Method of Costing

We know that costing is the system of calculating the cost. In the system of costing, we use different
methods of costing. Any method of costing can be used in any business according to the need.
Following are the main methods of costing.
1. Job Costing
In job costing, we calculate and collect the expenses for each work . This work is done on the basis
of order. So, this is the part of specific order costing. A job card is made for each work or job. This
method of costing is used in the factories which produce the machine tool and other engineering
products, furniture projects, hardware and interior decoration. This method of costing is also called a
piece of work costing or terminal costing.
Following are its features
a) Cost of Each unit of production is calculated separately.
b) A cost sheet is made for each job.
2. Batch Costing
Batch costing is just the extension of job costing. In batch costing, we do
not calculate and collect the cost of each unit of production but we calculate the cost of each group
or batch. Each group will be one unit of production under batchcosting. For example, we are
calculating the cost of 1000 bricks. It is one unit and under batch cost, we will calculate the material
cost, labour cost and overhead cost of producing 1000 bricks. Except this example, we can take the
example of ready-made garments batch, biscuit batch of 10 units in one packet etc.
3. Contract Costing
When the form of work will be big, at that time, we will use contract costing. We keep different
contract account for each contract. Contract costing is used in building construction,
machine construction contract. Actually like job costing, we will calculate the cost of material, cost of
labour and cost of overhead of each contract. Suppose, we have to construct the 40 foot by 40
foot shopping mall. This one contract will be the our cost unit. Our contract price is just like our sale
value. After deducting our all expenses, we will calculate our profit from contract. If any contract
goes more than one year. We will calculate the notion profit on the basis of completed work of
contract.
4. Process Costing
Process costing is used where production process will active all the time. Every production in
one process will be the raw material of other process. Because produced product will become at the
end of process, we will not only calculate the cost of each process but we will calculate the unit cost.
For every process, we will open process account. We will show all the expenses relating
to process in it. We will use the process costing in oil industry, chemical industry, paper industry etc.
5. Unit Costing
Unit costing is also called single or output costing. In cement industry, we can see the example of
unit costing. Every bag of cement is important. We will calculate its production cost when we have
to decide its sale price. When we produce the many units, we calculate unit cost by dividing total
cost with total units of product.
6. Operating Costing
When any company provides the service instead of production of goods, this method of costing is
used. For example, transport carriers, electricity distributing company, municipal committee,
hospitals and hotels.
7. Operation Costing
When a product is produced with different operations, we will use the operation costing.
We calculate the conversion cost of converting raw material into output. We also deduct the cost of
rejected material.
8. Multiple Costing
Multiple costing is that method in which we use many methods of costing together. For example, we
have to make a product whose part are made from different factories. So, every part's cost is
calculated under job costing. After this, it is joined with different process. So, process costing will be
applied. At the end, we will calculate the cost which we have calculated from multiple methods of
costing.

Overview of Zero-Base Budgeting

A zero-base budget requires managers to justify all of their budgeted expenditures, rather than
the more common approach of only requiring justification for incremental changes to
the budget or the actual results from the preceding year. Thus, a manager is theoretically
assumed to have an expenditure base line of zero (hence the name of the budgeting method).

In reality, a manager is assumed to have a minimum amount of funding for basic departmental
operations, above which additional funding must be justified. The intent of the process is to
continually refocus funding on key business objectives, and terminate or scale back any
activities no longer related to those objectives.

The basic process flow under zero-base budgeting is:

 1. Identify business objectives
2. Create and evaluate alternative methods for accomplishing each objective
3. Evaluate alternative funding levels, depending on planned performance levels
4. Set priorities

The concept of paring back expenses in layers can also be used in reverse, where you delineate
the specific costs and capital investment that will be incurred if you add an additional service or
function. Thus, management can make discrete determinations of the exact combination
of incremental cost and service for their business. This process will typically result in at least a
minimum service level, which establishes a cost baseline below which it is impossible for a
business to go, along with various gradations of service above the minimum.

