Likes/ dislikes. (4 Ps)
Gathering this information for demand forecasts.
Negative point:- Actual demand varies from stated intention.
Positive point:- method effective for relatively few buyers usually for B2B buyers.
e) Historical analogy method- Used where there is not past demand data.
Eg: - New product, but markets sold other product with similar features.
Marketing person may use historical analogy between eg: - two products and derive the demand for
the new product using historical data.
Quantitative Method
a)Test Marketing- Companys selected a limited no of cities with population which are representative
of target customer- demographic terms age, income, lifestyle and shopping habits etc.
A product is made available at outlets and features are highlighted either thro in store promotion/
small advertising campaign. Then the performance is tracked through consumer research and
modification-before national launch.
Target objective is
1) To study level of acceptance.
Second type of test market with similar characteristics is identified- one is called test marketsame as above mention without promo campaign 2nd is called Control Market where Product is
sold with a promotional campaign.
The different between both markets is a measure of effectiveness of promotion campaign. Any
inconsistency with sales variation in both the market is an indicator of the gap between customer
perception and performance of the product feature.

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Result- One can measure effectiveness of product helps in making customer loyal, campaigns
effectiveness and in store promotion.
b)Naive Method:
This is one of the simplest method- future sales are forecasted as the value of sales for
previous period .i.e. Next months sales are predicted based on the months performance.
Negative method ignores irregular component and assumes that seasonality and cyclicality do not
exist and trend is flat.

Chapter 5: Industrial Psychology and Personal Management


5.1 Industrial Psychology or Organization Psychology
Industrial organizational psychology is the branch of psychology that applies psychological
theories and principles to organizations. Often referred to as I/O psychology, this field focuses on
increasing workplace productivity and related issues such as the physical and mental well being of
employees. Industrial organizational psychologists perform a wide variety of tasks, including studying
worker attitudes and behavior, evaluating companies, and conducting leadership training. The overall
goal of this field is to study and understand human behavior in the workplace.
Six Key Areas of I/O Psychology
Industrial organizational psychologists work in one of six major subject areas:

Training and development: Professional in this area often determine what type of skills are
necessary to perform specific jobs as well as develop and evaluate employee training
programs.

Employee Selection: This area involves developing employee selection assessments, such
as screening tests to determine if job applicants are qualified for a particular position.

Ergonomics: The field of ergonomics involves designing procedures and equipment


designed to maximize performance and minimize injury.

Performance Management: I/O psychologists who work in this area develop assessments
and techniques to determine if employees are doing their jobs well.

Work Life: This area focuses on improving employee satisfaction and maximizing the
productivity of the workforce. I/O psychologists in this area might work to find ways to make
jobs more rewarding or design programs that improve the quality of life in the workplace.

Organizational Development: I/O psychologists who work in this area help improve
organizations, often through increasing profits, redesigning products, and improving the
organizational structure.

5.2 Scope Of Industrial Psychology


Industrial psychology is a branch of behavioral science that directs its research and courses
of study to business. Departments of management, design, production, pricing, marketing and
distribution all benefit from knowledge of industrial psychology

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i)Work Behavior
The psychology of work behavior is one form of industrial psychology. Attitudes of employees
as related to their performance is a main theme. Variables in employee personalities and abilities are
listed and situational and background differences are studied. The industrial psychologist also studies
human mental and physical abilities, administering tests and assessing values and establishing jobrelated criteria. Human-error factors also are monitored, as are costs and causes of accidents.
ii)Management
Many management skills fall under the umbrella of industrial psychology. Managers must be
educated concerning the area of employee supervision. Expertise in perception and assessment is
required in order to make proper decisions as to whether to promote or admonish. Determination of
training needs and abilities to resolve conflict are skills that managers would learn in their study of
industrial psychology. Motivational tactics are imperative to the success of industry, thus the industrial
psychologist also may devise financial or other incentives.
iii)Environmental Design
Environmental design is another area of industrial psychology. The psychology of the work
space concerns the environment of the worker. Performance can be affected adversely or positively
depending upon the employees surroundings. The industrial psychologist recommends physical
arrangements, colors, noise, lighting and ergonomics.
iv)Product Design
Product design is another avenue of industrial psychology that is important to a successful
business. A product that has been designed bearing safety, efficiency and desirability in mind may
have a higher chance of being successful in the marketplace. The industrial psychologist can collect
data and analyze buying trends to make recommendations for a feasible, salable design.
v)Organizational Studies
The overall function of the business may be evaluated by the industrial psychologist. Data relating to
job descriptions and hierarchy may be studied and recommendations put forth.
5.3 Personnel Management

personnel management can be defined as obtaining, using and maintaining a satisfied


workforce.

It is a significant part of management concerned with employees at work and with their
relationship within the organization.

According to Flippo, Personnel management is the planning, organizing, compensation,


integration and maintainance of people for the purpose of contributing to organizational,
individual and societal goals.

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5.3.1 Human Resource Management (Hrm)


The process of hiring and developing employees so that they become more valuable to
the organization.
According to Decenzo and Robbins:"Human resource management is a process consisting of four functions-acquisition,
development, motivation and maintenance of human resources."
5.3.2 Personnel Management Vs Human Resource Management
Human resource management is the new version of personnel management. There is no any
watertight difference between human resource management and personnel management. However,
there are some differences in the following matters.
1. Personnel management is a traditional approach of managing people in the organization.
Human resource management is a modern approach of managing people and their strengths in the
organization.
2. Personnel management focuses on personnel administration, employee welfare and labor
relation. Human resource management focuses on acquisition, development, motivation and
maintenance of human resources in the organization.
3. Personnel management assumes people as a input for achieving desired output. Human
resource management assumes people as an important and valuable resource for achieving desired
output.
4. Under personnel management, personnel function is undertaken for employee's
satisfaction. Under human resource management, administrative function is undertaken for goal
achievement.
5. Under personnel management, job design is done on the basis of division of labor. Under
human resource management, job design function is done on the basis of group work/team work.
6. Under personnel management, employees are provided with less training and development
opportunities. Under human resource management, employees are provided with more training and
development opportunities.
7. In personnel management, decisions are made by the top management as per the rules
and regulation of the organization. In human resource management, decisions are made collectively
after considering employee's participation, authority, decentralization, competitive environment etc.
8. Personnel management focuses on increased production and satisfied employees. Human
resource management focuses on effectiveness, culture, productivity and employee's participation.
9. Personnel management is concerned with personnel manager. Human resource
management is concerned with all level of managers from top to bottom.
10. Personnel management is a routine function. Human resource management is a strategic
function.
5.4 Motive
Motive is an idea or emotion which prompts an individual to take a certain course of action.
Motive is a reason for the expression of a particular ability
Motivation
"Motivation" is a Latin word, meaning "to move". Human motives are internalized goals within
individuals. Motivation may be defined as those forces that cause people to behave in certain ways.
Motivation encompasses all those pressures and influences that trigger, channel, and sustain human
behavior. Most successful managers have learned to understand the concept of human motivation
and are able to use that understanding to achieve higher standards of subordinate work performance.
According to Koontz and O'Donnell, "Motivation is a class of drives, needs, wishes and similar forces".
Types Of Motivation Techniques

