10 BUSINESS AND ITS ENVIRONMENT

BUSINESS ACTIVITY

Transformation of resources into goods and services to satisfy needs of consumers with
profit as an aim.

FACTORS OF PRODUCTION

FACTOR OF                             EXPLANATION REWARD

PRODUCTION
Land Site on which production takes place including the gifts of Rent
nature like agricultural land, seas, lakes, forests and
mineral ore deposits.
Labour Mental and physical effort put in by people in production Salary
of goods.
Capital Finance invested by the owner including plant, building Interest
and equipment.
Entrepreneurship The capacity to manipulate other factors of production or Profit/loss
the ability to take risk and run a business.

Opportunity Cost

Is the best foregone alternative in favour of the other.

Goods and Services

Goods are tangible items such as desks and chairs. Goods can be classified into consumer
and capital.

Consumer Goods

are tangible goods sold to the to the general public. Consumer goods can be classified into
consumer durable and non durable.

Consumer durable goods

-have a longer life span such as Television set

Consumer non durable Goods

-have a short life span such as food.

Capital/Producer Goods

are used to produce other goods for example tractors and sewing machine.

Services

are non tangible items such as education and entertainment. Services can be classified into
commercial and direct services.Commercial services-Involves the movement of goods from
the producer to the fina consumer with the aid of transport, communication etc whereas
direct services are offered personally to the final consumer for instance entertainment.

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Levels of business activity

primary level

involves extraction of raw materials e.g. mining.

secondary level

involves the processing of raw materials into semi-finished and finished goods.

Tertiary level

involves offering services to individuals and companies e.g. transport,insurance,banking etc

ENVIRNMENTAL SCAN

The business does not operate in isolation therefore it is imperative to scan and understand
the environment. The success or failure of a business is determined by the environment in
which it operates.

Elements of business environments

These elements are divided into internal and external.

Internal Elements

These are micro environmental variables that are within a business’control.eg

employees

managers

suppliers

customers

External Elements

These are macro environmental variables that are beyond a business ‘control e.g. political,
economic, cultural, legal, informational, social and technological.{PECLIST}

Constraints

These are factors that impede or hinder the success of a business.

Political constraints

 political trends
 social unrest
 political ideologies
 government policies

Economic constraints

 level of inflation
 exchange rate
 rate of unemployment
 balance of payment deficit

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  price control
 taxation
 interest rate

Cultural constraints

 lifestyle
 religious beliefs

Legal constraints

 employment laws
 laws restricting mergers
 price control
 consumer laws

Social constraints

 level of education/literacy rate

 norms and values
 mortality rate
 migration of people
 level of income
 lifestyle

Ethical constraints

 gender equality
 testing employees for HIV/AIDS
 prevention of environmental pollution

Technological constraints

 technological changes and breakthroughs

Changes in business activity

The importance of each level of business activity changes overtime.

Industrialisation

.is the growing importance of the secondary sector in the developing world.

Benefits of Industrialisation

 It increases the GDP ( gross domestic product )

 employment creation
 increases foreign currency through exports
 source of national revenue

Drawbacks of industrialisation

 environmental pollution
 causes problems of houses in urban areas.
 Global warming

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De-industrialisation

Is the decline in the importance of secondary sector activity and an increase in the tertiary
sector.

Reasons for De-industrialisation

 The rising imports of goods.

 creation of price competitive edge
 substantial growth in the service industry e.g. tourism

Public sector and private sector

The national economy consists of public sector and private sector enterprises.

Public Sector Enterprises

Public sector refers to the state owned and controlled enterprises like ZUPCO, ZBC and
ZESA.

Characteristics

 established by an act of parliament

 owned and controlled by the state
 provides essential goods and services at affordable prices
 has no profit making motive.
 policy decisions are made by the state.
 a separate legal entity which can sue or be sued in its own name.