Operating leverage
Operating leverage measures a company’s fixed costs as a percentage of its total costs. It is used
to evaluate the breakeven point of a business, as well as the likely profit levels on individual
sales. The following two scenarios describe an organization having high operating leverage and
low operating leverage.

1. High operating leverage. A large proportion of the company’s costs are fixed costs. In this case,
the firm earns a large profit on each incremental sale, but must attain sufficient sales volume to
cover its substantial fixed costs. If it can do so, then the entity will earn a major profi t on all sales
after it has paid for its fixed costs.
2. Low operating leverage. A large proportion of the company’s sales are variable costs, so it only
incurs these costs if there is a sale. In this case, the firm earns a smaller profit on each incremental
sale, but does not have to generate much sales volume in order to cover its lower fixed costs. It is
easier for this type of company to earn a profit at low sales levels, but it does not earn outsized
profits if it can generate additional sales.

For example, a software company has substantial fixed costs in the form of developer salaries,
but has almost no variable costs associated with each incremental software sale; this firm has
high operating leverage. Conversely, a consulting firm bills its clients by the hour, and incurs
variable costs in the form of consultant wages. This firm has low operating leverage.
 To calculate operating leverage, divide an entity’s contribution margin by its net operating
income. The contribution margin is sales minus variable expenses.

Financial leverage
Financial leverage is the amount of debt that an entity uses to buy more assets. Leverage is
employed to avoid using too much equity to fund operations. An excessive amount of financial
leverage increases the risk of failure, since it becomes more difficult to repay debt.

The financial leverage formula is measured as the ratio of total debt to total assets. As the
proportion of debt to assets increases, so too does the amount of financial leverage. Financial
leverage is favorable when the uses to which debt can be put generate returns greater than
the interest expense associated with the debt. Many companies use financial leverage rather than
acquiring more equity capital, which could reduce the earnings per share of
existing shareholders.

Financial leverage has two primary advantages:

 Enhanced earnings. Financial leverage may allow an entity to earn a disproportionate amount on
its assets.
 Favorable tax treatment. In many tax jurisdictions, interest expense is tax deductible, which
reduces its net cost to the borrower.

However, financial leverage also presents the possibility of disproportionate losses, since the
related amount of interest expense may overwhelm the borrower if it does not earn sufficient
returns to offset the interest expense. This is a particular problem when interest rates rise or the
returns from assets decline.
Credit analysis
Credit analysis is a review conducted by an outside party on a business or individual to judge
the subject’s ability to repay debt. This analysis typically involves a review of credit scores,
cash flows, income, and the presence of sufficient collateral to pay back debt. The outcome of
the analysis is a determination of whether to extend credit or loan money to the subject and if
so, the amount to be committed. This analysis can also be used to estimate whether the credit
rating of a bond issuer is about to change, which could present an opportunity to profit from
speculating in ownership of the bonds.

A credit analysis usually involves a scoring system that is unique to the reviewing party, and
which is designed to maximize its returns while minimizing bad debt losses. The analysis may
involve various ratios for the analysis of debt loads, earnings volatility, and the adequacy of
cash flows.

Time Value of Money

Time Value of Money (TVM) is an important concept in financial management. It can
be used to compare investment alternatives and to solve problems involving loans,
mortgages, leases, savings, and annuities.

TVM is based on the concept that a dollar that you have today is worth more than the
promise or expectation that you will receive a dollar in the future. Money that you
hold today is worth more because you can invest it and earn interest. After all, you
should receive some compensation for foregoing spending. For instance, you can
invest your dollar for one year at a 6% annual interest rate and accumulate $1.06 at
the end of the year. You can say that the future value of the dollar is $1.06 given a
6% interest rate and a one-year period. It follows that the present value of the $1.06
you expect to receive in one year is only $1.