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If a manager wants to get work done by his employees, he may either hold out a promise of
areward (positive motivation) or he/she may install fear (negative motivation). Both these types are
widely used by managements.
a) Positive Motivation:
This type of motivation is generally based on reward. A positive motivation involves thepossibility of
increased motive satisfaction. According to Flippo - "Positive motivation is aprocess of attempting to
influence others to do your will through the possibility of gain orreward". Incentive motivation is the
"pull" mechanism. The receipt of awards, due recognition and praise for work-well done definitely lead
to good team spirit, co-operation and a feeling of happiness.
Positive motivation include: Praise and credit for work done
Wages and Salaries
Appreciation
A sincere interest in subordinates as individuals
Delegation of authority and responsibility
b) Negative Motivation:
This type of motivation is based on force and fear. Fear causes persons to act in a certain
waybecause they fear the consequences. Negative motivation involves the possibility of decreased
motive satisfaction. It is a "push" mechanism. The imposition of punishment frequently results in
frustration among those punished, leading to the development of maladaptive behaviour. It also
creates a hostile state of mind and an unfavourable attitude to the job. However, there is no
management which has not used the negative motivation at some time or the other.
5.4.1 Motivation Theories
Some of the motivation theories are discussed below
a) McGregors Theory X and Theory Y:
McGregor states that people inside the organization can be managed in two ways. Thefirst is
basically negative, which falls under the category X and the other is basically positive,which falls
under the category Y. After viewing the way in which the manager dealt withemployees, McGregor
concluded that a managers view of the nature of human beings is based on a certain grouping of
assumptions and that he or she tends to mold his or her behavior towards subordinates according to
these assumptions.
Under the assumptions of theory X :
Employees inherently do not like work and whenever possible, will attempt to avoid it.
Because employees dislike work, they have to be forced, coerced or threatened withpunishment to
achieve goals.
Employees avoid responsibilities and do not work fill formal directions are issued.
Most workers place a greater importance on security over all other factors and displaylittle ambition.
In contrast under the assumptions of theory Y :
Physical and mental effort at work is as natural as rest or play.
People do exercise self-control and self-direction and if they are committed to those
goals.
Average human beings are willing to take responsibility and exercise imagination,
ingenuity and creativity in solving the problems of the organization.
That the way the things are organized, the average human beings brainpower is onlypartly used.
On analysis of the assumptions it can be detected that theory X assumes that lower-orderneeds
dominate individuals and theory Y assumes that higher-order needs dominateindividuals. An
organization that is run on Theory X lines tends to be authoritarian in nature, the word authoritarian
suggests such ideas as the power to enforce obedience and the right to command. In contrast

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Theory Y organizations can be described as participative, where the aims of the organization and of
the individuals in it are integrated; individuals can achieve their own goals best by directing their
efforts towards the success of the organization.
b) Abraham Maslows Need Hierarchy Theory:
One of the most widely mentioned theories of motivation is the hierarchy of needs theoryput
forth by psychologist Abraham Maslow. Maslow saw human needs in the form of ahierarchy,
ascending from the lowest to the highest, and he concluded that when one set ofneeds is satisfied,
this kind of need ceases to be a motivator.
As per his theory these needs are:
(i) Physiological needs:
These are important needs for sustaining the human life. Food, water, warmth, shelter, sleep,medicine
and education are the basic physiological needs which fall in the primary list of need satisfaction.
Maslow was of an opinion that until these needs were satisfied to a degree to maintain life, no other
motivating factors can work.
(ii) Security or Safety needs:
These are the needs to be free of physical danger and of the fear of losing a job, property, food or
shelter. It also includes protection against any emotional harm.
(iii) Social needs:
Since people are social beings, they need to belong and be accepted by others. People try tosatisfy
their need for affection, acceptance and friendship.
(iv) Esteem needs: According to Maslow, once people begin to satisfy their need to belong, they tend
to want to be held in esteem both by themselves and by others. This kind of need produces such
satisfaction as power, prestige status and self-confidence. It includes both internal esteem factors like
selfrespect, autonomy and achievements and external esteem factors such as states, recognition and
attention.
(v) Need for self-actualization:
Maslow regards this as the highest need in his hierarchy. It is the drive to become what one iscapable
of becoming; it includes growth, achieving ones potential and self-fulfillment. It is to maximize ones
potential and to accomplish something.

All of the needs are structured into a hierarchy and only once a lower level of need has beenfully met,
would a worker be motivated by the opportunity of having the next need up in thehierarchy satisfied.
For example a person who is dying of hunger will be motivated to achieve a basic wage in order to
buy food before worrying about having a secure job contract or the respect of others.
A business should therefore offer different incentives to workers in order to help them fulfill each need
in turn and progress up the hierarchy. Managers should also recognize that workers are not all
motivated in the same way and do not all move up the hierarchy at the same pace. They may
therefore have to offer a slightly different set of incentives from worker to worker.
c) Frederick Herzbergs motivation-hygiene theory:

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Fig(5.1)
Frederick has tried to modify Maslows need Hierarchy theory. His theory is also knownas
two-factor theory or Hygiene theory. He stated that there are certain satisfiersanddissatisfiers for
employees at work. Intrinsic factors are related to job satisfaction, while extrinsic factors are
associated with dissatisfaction. He devised his theory on the question: What do people want from
their jobs? He asked people to describe in detail, such situations when they felt exceptionally good or
exceptionally bad. From the responses that he received, he concluded that opposite of satisfaction is
not dissatisfaction. Removing dissatisfying characteristics from a job does not necessarily make the
job satisfying. He states that presence of certain factors in the organization is natural and the
presence of the same does not lead to motivation. However,their non-presence leads to demotivation. In similar manner there are certain factors, the absence of which causes no
dissatisfaction, but their presence has motivational impact.
Examples of Hygiene factors are:
Security, status, relationship with subordinates, personal life, salary, work conditions,relationship with
supervisor and company policy and administration.
Examples of Motivational factors are:
Growth prospectus ,job advancement, responsibility, challenges, recognition and achievements.
5.5 Morale

Morale is a mental condition or attitude of [individuals and groups] which determine their

willingness to co-operate.
Morale is defined as the extent to which an individuals needs are satisfied and the extent

to which the individual perceives satisfaction as stemming from his total job situation.
Morale is defined as a measure of extent (or level as either high or low) of voluntary co-

operation demonstrated by an individual or a workgroup and of the intensity of the desire


to attain common goals.
Reasons for low morale
Too fine division of authority and responsibility.
Improper selection of employees
Too small a real no. of executives
Over reliance on organizational charts.
Advantages of high morale
Perseverance at work
Loyalty to organization & its leadership.
Good discipline
Strong organizational stamina.
A high degree of employee interest in the job.
Reasonable employee initiative.
Team spirit.
Disadvantages of low morale

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High rate of absenteeism.


High labour turnover.
Friction, jealously & frustration among workers.
More complaints and employee grievances.
Enmity towards management.

Greater grievances and conflicts in organization.

Factors Affecting Or To Be Considered For Morale


1. Job factors:
Nature of job.
Fatigue & boredom associated with the job.
Employee interest in job
Job satisfaction
Confidence and individual members of the group.

Nature of leadership & supervision.


Working & environmental conditions.
Condition of working equipment.
2. Personal factors
Background.
Age.
Sex.
Mental & emotional condition of employee.
Intelligence.
Skill & proficiency.
Training.
Experience etc.
Difference Between Motivation And Morale
While motivation is an internal-psychological drive of an individual which urges him to behave in a
specific manner, morale is more of a group scenario.
Higher motivation often leads to higher morale of employees, but high morale does not essentially
result in greatly motivated employees as to have a positive attitude towards all factors of work
situation may not essentially force the employees to work more efficiently.
While motivation is an individual concept, morale is a group concept. Thus, motivation takes into
consideration the individual differences among the employees, and morale of the employees can
be increased by taking those factors into consideration which influence group scenario or total
work settings.
Motivation acquires primary concern in every organization, while morale is a secondary
phenomenon because high motivation essentially leads to higher productivity while high morale
may not necessarily lead to higher productivity.
Things tied to morale are usually things that are just part of the work environment, and things tied
to motivation are tied to the performance of the individual.
5.6 Fatigue
Fatigue is the state of feeling very tired, weary or sleepy resulting from insufficient sleep,
prolonged mental or physical work, or extended periods of stress or anxiety. Boring or repetitive tasks
can intensify feelings of fatigue. Fatigue can be described as either acute or chronic.
Acute fatigue results from short-term sleep loss or from short periods of heavy physical or mental
work. The effects of acute fatigue are of short duration and usually can be reversed by sleep and
relaxation.

85

Chronic fatigue syndrome is the constant, severe state of tiredness that is not relieved by rest. The
symptoms of chronic fatigue syndrome are similar to the flu, last longer than six months and interfere
with certain activities. The exact cause of this syndrome is still unknown.
Fatigue may be defined as
i.
Negative appetite for activity.
ii.
A reduction in the ability to do work as a consequence of previous work.
causes Of Fatigue
As an individual: Many life and work factors can contribute to fatigue. Some of the main causes are:

inadequate sleep (most adults need seven to eight hours)

not enough time to sleep (extended working hours, irregular working hours, shift work, having
more than one job)

poor quality sleep (workplace stress, sleep disorders)

extended waking and long work hours

shift work (upsets natural sleep rhythms)

ageing (teenagers tend to sleep later, older workers sleep less).