Advantages

 provides goods and services at affordable prices.

 government controls the provision of strategic goods and services.
 creates employment for the majority.
 implement price control polices on essential goods and services.
 a source of income for the government.
 enjoys limited liability

Disadvantages

 operates at below full capacity.

 provision of poor quality goods and services due to monopoly.
 political control and interference
 a lot of bureaucracy leading to inefficiency
 lack of initiative among employees leads to inefficiency.

Private Sector

Private sector enterprises are owned and controlled by individuals other than the
government. Business units include the following:

 sole trader
 partnership
 cooperatives

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  private limited company
 public limited company

Sole trader

Is owned and controlled by one person.

Characteristics

 owned by one person

 little start up capital required
 bears unlimited liability
 flexible working hours
 profit making business
 less legal formalities

Advantages

 little start up capital required.

 less legal formalities
 keeps all the profits
 easy to manage
 offers personal service to customers.
 full control by the owner.
 quick decision making
 flexible working hours
 easy to start
 owner have full control of assets and business decisions

Disadvantages

 bears unlimited liability

 difficult to raise additional capital.
 lacks continuity when the owner dies.
 prices of goods and services are usually high.
 lacks managerial skills
 lacks collateral security

Sources of capital

 personal savings
 borrowing from friends and relatives
 hire purchase
 leasing
 loans and overdraft from commercial banks

Partnership

Is a business formed by 2 to 20 people for trading partnership and 2 to 50 for professionals

like legal practitioners with the aim of making profits and sharing profits and losses.

Characteristics

 formed by 2 to 20 people for trading partnership and 2 to 50 for professionals.

 governed by Partnership Act and Partnership Deed.

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  controlled and managed jointly by partners.
 active partners bear unlimited liability
 sharing of profits and losses

Advantages

 sharing of business ideas.

 members contribute capital towards the business.
 losses are shared.
 less legal formalities.
 decision making is consultative.
 some degree of specialisation are injected into the business.

Disadvantages

 active partners bear unlimited liability.

 sharing of profits with lazy partners
 lacks continuity due to a change in membership.
 consultative decision making delays implementation of ideas.
 any contractual agreement by one partner is legally binding on all other partners
and may be costly to the business.

Sources of capital

 partners’ personal savings.

 ploughing back profits
 mortgage
 hire purchase
 leasing
 loans and overdraft from commercial banks

Cooperatives

.are groups of people who agree to work together and pool their resources. They can take
several forms for instance producer cooperatives, retail cooperatives or agricultural
cooperatives.

Advantages

 sharing of profits.
 purchasing economies of scale.
 consultative decision making.
 all members help in the running of a business.
 all members have one vote despite how many shares they brought.

Disadvantages

 consultation delays decision making.

 lack of capital since no sale of shares to non members is allowed.
 lack of managerial expertise unless professional managers are roped in.

Limited companies

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Classification

Company limited by guarantee

This is whereby the members guarantee to pay a specified contribution towards its debts
and liabilities. The liability of members is limited to the amount of this guarantee.

Company limited by shares

This is whereby members are issued shares in the company in return for payment. The
liability of members is then limited to paying to the company an unpaid amount
outstanding in their shares. In simpler terms shareholders can only lose amount of capital
invested in case of bankruptcy but personal property is safeguarded.

Private Limited Company

Characteristics

 formed by 2 to 50 shareholders.
 involves complex legal formalities.
 legal separate entity’
 shareholders enjoy limited liability.
 name of the company ends with “Ltd” or “pvt” Limited

Advantages

 a separate legal entity.

 shareholders enjoy limited liability.
 has continuity of existence.
 financial affairs are not published.
 can raise additional capital by selling shares.

Disadvantages

 many legal formalities.

 shares are not sold on the Stock Exchange
 more capital is required to start the business.
 accounts are audited annually.