A key concept of TVM is that a single sum of money or a series of equal, evenly-
spaced payments or receipts promised in the future can be converted to an equivalent
value today. Conversely, you can determine the value to which a single sum or a
series of future payments will grow to at some future date.
You can calculate the fifth value if you are given any four of: Interest Rate, Number
of Periods, Payments, Present Value, and Future Value. Each of these factors is very
briefly defined in the right-hand column below. The left column has references to
more detailed explanations, formulas, and examples.

Cost of capital formula

Cost of capital refers to the opportunity cost of making a specific investment. It is
therate of return that could have been earned by putting the same money into a
different investment with equal risk. Thus, the cost of capital is the rate of return
required to persuade the investor to make a given investment.

The cost of capital formula is the blended cost of debt and equity that a company has acquired
in order to fund its operations. It is important, because a company’s investment decisions
related to new operations should always result in a return that exceeds its cost of capital – if not,
then the company is not generating a return for its investors.

How to Calculate the Cost of Capital

The cost of capital is comprised of the costs of debt, preferred stock, and common stock. The
formula for the cost of capital is comprised of separate calculations for all three of these items,
which must then be combined to derive the total cost of capital on a weighted average basis. To
derive the cost of debt, multiply the interest expense associated with the debt by the inverse of
the tax rate percentage, and divide the result by the amount of debt outstanding. The amount of
debt outstanding that is used in the denominator should include any transactional fees associated
with the acquisition of the debt, as well as any premiums or discounts on sale of the debt.
These fees, premiums, or discounts should be gradually amortized over the life of the debt, so
that the amount included in the denominator will decrease over time. The formula for the cost
of debt is as follows:

(Interest Expense x (1 – Tax Rate) ÷

Amount of Debt – Debt Acquisition Fees + Premium on Debt – Discount on Debt

The cost of preferred stock is a simpler calculation, since interest payments made on this form
of funding are not tax-deductible. The formula is as follows:

Interest Expense ÷ Amount of Preferred Stock

The calculation of the cost of common stock requires a different type of calculation. It is
composed of three types of return: a risk-free return, an average rate of return to be expected
from a typical broad-based group of stocks, and a differential return that is based on the risk of
the specific stock in comparison to the larger group of stocks. The risk-free rate of return is
derived from the return on a U.S. government security. The average rate of return can be
derived from any large cluster of stocks, such as the Standard & Poor’s 500 or the Dow Jones
Industrials. The return related to risk is called a stock’s beta; it is regularly calculated and
published by several investment services for publicly-held companies, such as Value Line. A
beta value of less than one indicates a level of rate-of-return risk that is lower than average,
while a beta greater than one would indicate an increasing degree of risk in the rate of return.
Given these components, the formula for the cost of common stock is as follows:

Risk-Free Return + (Beta x (Average Stock Return – Risk-Free Return))

Once all of these calculations have been made, they must be combined on a weighted average
basis to derive the blended cost of capital for a company. We do this by multiplying the cost of
each item by the amount of outstanding funding associated with it, as noted in the following
table:

Total Debt Funding x Percentage Cost = Dollar Cost of Debt

Total Preferred Stock Funding x Percentage Cost = Dollar Cost of Preferred Stock

Total Common Funding x Percentage Cost = Dollar Cost of Common Stock

= Total Cost of Capital

Project Profile
The project profile contains default values and other control parameters such as the
planning method for dates and costs.

The data that you enter in the project profile will be copied into a project in its project
definition or in the WBS elements which can later be overwritten.

Project profiling is the process of extracting a characterization from

the known attributes of a project. The characterization will provide a
more comprehensive understanding of the project that should result
in developing an appropriate execution approach and the
assignment of organizational resources. In different terms, project
profiling is a process that summarizes what is known about the
attributes of a project and places the project into a category with
other projects that have similar characteristics. For example, you
can characterize a project as a large project or a small project. The
size of the project becomes the profiling attribute. You can
characterize a project as domestic or global, and the location of the
project becomes the profiling characteristic.
 Aged receivables

An accounts receivable aging is a report that lists unpaid customer invoices and unused credit
memos by date ranges. The aging report is the primary tool used by collections personnel to
determine which invoices are overdue for payment. Given its use as a collection tool, the report
may be configured to also contain contact information for each customer. The report is also
used by management, to determine the effectiveness of the credit and collection functions. A
typical aging report lists invoices in 30-day "buckets," where the columns contain the following
information:

 The left-most column contains all invoices that are 30 days old or less
 The next column contains invoices that are 31-60 days old
 The next column contains invoices that are 61-90 days old
 The final column contains all older invoices

The report is sorted by customer name, with all invoices for each customer itemized directly
below the customer name, usually sorted by either invoice number or invoice date.