In workplace: The various factors affecting fatigue and the methods to eliminate fatigue are briefed
below
1. Hours of work:
The highest productivity per hour 7 less fatigue is achieved with small no of working hours per
day.
2. Working days of a week:
The highest hourly output can be achieved by a five day week with 40 working hours.
3. Nature of work:
Complex muscular work can be done by suitable material handling equipment.
Minute & precise work imparts more fatigue.
Work requiring more mental tasks adds fatigue.
Works involving standing and abnormal posture tend to increase fatigue more.
4. Working conditions:
Improper light.
Improper working conditions such as

Too cold/hot atmosphere.


Insufficient ventilation.
Presence of bad smell, fumes, dust, smoke & flash.
Noise.
Heavy protective clothing.

Effect Of Fatigue

Affects badly muscles , nerves and mind of the workers.


Decreases a workers capacity to do more work.
Loss of workers efficiency.
Creates a feeling of tiredness and weakness.
Creates disinterest in work.
Increases monotony & boredom.
Increases accidents.
Increases absenteeism.
Increases labour turnover.

sleepiness

irritability (more than usual)

less conversational, or less clear in communication

86

reduced attention span, more easily distracted

slower reactions, clumsiness, poorer hand-eye coordination, reduced manual skills

slower thinking

Remedies Or Strategies Or Methods Or Tips To Reduce Fatigue


Tips For Employees
Employees have a responsibility to arrive fit for work and to behave safely in the workplace. This
includes arriving at work well rested, and understanding and managing fatigue-related risks in the
workplace. To help, you can do the following:

manage your sleep time: have a regular bed time; make sure your bedroom is comfortable;
avoid caffeine for five hours before bedtime

manage your home life: make getting enough sleep a priority; avoid cutting back on sleep in
order to fit everything in

manage your work life: vary or rotate work tasks so you stay alert; take a break if youre tired;
tell your supervisor or manager youre feeling fatigued

eat and drink properly: eat light nutritious meals (heavy meals make you drowsy); drink plenty
of water; watch your caffeine intake

avoid medications that make you sleepy: antihistamines, travel sickness tablets, sleeping
pills, some cold preparations and pain killers

take power naps.

Tips For Employer


The Health and Safety in Employment Act 1992 (external link) requires employers to take all practical
steps to ensure the safety of employees while at work. As an employer you must develop safe
systems of work, and identify, assess and control hazards. Fatigued workers can be a significant
hazard.
As with other workplace hazards, you need to share the management of fatigue with your employees,
especially because it involves factors both inside and outside of work.
Work-wise, look into:

length of shifts: take account of the physical and mental load of the work when determining
shift length

distribution of leisure time: allow for rest and recovery

regularity of shift system: allow workers to prepare for work

previous hours and days worked: monitor and take account of your workers previous hours
and days. The effects of fatigue are cumulative - workers may have sleep debt due to the
length of previous shifts

type of work being performed: pay particular attention to the level of physical or mental effort
required

time of day work is being performed: arrange work so that high risk tasks are scheduled at the
times when workers are performing at their best, outside body clock low points

recovery time from sleep debt: provide workers with at least two unrestricted nights of sleep in
a row

87

breaks: the frequency and length of breaks needs to match the length of shift and the effort
demanded by the work.

5.7 Accidents
An "accident" is an unplanned, undesired event which may or may not result in injury or property
damage, that interferes with the completion of an assigned task.
Types Of Industrial Accidents
Technological disasters are non-natural disastrous occurrences that include:

Accident release: Occurring during the production, transportation or handling of hazardous


chemical substances

Explosions:Disasters will only be classified as explosions when the explosions is the actual
disaster. If the explosion is the cause of another disaster, the event will be classified as the
resulting disaster.

Chemical explosion :Violent destruction caused by explosion of combustible material, nearly


always of chemical origin.

Nuclear explosion/Radiation :Accidental release of radiation occurring in civil facilities,


exceeding the internationally established safety levels.

Mine explosion : Accidents which occur when natural gas or coal dust reacts with the air.

Pollution: Degradationof one or more aspects in the environment by noxious industrial,


chemical or biological wastes, from debris or man-made products and from mismanagement of
natural and environmental resources.

Acid rain: A washout of an excessive concentration of acidic compounds in the atmosphere,


resulting from chemical pollutants such as sulphur and nitrogen compounds. When deposited
these increase the acidity of the soil and water causing agricultural and ecological damage.

Chemical pollution :A sudden pollution of water or air near industrial areas, leading to
internal body disorders with permanent damage of the skin.

Atmosphere pollution: Contamination of the atmosphere by large quantities of gases, solids

and radiation produced by the burning of natural and artificial fuels, chemicals and other industrial
processes and nuclear explosions
Economic Aspects Of Accidents
An accident can be very costly to the employee as well as the employer. There are definite costs
associated with the accident (i) Direct costs (ii) Indirect costs.
i.
Direct costs
Compensation.
Insurance.
Wage loss for the employee.
Medical cost.
ii.
Indirect costs.
Cost of damage to equipment, materials & plants.
Cost of wages paid for time lost by workers not injured.
Cost of wages paid to injured worker.
Cost of replacing the injured employee.
Cost of delay in production.
Cost of lowered production by substitute worker.
Cost of reduction in efficiency of the injured worker.
Cost of safety engineers, supervisors, and staff in investigating recording and reporting of
accidents & its causes.
5.7.1 Causes Or Factors Responsible For Accidents
Causes of accidents in industries and in common

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Taking Shortcuts: Every day we make decisions we hope will make the job faster and more
efficient. But do time savers ever risk your own safety, or that of other crew members? Short
cuts that reduce your safety on the job are not shortcuts, but an increased chance for injury.

Being Over Confident: Confidence is a good thing. Overconfidence is too much of a good
thing. "It'll never happen to me" is an attitude that can lead to improper procedures, tools, or
methods in your work. Any of these can lead to an injury.

Starting a Task with Incomplete Instructions: To do the job safely and right the first time you
need complete information. Have you ever seen a worker sent to do a job, having been given
only a part of the job's instructions? Don't be shy about asking for explanations about work
procedures and safety precautions. It isn't dumb to ask questions; it's dumb not to.

Poor Housekeeping: When clients, managers or safety professionals walk through your work
site, housekeeping is an accurate indicator of everyone's attitude about quality, production
and safety. Poor housekeeping creates hazards of all types. A well maintained area sets a
standard for others to follow. Good housekeeping involves both pride and safety.

Ignoring Safety Procedures: Purposely failing to observe safety procedures can endanger you
and your co-workers. You are being paid to follow the company safety policies-not to make
your own rules. Being "casual" about safety can lead to a casualty!

Mental Distractions from Work: Having a bad day at home and worrying about it at work is a

hazardous combination. Dropping your 'mental' guard can pull your focus away from safe
work procedures. You can also be distracted when you're busy working and a friend comes by
to talk while you are trying to work. Don't become a statistic because you took your eyes off
the machine "just for a minute."
Mechanical causes (or) factors

Unsafe mechanical design or construction.


Hazardous arrangement (piling, overloading, etc.)
Improper machine guarding.
Unsafe apparel.
Protruding nails.

Environmental factors:

Too low temperature causing shivering.


Too high temperature causing headache& sweating.
Too high temperature causing uncomfort , fatigue & drowsiness.
Defective & inadequate illumination causing eyestrain, glass, shadows, etc.

Personal factors

Age.
Financial position.
Lack of knowledge and skill.
Incorrect machine habits.
Day-dreaming.

5.7.2 Prevention Of Industrial Accidents


1. Put formal safety policies and procedures in place. Create a company handbook that lists
out the steps that must take place in order to prevent accidents in the work place. Include
instructions such as how to store dangerous and toxic items and where certain product should
be stowed to ensure safe storage and retrieval.
2. Put someone in charge of safety in your company. Discuss the current safety policies with
this safety coordinator, and work on a plan to make sure that they are adhered to. Confirm
that the person is aware of all the responsibilities associated with safety. Express your

89

3.

4.

5.

6.

7.

8.

9.

support to this person and arrange to meet on a regular basis to discuss concerns about and
solutions to further accident prevention.
Communicate your expectations for a safe work environment. Let your staff know on a
regular basis that safety is a major concern in your business. You can do this verbally and you
can reiterate your expectations in memos. You can also post safety information throughout
your facility.
Inspect your facility regularly with your safety coordinator. Make certain that your staff is
following safety policies at work. Check areas that are of concern and ensure that precautions
have been met. If you see an area that is cause for concern, discuss it with the person
responsible, and then arrange a meeting with all the staff to further communicate the concern
and ensure that it does not happen again.
Have the right tools available so that you or your employees don't have to improvise.
Asking your employees to improvise pretty much says that you don't take safety seriously.
For example, if you have a storage area that includes high shelving, ensure that you have a
safe ladder or step-stool available so that you or your staff members are not forced to climb
on boxes of furniture to retrieve items.
Schedule regular training for all scenarios that pose a risk for accidents. Training should
involve methods in picking up and carrying heavy objects and how to use mechanical
equipment and tools.
The type of training will depend on the type of business you are running. Some
businesses such as restaurants and warehouse facilities will have more training than others.
Be prepared for a fire in your workplace. Fires are potentially devastating occurrences,
putting many businesses, especially restaurants, in jeopardy.[1] Ensure that your workplace is
properly protected against the possibility of a fire to cut down on accidents:
Make sure smoke detectors are installed and have batteries.
Consider investing in first-aid training or, at the very least, a first aid kit. First-aid
training won't keep the accident from happening in the first place, but it could help keep any
injuries incurred during an accident from getting out of control.
Invest in a first-aid kit for each floor of your workplace. Place it in a strategically central
location that is easily accessible.
Create incident reports after each workplace accident. If an accident occurs in your
workplace, write up an incident report. Investigate what happened, who was involved, how the
accident might have been prevented, and recommendation for further procedures. At the very
least, an incident report will foster awareness and possibly act as a deterrent for future
accidents.

5.8 Man Power Planning


According to Terry L. leap and Michael D. Crino, HRP includes estimation of how many
qualified people are necessary to carry out the assigned activities, how many people will be available
and what, if anything, must be done to ensure that personnel supply equals personnel demand at the
appropriate point in the future.
HRP can now be defined as the comparison of an organizations existing labour resources
with forecast labour demand, and hence the scheduling of activities for acquiring, training, redeploying
and possibly discarding labour. It seeks to ensure that an adequate supply of labour is available
precisely when required.
Human Resource Planning Process:
How to have the right number of people with right skills at right times? The process of human
resource planning helps in this regard. The human resource planning process consists of actives

90

relating to future demand for and supply of manpower and matching the two in the context of overall
organizational plans and objectives.
The various activities involved in the process of human resource planning are now discussed one by
one.
1. Analyzing Organizational Plans and Objectives: The process of human planning begins
with analyzing the overall plans and objectives of organization. The reason being human
resource plans stem from business plans. Analysis of business plans into sub-sectional and
functional plans such as technology, production, finance, marketing, expansion and
diversification provides for assessing the human resource requirements for each activity in
each section and department.
2. Analyzing Objectives of Human Resource Planning: The main purpose of human
resource planning is matching employees abilities to enterprise requirements, with an
emphasis on future instead of present argument. According to sikula, the ultimate mission or
purpose of human resource planning is to relate future human resource to future enterprise
need so as to maximize the future return on investment in human resources.
3. Forecasting Demand for Human Resource. The demand for human resources in an
organization is subject to vary from time to time, depending upon both external factors.
External factors include competition, economic and political climate, technological changes,
government policy, etc.
Techniques Or Methods Available For HRP

Management Judgment
Work-study Method
Ratio-trend Analysis
Delphi Technique
Flow Models
Mathematical Models.

These are described one by one:


1. Management Judgment: This technique is very simple and time-saving. Under this
technique either a Bottom-up or a top-down approach is employed for forecasting future
human resource requirement of an organisaiton. In case of bottom-up approach, line
managers prepare departmental requirements for human resource and submit it to the top
managers for their review and consideration. In the top down approach the top managers
prepare the departmental forecasts which are reviewed with the departmental heads or
managers.
2. Work-study Method: This method can be used when it is possible to measure standards
and where job methods do no change frequently. In this method, as used Winslow Taylor in
his scientific management, time and motion study are used to ascertain time for doing a
standard work. Based on this, the number of workers required to do standard worked out.
3. Ratio-Trend Analysis. This is one of the quickest forecasting technique. Under this method,
forecasting for future human resource requirements is made on the basis of time series data.
In other words, this technique involves studying past rations(e.g. total output/number of
workers, total sales volume/number of sales persons, direct workers, is made for indirect
workers) and , based on these forecasting is made for future rations. While calculating future
ratios, allowances can be made for expected changes in organization, methods and jobs. The
demand for human resources is calculated on the basis of established rations between two
variables.
4. Delphi Technique. Delphi technique is named after the ancient greed oracle at the city of
Delphi. This is one of the judgmental methods of forecasting human resource needs. It is a
more complex and time-consuming technique which does not allow group members to meet

91

face-to-face. Therefore, it does not require the physical presence of the group members. The
following steps characterize the Delphi technique:
The members are asked to provide their estimates of human resource requirement

through a series of carefully designed questionnaires.


Each member anonymously and independently completes the first questionnaire.
Results of the first questionnaire are compiled at a central lovation, transcribed, and

copied.
Each member receives the copy of the result.
After viewing the results, members are again asked to review their estimates. This initial

results typically trigger new estimates or cause changes in the original position.
Steps 4 and 5 are repeated as often as necessary until a consensus is reached.
5. Flow Models: Among the flow models the simplest one is called the Markov model. This
model involves the following:
(i)
Determination of time period that will be covered under forecast.
(ii)
Establishment of employees categories also called states. There should not be
overlapping among the various categories.
(iii)
Enumeration of annual flows among various categories or states for several time periods.
(iv)
Estimation of probability of flows or movements from one category to another based on
past trends in this regard.
6. Mathematical Models: Mathematical models express relationship between independent
variables(e.g. production, sales, etc.) and dependent variable(e.g. number of workers
required).
Benefits of HRP:

It enables organization to have right men at right time in right place.


It checks corporate plans of organization.
It provides scope for employee training & development etc.
It helps to anticipate the cost of salary enhancement, better benefits, etc.
To foresee the need of redundancy and plan to check it or to provide alternative employment

in consultation with trade union, other organization & government.


To foresee changes in values, aptitude of human resources & to change the techniques of

interpersonal, management etc.


To plan for physical facilities, working conditions & fringe benefits like canteen, schools,

hospitals, conveyance, child care centers, stores etc.


It gives an idea on the type of test & interview techniques to be used for selection of

candidates.
It helps to take steps to increase productivity, sales, turnover etc.

Factors affecting or factors to be considered in Human resource planning


External
Internal

Government policies
Level of economic development
Business environment
Level of technology
Natural factors
Internal factors
International factors

5.9 Job Analysis(Job Description + Job Specification)

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Policies & strategies of company


HRP of the company
Formal & informal groups
Job analysis
Time horizons
Trade union etc.

A job analysis is the process used to collect information about the duties, responsibilities,
necessary skills, outcomes, and work environment of a particular job. You need as much data as
possible to put together a job description, which is the frequent outcome of the job analysis. Additional
outcomes include recruiting plans, position postings and advertisements, and performance
development planning within your performance management system.

Fig 5.2 Job Analysis


Job Description: Job description includes basic job-related data that is useful to advertise a specific
job and attract a pool of talent. It includes information such as job title, job location, reporting to and of
employees, job summary, nature and objectives of a job, tasks and duties to be performed, working
conditions, machines, tools and equipments to be used by a prospective worker and hazards involved
in it.
Purpose of Job Description
The main purpose of job description is to collect job-related data in order to advertise for a

particular job. It helps in attracting, targeting, recruiting and selecting the right candidate for
the right job.
It is done to determine what needs to be delivered in a particular job. It clarifies what

employees are supposed to do if selected for that particular job opening.


It gives recruiting staff a clear view what kind of candidate is required by a particular
department or division to perform a specific task or job.