Margin of safety | Safety margin

August 07, 2017

The margin of safety is the reduction in sales that can occur before the breakeven point of a
business is reached. This informs management of the risk of loss to which a business is
subjected by changes in sales. The concept is useful when a significant proportion of sales are
at risk of decline or elimination, as may be the case when a sales contract is coming to an
end. A minimal margin of safety might trigger action to reduce expenses. The opposite situation
may also arise, where the margin of safety is so large that a business is well-protected from
sales variations.

To calculate the margin of safety, subtract the current breakeven point from sales, and divide by
sales. The formula is:

(Current Sales Level – Breakeven Point) ÷ Current Sales Level

The amount of this buffer is expressed as a percentage.

 Here are two alternative versions of the margin of safety:

1. Budget based. A company may want to project its margin of safety under a budget for a future
period. If so, replace the current sales level in the formula with the budgeted sales level.
2. Unit based. If you want to translate the margin of safety into the number of units sold, then use
the following formula instead (though note that this version works best if a company only sells
one product):

(Current Sales Level - Breakeven Point) ÷ Selling Price Per Unit

For example, Lowry Locomotion is considering the purchase of new equipment to expand the
production capacity of its toy tractor product line. The addition will increase Lowry's operating
costs by $100,000 per year, though sales will also be increased. Relevant information is noted in
the following table:
Before Machinery Purchase After Machinery Purchase

Sales $4,000,000 $4,200,000

Gross margin percentage 48% 48%

Fixed expenses $1,800,000 $1,900,000

Breakeven point $3,750,000 $3,958,000

Profits $120,000 $116,000

Margin of safety 6.3% 5.8%

The table reveals that both the margin of safety and profits worsen slightly as a result of the
equipment purchase, so expanding production capacity is probably not a good idea.
The margin of safety concept does not work well when sales are strongly seasonal, since some
months will yield catastrophically low results. In such cases, annualize the information in order
to integrate all seasonal fluctuations into the outcome.

The margin of safety concept is also applied to investing, where it refers to the difference
between the intrinsic value of a company's share price and its current market value. An investor
wants to see a large variance between the two figures (which is the margin of safety) before
buying stock. This implies that there is substantial upside potential for the stock price - or at
least, it means any error in deriving the intrinsic value must be a big one in order to erase the
margin of safety.

Cash flow forecasting

April 22, 2018

Cash flow forecasting involves the creation of a detailed listing of when cash receipts and cash
expenditures should occur in the future. This information is needed to make fundraising and
investment decisions. The cash flow forecast can be divided into two parts: near-term cash
flows that are highly predictable (typically covering a one-month period) and medium-term cash
 flows that are largely based on revenues that have not yet occurred and supplier invoices that
have not yet arrived. The first part of the forecast can be quite accurate, while the second part
yields increasingly tenuous results after not much more than a month has passed. It is also
possible to create a long-term cash forecast that is essentially a modified version of the
company budget, though its utility is relatively low. In particular, there is an immediate decline
in accuracy as soon as the medium-term forecast replaces the short-term forecast, since less
reliable information is used in the medium-term forecast.

The short-term cash forecast is based on a detailed accumulation of information from a variety
of sources within the company. The bulk of this information comes from the accounts
receivable, accounts payable, and payroll records, though other significant sources are
the treasurer (for financing activities), the CFO (for acquisitions information) and even the
corporate secretary (for scheduled dividend payments). Since this forecast is based on detailed
itemizations of cash inflows and outflows, it is sometimes called the receipts and disbursements
method.