93

Fig 5.3
Job Specification: Also known as employee specifications, a job specification is a written statement
of educational qualifications, specific qualities, level of experience, physical, emotional, technical and
communication skills required to perform a job, responsibilities involved in a job and other unusual
sensory demands. It also includes general health, mental health, intelligence, aptitude, memory,
judgment, leadership skills, emotional ability, adaptability, flexibility, values and ethics, manners and
creativity, etc.
Purpose of Job Specification
Described on the basis of job description, job specification helps candidates analyze whether

are eligible to apply for a particular job vacancy or not.


It helps recruiting team of an organization understand what level of qualifications, qualities

and set of characteristics should be present in a candidate to make him or her eligible for the
job opening.
Job Specification gives detailed information about any job including job responsibilities,

desired technical and physical skills, conversational ability and much more.
It helps in selecting the most appropriate candidate for a particular job.

Job description and job specification are two integral parts of job analysis. They define a job fully and
guide both employer and employee on how to go about the whole process of recruitment and
selection. Both data sets are extremely relevant for creating a right fit between job and talent, evaluate
performance and analyze training needs and measuring the worth of a particular job.
Contents Of Job Analysis:

reviewing the job responsibilities of current employees,

doing Internet research and viewing sample job descriptions online or offline highlighting
similar jobs,

analyzing the work duties, tasks, and responsibilities that need to be accomplished by the
employee filling the position,

researching and sharing with other companies that have similar jobs, and

articulation of the most important outcomes or contributions needed from the position.

fig 5.4 job analysis methods

Most Common Methods of Job Analysis

94

Observation Method: A job analyst observes an employee and records all his performed and

non-performed task, fulfilled and un-fulfilled responsibilities and duties, methods, ways and
skills used by him or her to perform various duties and his or her mental or emotional ability to
handle challenges and risks. However, it seems one of the easiest methods to analyze a
specific job but truth is that it is the most difficult one. This particular method includes three
techniques: direct observation, Work Methods Analysis and Critical Incident Technique.
Interview Method:In this method, an employee is interviewed so that he or she comes up

with their own working styles, problems faced by them, use of particular skills and techniques
while performing their job and insecurities and fears about their careers. This method helps
interviewer know what exactly an employee thinks about his or her own job and
responsibilities involved in it. It involves analysis of job by employee himself. In order to
generate honest and true feedback or collect genuine data, questions asked during the
interview should be carefully decided.
Questionnaire Method: Another commonly used job analysis method is getting the
questionnaires filled from employees, their superiors and managers. However, this method
also suffers from personal biasness. A great care should be takes while framing questions for
different grades of employees.
In order to get the true job-related info, management should effectively communicate it to the
staff that data collected will be used for their own good. It is very important to ensure them
that it wont be used against them in anyway. If it is not done properly, it will be a sheer
wastage of time, money and human resources.

5.10 Merit Rating


It analyzes the differences in performance between employees who are working on similar
jobs and would therefore earn the same wages. Merit rating is a system of rating employees on the
basis of factors such as absenteeism, adaptability, attitude, health, length of service, punctuality and
safety record. It is the employee rating achieved through a periodic employee evaluation system,
often used as the basis for pay increases and/or promotion.
Merit rating has been defined as:
1. Performance appraisal (or merit rating) is the process of evaluating the employees
performance on the job in terms of requirements of the job.
2. Merit-rating refers to all formal procedures used in working organizations to evaluate
personalities and contributions and potential of group member.
Characteristics and factors that are considered in Merit appraisal of the workers
1. Co-operation
2.Quality of work done
3.Attendance and regularity
4.Education, skill, experience
5.Character and integrity
6.Initiative
Objectives of merit rating:
It provides a record of the worth of employees.
It helps to assign appropriate jobs to the employees.
It unfolds the limitations of the employees & thus helps in employee improvement.
Merit rating records forms a basis for

Wage increase
Promotion
Special assignments

-Training
-Transfer
-discharge

95

Advantages
Merit-rating plays very important role in the human resource administration of a firm. Its advantages
are:
1. Systematic evaluation of employees.
2. Facilitates matching of job with individual.
3. Facilitates promotion related decisions
4. Helpful in identifying weakness of the employees which may systematically be removed.
5. Facilitates training related decisions.
6. Provides base for guidance and counseling for the employees.
7. Develops healthy competition among workers to improve performance.
8. Serves as motivational tool for employees.
Disadvantages
Merit rating has the following drawbacks;
1. The rating of empl9oyees may be subjective and this creates dissatisfaction among them.
2. Evaluators or taters tend to give much premium to past ratings of an employee who might
have improved himself in the course of time.
3. Rates may be influenced by raters own attitude and self-made rating factors which are not
consistent with the merit rating process. Incentives schemes may not be introduced
advantageously if merit rating is inaccurate, unreliable and subjective.
Factors to be considered while evaluating the worker for merit rating
Employees are rated on the basis of many factors related to personal attributes, leadership quality,
on-job performance, interpersonal quality, loyalty, attendance, etc. Some of these factors are:

1.

2.

Quality of work
1.1

Accuracy

1.2

Rejections and scrap

1.3

Thoroughness

1.4

Economy of time

1.5

House keeping

1.6

Contribution in quality circle team

1.7

Contribution in other TQM effort

Quantity of work
2.1

3.

Output

2.2

Approach in meeting over-demand

Personal Qualities
3.1

Team spirit

3.2 Attitude for work

3.3

Loyalty

3.4 Leadership

3.5

Relations with superior

3.6 Relations with subordinates

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3.7
4.

Integrity

3.8 Judgment

Others
3.3

Attendance

4.3

Safety habits

4.5

4.2 Ability to follow instructions


4.4 Interest in training and learning

Interest in corporate culture, etc.

Different Methods Or Strategies Or Tips Available For Merit Rating


i)Rating scale method:
The steps involved in rating scale method are as follows
a) Define the merit factors to rate the employees
Eg.Standard of output.
Quantity of output.
Intelligence.
Leadership.
Job knowledge.
Character.
Adaptability.
Loyalty etc.
b) Choose six to ten factors.
c) Divide each factor into 3/5 different grades.
Eg.Excellent, very good, good, fair & unsatisfactory.
d) Impart certain points(marks) to eachgrade
e) The worth of an employee can be determined from the total points he gets for all his
merit factors.
f) On the basis of these points different workers can also be compared .
ii)Employee comparison method:
This method compares a worker on a job with another workers on the same job, in pairs. This
method consumer much time especially when the number of employees to be compared is
large.
Advantages of merit rating:
i.
It develops the ability of a rater.
ii.
Meritorious employees are encouraged.
iii.
Employer-employee relations improve.
iv.
It is easy to deal with trade unions.
v.
It involves lesser calculations as compared to other incentive schemes.
Disadvantages of merit rating:
i.
It entails halo effect.
ii.
Correct results will not be obtained, if merit factors relevant to a particular job are not
selected.
iii.
It encourages biasness.
iv.
Without personal contact a rater cannot rate an employee.
v.
It does not reward the employee immediately.
iii)Graphic rating scales : This method is widely used in merit- rating and is similar to the techniques
in point-evaluation plans. This involves the supervisor to rate employee performance in terms of
prescribed traits (e.g. quality of work, quantity of work, co-operativeness, initiative, dependability and
knowledge of work.) Each trait is defined and various degrees of each are prescribed in some way.
From the traits and degrees overall rating can be obtained.

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iv)Check-lists: In this technique a number of statements are prepared, each relating to employee
performance. The supervisor then checks-off those statements which apply to the employee being
rated. Under each rate, the check-list contains a number of questions which examine the employees
performance in far greater detail than the rating scale can. A check-list attempts to indicate specific
ways in which the employee is doing well or failing to measure up to a satisfactory performance.
v)Grouping and ranking: It is the easiest and the most popular method of merit-rating. The
supervisor evaluates employee performance by simply grouping and ranking the employees.
Under this method employees are classified into broad categories of excellent, good, average, fair
and poor. Ranking is a simple matter of identifying the best performers in the group and then ranking
all the member in order, down to the poorest. Although a crude technique, it can help the supervisor to
relate pay to performance.
vi)Direct appraisal; Under this system an actual list of assigned duties is taken from each job
description. Against each duty assignment is a space for the supervisor to assess the performance of
the employee.
vii)Standards of performance: Under this system the supervisor determines in his own mind just
what he reasonably expects to be accomplished in each area of responsibility. He will be then in a
better position to judge performance by comparing actual accomplishments against the standards
which have been established.
viii)Critical incident method: Although this is not a direct method of evaluating employee
performance, this technique might well be used by supervisors for merit-rating. A supervisor maintains
a separate data sheet for each employee. Incidents which illustrate, unusual accomplishment or
particular job failures can be noted.
Similarly, the supervisor can take notes on incidents, which illustrate particular characteristics of the
employees work at the time they occur. Such written case histories serve as invaluable guides to the
supervisor when preparing merit rating inventories.