The medium-term cash forecast extends from the end of the short-term forecast through
whatever time period is needed to develop investment and funding strategies. Typically, this
means that the medium-term forecast begins one month into the future.

The components of the medium-term forecast are largely comprised of formulas, rather than the
specific data inputs used for a short-term forecast. For example, if the sales manager were to
contribute estimated revenue figures for each forecasting period, then the model could derive
the following additional information:

 Cash paid for cost of goods sold items. Can be estimated as a percentage of sales, with a time
lag based on the average supplier payment terms.
 Cash paid for payroll. Sales activity can be used to estimate changes in production headcount,
which in turn can be used to derive payroll payments.
 Cash receipts from customers. A standard time lag between the billing date and payment date
can be incorporated into the estimation of when cash will be received from customers.
Budget Deficit
Definition: The Budget Deficit is the financial situation wherein the expenditures exceed the
revenues. The Budget Deficit generally relates to the government’s expenditure and not the
business or individual’s spending.

The government’s collective deficits are termed as “National Debt”. In the case of a budget
deficit, be it the Government or any business, it has to resort to the external borrowings in order
to escape the bankruptcy. The Investors or analyst study the budget deficit of the country or
business to judge its financial health.

There can be different types of budget deficits that can be classified on the basis of types of
receipts and expenditures taken into the consideration. These are:

The Budget surplus is opposite of budget deficit where the revenues exceed the expenditures,
and when the spending is equal to the revenues, the budget is said to be balanced. The major
implications of a Government budget deficit are:

 Slower economic growth

 Increased tax revenue
 High unemployment rates
 High Government spending
 Investors expect high inflation rates due to which the real value of debt reduces and thus, the
investors expect higher interest rates for their future loans to the government.
Ideally, for any investor the budget deficits are a threat, but he must understand the reasons
behind such a deficit. The reason for such a deficit could be the investments made in the
infrastructure development or any other profitable investments that will yield profits in the
future, could be seen as healthier than the situation, where a country or a business entity is facing
a deficit due to unsustainable expenses.
Definition of Reporting to Management
S.N.Maheshwari,
“Reporting to Management can be defined as an organized method of providing each manager
with all the data and only those data which he needs for his decisions, when he needs them and
in a form which aids his understanding and stimulates his action”.
The reporting to management can also be called as management reporting or
internal reporting.

Objectives or Purpose of Reporting to management

A Management Accountant has to prepare the report for the following
purposes.

1. Means of Communication: A report is used as a means of upward

communication. A report is prepared and submitted to someone who needs
that information for carrying out functions of management.
2. Satisfy Interested Parties: The interested parties of management report are
top management executives, government agencies, shareholders, creditors,
customers and general public. Different types of management reports are
prepared to satisfy above mentioned interested parties.
3. Serve as a Record: Reports provide valuable and important records for
reference in the future. As the facts and investigations are recorded with
utmost care, they become a rich source of information for the future.
4. Legal Requirements: Some reports are prepared to satisfy the legal
requirements. The annual reports of company accounts is prepared to
furnished the same to the shareholders of the company under Companies Act
1946. Likewise, audit report of the company accounts is submitted before the
income tax authorities under Income Tax Act 1961.
5. Develop Public Relations: Reports of general progress of business and
utilization of national resources are prepared and presented before the public.
It is useful for increasing the goodwill of the company and developing public
relations.
6. Basis to Measure Performance: The performance of each employee is
prepared in a report form. In some cases, group or department performance is
prepared in a report form. The individual performance report is used for
promotion and incentives. The group performance report is used for giving
bonus.
7. Control: Reports are the basis of control process. On the basis of reports,
actions are initiated and instructions are given to improve the performance.