5.11 Wage And Salary Administration


Wage and Salary Administration refers to the establishment and implementation of sound
policies and practices of employee compensation. The basic purpose of wage and salary
administration is to establish and maintain an equitable wage and salary structure. Wages and
salaries are often one of the largest components of cost of production and such have serious
implications for growth and profitability of the company. On the other hand, they are the only source of
workers income.
After the independence and particularly after 1948, some new terms relating to wages began to be
used. These are:
1. Statutory Minimum Wages
2. Basic Minimum Wages
3. Minimum Wages
4. Fair Wages
5. Living Wages
6. Need Based Wages

Steps Involved Or Flow Or Wage Determination Process

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Wage determination is a complex process. However, wage determination process consists of


the following steps:
1. Job Analysis: Job analysis describes the duties, responsibilities, working conditions and interrelationships between the job as it is and the other jobs with which it is associated. It attempts to
record and analyse details concerning the training, skills, required efforts, qualifications, abilities,
experience, and responsibilities expected of an employee. After determining the job specifications, the
actual process of grading, rating or evaluating the job occurs. A job is rated in order to determine its
value relative to all the other jobs in the organization which are subject to evaluation. The next step is
that of providing the job with a price. This involves converting the relative job values into specific
monetary values or translating the job classes into rate ranges.
2. Wage Survey: In determining the wages for a specific job it is very necessary to work as to what
wages are being given for the same job in other enterprises. If, on the basis of utility, the wages for a
specific job are determined below the wages for the same job on other enterprises, following will be its
disadvantages:
1. Good persons and persons of merit will not be available.
2. If such people are at all obtained for employment, they will shift to another enterprise after some
time.it is, therefore, necessary to keep in mind the following in wage-survey:
i) Term of survey, (weekly or monthly)
ii) The whole wage-payment-knowledge of daily working hours or monthly payment.
iii) Definition of jobs.
iv) Appropriate questionnaire for collecting information.
v) Scientific technique of collecting the data.
3. Group Similar Jobs into Pay Grades: After the results of job analysis and salary surveys have
been received, the committee can turn to the task of assigning pay rates to each job, but it will usually
want to first group jobs into pay grades. A pay grade is comprises the jobs of approximately equal
difficulty or importance as determined by job evaluation. Pay grading is essential for pay purposes
because instead of having to deal with hundreds of pay rates, the committee might only have to focus
on a few.
4. Price Each Pay Grade: The next step is to assign pay rates to pay grades. Assigning pay rates to
each pay grade is usually accomplished with a wage curve. The wage curve depicts graphically the
pay rates currently being paid for jobs in each pay grade, relative to the points or ranking assigned to
each job or grade by the job evaluation. The purpose of wage curve is to show the relationship
between (i) the value of the job as determined by one of the job evaluation methods and (ii) the
current average pay rates for the grades.
5. Fine-Tune Pay Rates: Fine tuning involves correcting out of line rates and developing rate ranges.
(i) Correcting out of Line Rates: The average current pay for a job may be too high or too low,
relative to other jobs in the firm. If a rate falls well below the line, a pay rise for that job may be
required. If the rate falls well above the wage line, pay cuts or a pay freeze may be required.
(ii) Developing Rate Ranges: Most employers do not pay just one rate for all jobs in a particular pay
grade. Instead, they develop rate ranges for each grade so that there might be different levels and
corresponding pay rates within each pay grade. The rate is usually built around the wage line or
curve. One alternative is to arbitrarily decide on a maximum and minimum rate for each grade. As an
alternative, some employers allow the rate for each grade to become wider for the higher pay ranges
reflecting the greater demands and performance variability inherent in these more complex jobs.
6. Wage Administration Rules: The development of rules of wage administration has to be done in
the next step. It is considered advisable in the interests of the concern and the employees that the
information about average salaries and ranges in the salaries of group should be made known to the
employees concerned; for secrecy in this matter may create dissatisfaction and it may also vitiate the

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potential motivating effects of disclosure. Finally, the employee is appraised and the wage is fixed for
the grade he is found fit.
Types Of Wage Incentive Plans
1. Time wage: In this type the worker is given remuneration according to time. This type of
remuneration may be per hour, per day or per month or per year. There exists no relationship between
the quantum of work and the wage. This type is in operation in all industries in India. This plan is very
simple to understand. The worker works after due thinking and with convenience. However it
encourages the tendency of prolonging or delaying the work unnecessarily. Moreover, it is very
difficult to measure the productivity of the workers under this type of plan.
2. Piece Rate System: In this type of plan, a worker gets remuneration according to his output
irrespective of the time he takes in finishing his job. Here, the payment of remuneration is related to
work and not to time. Under this type, the workers are encouraged to earn more and more. The more
the output is, the more the remuneration is. The workers are also at liberty for their job with interest
and they need not be supervised. However, this type of wage payment is not suitable for commodities
of artistic taste. Moreover, the quality of goods goes down.
3. Wage incentive Plan: This type of wage payment is the combination of two types the above
referred. Efforts have been made here to obtain the advantages of both these types while avoiding
their disadvantages. This includes:
a) Halsey Premium Scheme: Under this scheme if a worker gives an output more than the fixed
standard job, he is given about 33% to 50% of the remuneration for that job as bonus. Here a
standard of output is fixed and a standard of time is also fixed for the completion of that job before
hand. If the job of fixed standard is completed with the standard time fixed for the purpose, the worker
gets his fixed wages. But, if he completes the job before the fixed standard time and, thereby, saves
some time, he gets a fixed percentage of his wages for the time so saved as bonus.
b) Rowan Premium Scheme: This plan is an improvement upon Halsey Plan. Under this plan,
premium is that proportion of the wages for the time taken which the time saved bears to the standard
time. The credit of this incentive premium method goes to Rowan of Scotland. The worker is paid
wages at normal rates for the duration he has worked and is paid extra money in the form of premium
on the basis of the time he has saved. Under this scheme, the standard work and the standard time
both are fixed. The wages for the time saved will increase in the same percentage that is equal to the
proportion the time saved bears to standard time. The premium for the time saved cannot be more
than the total standard wages. Thus, a worker cannot get cleverly wages more than needed.
c) Taylors Plan: Taylor plan is based on wages per unit. In other words, a worker is paid wages in
accordance with his output. Higher price rate is fixed for the workers who give production over and
above the standard workload fixed. The lower rate is fixed for the workers who give production below
the standard workload fixed.
d) Merrick Plan: This plan is somewhat a modified form of Taylors plan. This plan offers three grade
piece rates than the two offered in the Taylors plan.
I. First limit is for new workers and is very low.
II. Second limit is for workers with average efficiency.
III. Third limit is for very efficient workers.
e) Gantt Plan: This is also a modified form of Taylor plan. In it, wages are fixed on the basis of time.
On the other hand, the efficient workers are given wages per unit. Thus, the workers who give more
output get their wages at enhanced rates.
f) Emerson Plan: This plan is a combination of Taylor, Merrick and Gantt plans. However, a slight
modification in these plans has been made and different rates of bonus have been fixed under this
plan. The amount of bonus increases with the increase in efficiency. These percentages are as under:
1% bonus on 67.5 efficiency.
10% bonus on 90% efficiency.
20% bonus on 100% efficiency.
20% + 30% extra on bonus on efficiency more than 100%.