Industrial Sickness

Industrial sickness is defined all over the world as "an industrial company (being a company
registered for not less than five years) which has, at the end of any financial year, accumulated
losses equal to, or exceeding, its entire net worth and has also suffered cash losses in such financial
year and the financial year immediately preceding such financial year".

Reasons and Causes of Industrial Sickness

The various external and internal causes of Internal Sickness in Bangladesh have been
discussed below:

1. External causes

Recession in the Market: Sometimes recession hits the whole industry as a result of
which individual units are unable to sell their products. The availability of credit is also
restricted during such times which jeopardize the production activities of such units.
Hence, the work of these units comes to a standstill.
Decline in Market Demand for the product: A product may reach a stage of maturity
and ultimately a stage of decline. This happens when new better products invade the
market and make the old product redundant.

Excessive competition in the Market: Excessive competition in the market will justify
the survival of only the fittest firm. The high cost units over time will become weak and
fall sick.

Erratic supply of Inputs: Erratic and insufficient supply of inputs like raw-materials,
power, skilled manpower, finance, credit and transport at reasonable prices could cause
disturbance in the production schedule and ultimately result in sickness of the firm.

Government Policy: Excessive govt., control and restrictions on capacity utilisation,

location, product mix, product quality, prices, distribution etc. come in the way of smooth
functioning of the firms and often result in sickness of the firm. Further, frequent
changes in government policy relating to industrial licensing, import, exports, taxation,
credit can make healthy units sick overnight.

Unforeseen circumstances: Natural calamities such as droughts, floods earthquakes,

accidents and wars etc. may turn some units sick and enviable.

2. Internal Causes

Faulty planning: At the planning stage itself, weak foundations may be laid, which may
ultimately result in downfall of the unit.

Incompetent Entrepreneurs: Many persons starting new business lack technical

knowledge of the product they want to manufacture. It is the normal case with small
scale entrepreneurs. They sometimes plough into production activity, without bothering
to find out the marketing potential of their product or sometimes they start production
without properly calculating the ultimate cost. Poor maintenance of plant and machinery,
constant technical problems with maintenance of production volume, quality, time
schedule and cost limits may ultimately spell doom for the firm.

Problems relating to Management: Since Production, marketing, finance, etc. are in

the hands of management, any wrong decision by them in regard to these fields may
ultimately ruin a firm. The management may lack business acumen to make demand
projections, to push the product in the market, to build up market image and customer
loyalty, to face competition and so on.

Improper level and use of working capital can also ruin the firm. Similarly, poor industrial
relations, lack of human resources planning, faulty wage and promotional policies can
cause problems for the existence of the firm. So, incompetent management is the most
important reason behind industrial sickness.

Financial problems: These problems are generally faced by small units. Often the
financial base of the small units is very weak. They generally borrow from their own
known sources or banks, rather than approaching market. Generally, they are unable to
meet their debt obligations in time and these debts accumulate. Banks normally do not
help at this stage when symptoms begin to show the problem and sickness becomes
chronic.

Labor unrest: Labor unrest for a long period may ultimately spell doom for the firm.

The above causes are general causes of sickness. A firm could get sick because of one
or more of the above causes. However, it has been found that industrial sickness results
more due to faulty, careless behaviour and attitude of management, than due to any
other reason. In many cases, irresponsible and callous behaviour of the managers has
been found to be the most important cause of sickness for the firm.

Steps Taken for Revival of Sick Industrial Units

The Government of Bangladesh has taken a number of steps for the revival of sick
industrial units. Important among these are:-

1. Setting up of Industrial Reconstruction Bank of Bangladesh (IRBI) for rehabilitating sick

units.
2. Introduction of margin money scheme for sick units.
3. Instructing banks and financial institutions to detect sickness in the incipient stage and to
take corrective measures in time.
4. Close monitoring of sick units by the Reserve Bank of Bangladesh.
5. Setting up of the BIFR under SICA for determining preventive ameliorative and remedial
measures.
6. Introduction of the scheme of excise loan to sick units.
7. Instructions to banks to actively participate in rehabilitating the units which have turned
sick to whom they had earlier given finance under consortium agreement.
g
What is Inventory Management?
Inventory management is a component of supply chain management that involves supervising
non-capitalized assets, or inventory, and stock items. Specifically, “inventory
management supervises the flow of goods from manufacturers to warehouses and from these
facilities to point of sale.” Thus, inventory management hinges on detailed records of products
or parts as they enter and leave warehouses and points of sale.
Inventory management is critical to the bottom line because inventory is a major asset that
remains an investment until the products sell. Several costs are tied to inventory management
because businesses must store, track, and insure inventory. Overall, best practices in inventory
management involve sound purchasing plans to guarantee items are available when they are
needed without having too few or too many on hand and the necessary tools for tracking
existing inventory.

Methods of Inventory Management

There are two common inventory management strategies: the just in time method and the
materials requirement planning method.

Just In Time Method

The just in time method (JIT) of inventory management involves companies planning to receive
items as they are needed instead of maintaining high levels of inventory. One benefit of this
inventory management method is that companies do not have a great deal of money tied up in
inventory levels; they reduce storage and insurance costs and the cost of liquidating unused
inventory. Another benefit of the just in time method is that companies reduce waste.
Challenges of the just in time method of inventory management come into play when
manufacturers and retailers have to work together to monitor the availability of manufacturing
resources and consumer demand. Just in time inventory management also is considered risky
because companies take a gamble with being unable to fill orders; being out of stock reduces
revenue and may harm customer relations.

Materials Requirement Planning Method

The materials requirement planning method (MRP) of inventory management involves
companies scheduling material deliveries based on sales forecasts. Typically a computer-based
inventory management system, MRP breaks down inventory requirements into planning
periods so that production can be completed efficiently while keeping inventory levels and
storage costs at a minimum. Another benefit of MRP inventory management is that it aids
production managers in planning for capacity needs and allocating production time.
One of the most significant disadvantages of the MRP inventory management method is that
the systems often are expensive and involve a time-consuming implementation period. It also
may be challenging for companies to put quality information into the MRP system to gain
accurate forecasts; to reap the full benefits of MRP inventory management, organizations must
be prepared to maintain current and accurate bills of materials, part numbers, and inventory
records.

Inventory Management Best Practices

Companies that continue to rely on manual inventory tracking with spreadsheets run the risk of
data entry errors, shipping mistakes, and lack of inventory knowledge. Thus,
implementing inventory management best practices is important for business success and the
bottom line:
1. Determine whether a continuous review system or periodic review system is the best type
of inventory management system for your business
2. Implement a cycle counting program after considering counting frequency, counting
strategy, and cycle count management
3. Manage your inventory by knowing the inventory levels that are most beneficial to the flow
of your business; track data to make better inventory management decisions
4. Implement quality control procedures so that all employees can work toward the same
goals
5. Optimize inventory levels to boost efficiency and meet customer demands
6. Prepare for growth and implement inventory management best practices that will support
your business goals
Inventory management is critical to a company’s success and bottom line. Determining which
inventory management method is better suited to your business and following through with
inventory management best practices is key to successful inventory management for the long
term.

What is a 'Hire Purchase'

A hire purchase is a method of buying goods through making installment payments over time.
The term "hire purchase" originated in the United Kingdom and is similar to rent-to-own
arrangements in the United States. Under a hire purchase contract, the buyer is leasing the
goods and does not obtain ownership until the full amount of the contract is paid.
 Hire purchase agreements
Hire purchase is an agreement whereby a person hires goods for a period of time by
paying instalments, and can own the goods at the end of the agreement if all
instalments are paid.

Hire purchase agreements usually last between 2 and 5 years, the most common last
3 years. Under a hire purchase agreement, the consumer does not actually own the
goods until the last instalment is paid, although they have full use of the goods
throughout the repayment period.

Hire purchase agreements can be held with banks, building societies, finance
companies and certain retail stores, for example, garages. The store or garage is not
actually providing the loan. It is acting as an agent for a finance company and earns
commission from the finance company for arranging the loan.