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g) Profit-Sharing Scheme: Under this scheme, workers are given a certain percentage of profits as
bonus. But it suffers from one defect. Suppose, there is no profit in a particular year. Workers will also
not be given the bonus for that very year. The workers think that they have been deceived by the
employers and therefore, clash with them on this very issue. This assumes the form of workermanagement unrest and has its bad effect on the production. This scheme is undoubtedly a new and
better scheme. But, the trade unions misuse the scheme.
h) Scalar Plan: Under this scheme, the workers are paid bonus equal to the percentage of profits
earned more than the profits earned last year by the organisation. 15% of the bonus is deducted and
this deduction is deposited in the fund which is distributed among the workers in the year to come.
5.12 Industrial Unrest
According to the Industrial Dispute Act, 1947,sec 2(k), Industrial disputes(unrest) means any dispute
or difference between employers and employers or between employers and workmen or between
workmen and workmen, which is connected with the employment (or) non-employment (or) terms of
employment (or) with the conditions of labour of any person.
A situation of clash or difference in opinions between

Workers and employer


Employers and employers
or workers and workers
in connection with employment terms and conditions is known as industrial dispute.

Factors Contributing Industrial Conflicts


The causes of industrial disputes can be broadly classified into two categories: economic and noneconomic causes.
The economic causes will include issues relating to compensation like wages, bonus, allowances, and
conditions for work, working hours, leave and holidays without pay, unjust layoffs and retrenchments.
The non economic factors will include victimization of workers, ill treatment by staff members,
sympathetic strikes, political factors, indiscipline etc.
Economic Causes:
The most common causes of industrial disputes are economic causes. These are follows:
Demand for higher Wages: Rise in the cost of living forces the workers to demand more wages to
meet the rising cost of living index and to increase their standards of living. This brings them into
conflict with their employers who are never willing to pay more wages to workers.
Demand for Allowances and Bonus: Increase in cost of living was the main cause of the demand of
certain allowance allowances such as dearness allowance, house allowance, medical allowance,
night shift allowance, conveyance allowance etc; by the workers to equate their wages with the rise of
prices. Bonus also plays an important role as a cause of industrial dispute. Both the amount and the
method of bonus payment have led to a number of disputes.
High Industrial Profits: In the changing world, concept of labour has changed considerably. At the
present, employers consider themselves as a partner of the industry and demand their share in the
profits.
Non- Economic Causes:
Working Conditions and Working Hours: The working conditions in Indian industries are not
hygienic. There is not ample provision of water, heating, lighting, safety etc. On the other hand,
working hours are also greater. The demand of palatable working conditions and shorter hours of
work led to labour disputes
Modernization and Automation of Plant and Machinery: The attempt at modernization and
introduction of automatic machinery to replace labour has been the major cause of disputes of India.
Workers go on strike, off and on, to resist such rationalization.

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Personnel Causes: Sometime industrial disputes arise because of personnel problems like
dismissal, retrenchment, layoff, transfer, and promotion etc.
Political Causes: Various political parties control trade unions in India. In many cases, their
leadership vests in hands of persons who are more interested in achieving their political interests
rather than the interests of the workers.
Indiscipline: Industrial disputes also take place because of indiscipline and violation on part the
workforce. The managements to curb indiscipline and violence resort to lockouts
Non-reorganization of trade unions: The employers usually do not like the interference by trade
unions. They do not recognize them. This brings the workers into conflict with their employers.
Weakness of Trade Unions: Weaknesses of trade unions encourages the employers to deny
certain basic needs of the workers such as medical, education and housing facilities etc. This led to
resentment on the part of workers who resorted to direct action.
Types Of Industrial Conflicts Or Unrest
1. Strikes
- Primary
- Secondary
2. Lock-outs

- Others

Strike
According to Peterson, strike is a temporary cessation of work by a group of employees in
order to express grievances or to enforce a demand concerning changes in work conditions.
Section 2(q) of the Industrial Disputes Act, 1947 strike is a cessation of work by a body of
persons employed in any industry, acting in combination or a concerted refusal under a common
understanding, of a number of persons who are or have been so employed to continue to work or to
accept employment.
Different types of strikes
1. Primary Strike
2. Secondary Strikes
3. Others
1. Primary Strikes

Stay away Strikes: In this strike, workmen stay away the work place. They organize

rallies, demonstrations etc.


Stay-in Strike or Sit-down strike: In this strike, workmen come to place, they stay at work

place but they dont work.


Tools-down, pen-down or Mouth-shut Strike: In this Strike, the strikers lay down their tools

in case of factory workers, lay down their pens in case of office workers and shut their
mouth in case of teachers.
Token or Protest Strike: It is a very short duration and is in the nature of signal for the

danger ahead. In this strike the workers do not work for an hour or a day.
Lightening or Wildcat strike: In this strike, the strikers strike the work without any prior

notice or with a shortest notice.


Go Slow: In this strike, the workers intentionally reduce the speed of work.
Work to Rule/Work to Destination: In this strike, the strikers undertake the work

according to rules or job description.


Picketing: It is an act of posting pickets and implies machinery or patrolling of the

workmen in front of the premises of the employer.


Boycott: It aims at disrupting the normal functioning of the enterprise.

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Hunger strike: This type of strike is resorted to either by the leader of the union or by

some workers all at a time or in small batches for a limited period or up to the period of
settlement of disputes.
Gherao: It is a physical blockade of target either by encirclement, intended to block the
regress and ingress from and to a particular office, workshop etc.

2. Secondary Strikes

Sympathetic strikes: Against a third party.

3. Others

General Particular Political Bandhs

The following suggestions may prove fruitful to prevent strikes:

It should adopt a well-defined, precise, clear and progressive personal policies aiming at
the maintenance of good industrial relations in the undertaking

It should ensure an effective administration and timely implementation of these policies.

It should adopt fair and reasonable recruitment, promotion and wage policies and ensure
their proper implementation.

It should ensure an effective two-way system of communication. This will help the

management to create a favorable atmosphere of goodwill, and faith in the organization


and understand human climate threat; and enable the workers to appreciate the
management policies in their right perspective so that no misunderstanding is created
with the employees at all levels.
Prevention Of Industrial Conflicts Or Unrest
Prevention of industrial disputes may have different methods. These methods cover the
entire field of relations between industry and labour and include enactment and enforcement of
progressive legislation, works committees and councils, wage boards, and trade boards profit sharing
and co-partnership, tripartite labour machinery, education, housing, welfare work, and all such
measures which can bridge the gap between the employers and employed.
Labour Welfare Officer
Section 49(1) and (2) of the Factories Act, 1948 specifies that every factory wherein
500 or more workers are ordinarily employed, at least one welfare officer must be appointed, where
the number of workers are in excess of 2,500, the Assistant and/or Additional Welfare Officers are
required to be appointed to assist the welfare officer.
Functions of Labour Welfare Officer
The Committee on Labour Welfare has laid down the following duties of labour welfare officers,
based upon the Model Rules framed under the Factories Act of 1948:
(a) Supervision of: (i) safety, health and welfare programmes like housing, recreation, sanitation
services as provided under the law or otherwise; (ii) working of Joint Committees (iii) grant of
leave with wages; and (iv) redress of workers grievances.
(b) Counselling Workers in: (i) personnel and family problems, (ii) helping them to adjust to their
work environment, and (iii) understand their rights and privileges.
(c) Advising Management in Matters of: (i) formulating labour and welfare policies; (ii)
apprenticeship training programmes; (iii) meeting statutory obligations of workers; (iv)
developing fringe benefits; and (v) workers education and use of communication media.
(d) Establishing liaison with workers so that they may: (i) understand various limitations under which
they work; (ii) appreciate the need of harmonious industrial relations in the plant; (iii) interpret

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company policies to works; and (iv) persuade workers to come to a settlement in case of
disputes.
(e) Establishing liaison with management so that the latter may: (i) appreciate workers viewpoint to
various matters in the plant; (ii) welfare officers should intervene on behalf of workers in matters
under consideration of the management; (iii) help different department heads to meet their
obligation under the Act; (iv) maintain harmonious industrial relations in the plant; and (v)
suggest measures for promoting general well-being of workers.
(f) Working with Management and Workers: (i) to maintain harmonious industrial relations in the
plant; (ii) to arrange for prompt redressal of grievances and speedy settlement of disputes; (iii) to
improve productivity and productive efficiency of the enterprise.
(g) Working with Outside Public: (i) securing proper enforcement of various Acts as applicable to the
plant by establishing contact with factory inspectors medical officers and other inspectors; (ii)
other agencies in the community with a view to helping workers to make use of community
servies.
5.13 Collective Bargaining
Collective bargaining may be defined as the process in which conditions of employment are
determined by agreement between representatives of the union, on the one land, and those of the
employer, on the other. It is called collective because both the employer and the employees act as a
group rather than individuals.
CB is amthod by which trade unions protected & improved the conditions of their members
working lives.
According to encyclopedia of social science collective bargaining is a process of discussion &
negotiation between two parties, one or both of whom is a group of persons acting in consent.
CB is a procedure by which employers and a group of employers agree upon the condition of
work.
Four Types Of Collective Bargaining
According to Walton Mckersie, a collective bargaining process generally consists of four types of
activities:
i.
distributive bargaining,
ii.
integrative bargaining,
iii.
attitudinal structuring and
iv.
intra-organisational bargaining.
The first type of activity often involved in a collective bargaining process is distributive bargaining.
This is straight-out haggling over how to split up a pie . In this type of activity one pays gain is the
other partys loss. When there are economic issues in dispute(e.g.wages) this type of activity
predominates in the bargaining process.
The Second type of activity is integrative bargaining. This is negotiation of an issue on which both
parties may gain, or at least neither one loses. A co-operative search for the best job evaluation
system or a training programme are examples of integrative bargaining.
The Third type of activity involved in collective bargaining is attitudinal structuring. The process of
collective bargaining helps in shaping such attitudes as trust or distrust, friendliness or hostility
between the parties. This is simple fact that both parties have to deal with each other almost daily and
that they do not have just a sporadic relationship promotes restraint between the negotiators during
the bargaining process. But if there is a backlog of bitterness, it can erupt and destroy all negotiations
over a new contract.
The fourth type of activity that goes on in all collective bargaining is intra-organizational bargaining.
i.e., maneuvering to achieve consensus within the labor and management organizations. There are
always groups within a union which believe that their interests are not being given adequate

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consideration by the organization. The skilled workers may believe that the union pays too much
attention to the unskilled; women members may think that their interests are not fairly considered by
the men who run the union and so on. Similarly, on the side of the employer there may be differences
which need to be resolve.
General Advantages And Disadvantages Of Collective Bargaining
Pros

Can lead to high-performance workplace where labor and management jointly engage in
problem solving, addressing issues on an equal standing.

Provides legally based bilateral relationship.

Managements rights are clearly spelled out.

Employers and employees rights protected by binding collective bargaining agreement.

Multi-year contracts may provide budgetary predictability on salary and other compensation
issues.

Cons

Managements authority and freedom are much more restricted by negotiated rules.

Creates significant potential for polarization between employees and managers.

Disproportionate effect of relatively few active employees on the many in the bargaining unit.
This is particularly the case when collective bargaining involves a system-wide structure of
elections.

Increases bureaucratization and requires longer time needed for decision making.

Increases participation by external entities (e.g., arbitrators, State Labor Relations Board) in
higher educations decision making.

Protects the status quo, thereby inhibiting innovation and change. This is particularly the case
when the change involves privatizations.

5.14 MBO (Management By Objective)


MBO may be defined as a process whereby superiors and subordinates jointly identify the common
objectives, set the results that should be achieved by the subordinates, assess the contribution of
each individual in terms of the results expected of him, and integrate individuals with the organization
so as to make use of organizational resources.
Characteristics of MBO:

MBO is both a philosophy and a technique.


MBO is goal good-oriented. Deadlines are fixed for achieving goals.
MBO stresses participative decision making because it assumes that it leads to because

it assumes that it leads to better commitment and motivation.


It lays down an evaluative mechanism through which the contribution of each individual is

measured.
It creates a link between individual and organizational goals.
It evaluates employees performance periodically.
MBO is a continuous process.

Steps In MBO
1. Central goal setting: defining and verifying organizational objectives is the first step in MBO
process. Generally these objectives are set by central management of the organization but it does so

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after consulting other managers. Before setting of these objectives, an extensive assessment of the
available resources is made by the central management. It also conducts market service and
research along with making a forecast. Through this elaborate analysis, the desired long run and short
run objectives of the organization are highlighted.
2. Development and individual goal setting : After organization objectives are established by the
central management, the next step is to establish the department goals.
The top management needs to discuss these objectives with the heads of the departments so that
mutually agreed upon objectives are established. Long range and short range goals are set by each
department in consultation with the top management. After the department goals are established, the
employees work with their managers to establish their own individual goals which relate with the
organization goals.
These participative goals are very important because It has been seen that employees become highly
motivated to achieve the objectives established by them. These objectives for individuals should be
specific and short range. These should indicate the capability of the unit of the individual. Through this
process all the members of the organization become involved in the process of goal setting.

Fig 5.5MBO (Management By Objective)


3. Revision of job description : In the process of MBO resetting individual goals involves a revision
of job description of different positions in the organization which in turn requires the revision of the
entire structure of the organization. The organization manuals and charts may also have to be
modified to portray the changes that have been introduced by the process of MBO. The job
description has to define the objectives, authority and responsibility of different jobs. The connection
of one job with all other jobs of the organization also needs to be established clearly.

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4. Matching goals :The establishment of objectives can not be fruitful unless the resources and
means required to achieve these objectives are provided. Therefore the subordinates should be
provided required tools and materials which enables them to achieve the objectives efficiently and
effectively. Resource requirements can be measured precisely if the goals are set precisely. This
makes the process of resource allocation relatively easy. Resource allocation should be made after
consulting the subordinates.
5. Freedom implementation: The task team of manager and his subordinates should be given
freedom in deciding the way to utilize their resources and the way to achieve their objectives. There
should be very little or no interference by the seniors as long as the team is working with in the
framework of organization policies.
6. Establishing check points: The process of MBO requires regularly meetings between the
managers and their subordinates to discuss the progress achieve in the accomplishment of the
objective established for the subordinates. For this purpose the mangers need to establish the
standards of performance or check points to evaluate the progress of their subordinates. The analysis
of key results should be recorded in writing and it generally contains information regarding :
(i) The overall objectives related with the job of subordinates.
(ii) The key results which must be achieved by the subordinate to fulfill his objectives.
(iii) The long term and short term priorities, a subordinate needs to adhere to.
(iv.) The extent and scope of assistance expected by a subordinate from his superior and other
departmental managers and also the assistance, the subordinates is required to extend to other
departments of his organizations.
(v.) Nature of information and the reports receive by the subordinate to carry out self evaluation.
(vi.) The standards use to evaluate the performance of the subordinate.
7. Performance appraisal :An informal performance appraisal is generally conducted in routine by
the manager, a periodic review of performance of the subordinates should also be conducted.
Periodic reviews are required as the priorities and conditions change constantly and need to be
monitored constantly. These reviews help the mangers as well as the subordinates to modify the
objectives or the methods whenever require. This significantly increases the chances of achieving the
goals and also ensures that no surprises are found at the time of final appraisal. Periodic performance
appraisal needs to be based on measurable and fair standards so that these are completely
understood by the subordinates and there are also aware of the degree of performance required at
each step.
8. Counseling :Periodic performance review helps the subordinates in improving his future
performance.

Goal setting: The first phase in the MBO process is to define the organizational objectives.

These are determined by the top management and usually in consultation with other
managers. Once these goals are established, they should be made known to all the
members. In setting objectives, it is necessary to identify "Key-Result Areas' (KRA).
Manager-Subordinate involvement: After the organizational goals are defined, the

subordinates work with the managers to determine their individual goals. In this way,
everyone gets involved in the goal setting.
Matching goals and resources: Management must ensure that the subordinates are
provided with necessary tools and materials to achieve these goals. Allocation of resources
should also be done in consultation with the subordinates.

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Implementation of plan: After objectives are established and resources are allocated, the

subordinates can implement the plan. If any guidance or clarification is required, they can
contact their superiors.
Review and appraisal of performance: This step involves periodic review of progress
between manager and the subordinates. Such reviews would determine if the progress is
satisfactory or the subordinate is facing some problems. Performance appraisal at these
reviews should be conducted, based on fair and measurable standards.

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