It is advisable to read a hire purchase contract very carefully before committing

yourself to any agreement.

Typical fees and costs on a hire purchase agreement

The fees and charges on hire purchase agreements vary, but may include:

 Documentation fees
 Interest surcharge for missed repayments - this means an additional amount of
interest will be charged on the amount unpaid
 Penalty fees for missed or late payments
 Completion fee for ownership of the goods to pass to you
 Repossession charge - if the goods are repossessed, you will be charged around €300
 Rescheduling charge - if your lender agrees to change the loan terms

Budgetary Control system

“According to Brown and Howard, “Budgetary control is a system of controlling costs which
includes the preparation of budgets, coordinating the departments and establishing
responsibilities, comparing actual performance with the budgeted and acting upon results to
achieve maximum profitability.” Weldon characterizes budgetary control as planning in
advance of the various functions of a business so that the business as a whole is controlled.

Objectives of Budgetary Control:

Budgetary control is essential for policy planning and control. It also acts an instrument of co-
ordination.

The main objectives of budgetary control are the follows:

1. To ensure planning for future by setting up various budgets, the requirements and expected
performance of the enterprise are anticipated.

3. To operate various cost centres and departments with efficiency and economy.

4. Elimination of wastes and increase in profitability.

5. To anticipate capital expenditure for future.

6. To centralise the control system.

7. Correction of deviations from the established standards.

8. Fixation of responsibility of various individuals in the organization.

Traditional system of credit granting evaluation

What are the 'Five Cs Of Credit'

The five C's of credit is a system used by lenders to gauge the creditworthiness of potential
borrowers. The system weighs five characteristics of the borrower and conditions of the loan,
attempting to estimate the chance of default. The five C's of credit are character, capacity,
capital, collateral and conditions.

BREAKING DOWN 'Five Cs Of Credit'

The five C's of credit method of evaluating a borrower incorporates
both qualitative and quantitative measures. Lenders look at a borrower's credit reports, credit
score, income statements and other documents relevant to the borrower's financial situation,
and they also consider information about the loan itself.
Character
Sometimes called credit history, the first C refers to a borrower's reputation or track record for
repaying debts. This information appears on the borrower's credit reports. Generated by the
three major credit bureaus – Experian, TransUnion and Equifax – credit reports contain detailed
information about how much an applicant has borrowed in the past and whether he has repaid
his loans on time. These reports also contain information on collection accounts, judgments,
liens and bankruptcies, and they retain most information for seven years. The Fair Isaac
Corporation (FICO) uses this information to create a credit score, a tool lenders use to get a
quick snapshot of creditworthiness before looking at credit reports.

Capacity
Capacity measures a borrower's ability to repay a loan by comparing income against recurring
debts and assessing the borrower's debt-to-income (DTI) ratio. In addition to examining
income, lenders look at the length of time an applicant has been at his job and job stability.

Capital
Lenders also consider any capital the borrower puts toward a potential investment. A large
contribution by the borrower decreases the chance of default. For example, borrowers who
have a down payment for a home typically find it easier to get a mortgage. Even special
mortgages designed to make homeownership accessible to more people, such as loans
guaranteed by the Federal Housing Authority (FHA) and the Veterans Administration (VA),
require borrowers to put between 2 and 3.5% down on their homes. Down payments indicate
the borrower's level of seriousness, which can make lenders more comfortable in extending
credit.

Collateral
Collateral can help a borrower secure loans. It gives the lender the assurance that if the
borrower defaults on the loan, the lender can repossess the collateral. For example, car loans
are secured by cars, and mortgages are secured by homes.

Conditions
The conditions of the loan, such as its interest rate and amount of principal, influence the
lender's desire to finance the borrower. Conditions refer to how a borrower intends to use the
money. For example, if a borrower applies for a car loan or a home improvement loan, a lender
may be more likely to approve those loans because of their specific purpose, rather than
a signature loanthat could be used for anything.