Sources of capital

 issue of shares
 debentures
 mortgage
 hire purchase
 leasing
 ploughing back profits

Public Limited Company

Is formed by at least 2 shareholders to no maximum

Characteristics

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  separate legal entity
 formed by at least 2 shareholders to no maximum.
 annual accounts are published
 auditing is compulsory
 sells shares to members of the public through the stock exchange

Advantages

 separate legal entity

 limited liability
 can raise additional capital through issue of shares on the stock exchange.
 business continuity
 enjoy economies of scale
 ordinary shareholders have voting rights

Disadvantages

 several legal formalities

 risk of takeover since shares are sold on the stock exchange.
 auditing is compulsory
 annual accounts are published
 large capital outlay is required.
 management problems as the business grows large.

Sources Of Capital

 selling shares to members of the public

 issuing debentures
 mortgage
 hire purchase
 leasing
 ploughing back

COMPANY POWERS

Legal formalities

Memorandum Of Association

Is a document that outlines the company’s constitution and defines the scope of the
company’s powers. It spells out the external relationship.

Summary of Contents

 name of company
 registered office
 objectives
 statement of liability
 amount of share capital
 number of shares to be taken by each director
 statement of intent to form a limited company

Name of Company

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.For a private company the name shall include “private”.

.For a public limited company (PLC)

.For a cooperative (co op)

The name must not be offensive or constitutes criminal offence.

Objects Clause

.states the objective for which the is established. If a company produces a different product
it is acting ultra vires or outside the scope of the business. which is an offence.

Registered Office

A company must have a registered office in Zimbabwe to which are communications are
addressed.

Liability Clause

States that the liability of shareholders is limited to the amount they have invested in the
company.

Capital Clause

Is a statement of the amount of capital with which the company is to be registered and the
manner it is to divided into shares for instance $500000 divided into 50 units shares of
$1each.

Association Clause

Is a declaration implying that by signing the memorandum the members wish to form the
company and that they are prepared to take up and pay for the number of shares shown on
the form by their names.

Articles Of Association

Outlines internal regulations for the management of the company’s affairs.

Contents

 the rights of shareholders

 election procedures for directors
 calling for the meeting
 division of profit
 voting rights
 rights and duties of directors
 the issue of shares
 borrowing powers of the company

Going Public/Private

Reasons for Going Public

To raise additional capital to:

 to acquire new capital equipment

 expand and modernise the production processes and techniques.

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  develop new products

Reasons for Going Private

 to regain control of the business

 to eliminate threat of takeover
 to avoid administration burden.
 to pursue interdependence in the long term.

Corporate Personality

From the date of incorporation a company becomes a body corporate or incorporation. It

becomes an artificial/ legal person with rights and duties distinct from its members or
shareholders.

Significance

A company may enter into contract in the same way as natural person provided that is not
acting ultra vires (beyond its powers). It has the capacity to commit delicts and is liable for
the delicts of its employees as they are acting in the course of their employment.

Advantages

Legal Person

Once a company is registered it becomes an artificial legal persona or legal separate entity
distinct from its members. It becomes subject to rights and duties. It can sue or be sued in
its own rights.

Limited Liabilities

This is the greatest benefit of incorporation. It means that the liability of members to
contribute to the company is limited to the unpaid balance due on their shares.

Property

Legal personality enables the company to own, hold, occupy, acquire or dispose of property
in its own right or name. The property of the company is construed separate from that of its
members.

Debts

If shares are fully paid there is no further liability on the shareholder.

Borrowing

It can borrow in its own right or name.

GLOBALISATION

Is best defined as a process of deeper economic integration between countries.

GLOBALISATION INVOLVES:

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  intensified trade in goods and services
 transfer of financial capital
 expansion of foreign direct investment
 remittances
 spatial division of labour
 high levels of labour migration

KEY DRIVERS

 fall in transport costs

 decline in tariffs
 rising living standards
 lower communication costs
 entry of new countries into official World trade system
 trade liberalisation
 technological changes
 less protectionism
 containerisation

KEY PLAYERS

 AU,WTO,UN,EU,COMESA,ECOWAS,SADC

Advantages

 leads to improvement in efficiency

 leads to specialisation in areas of comparative advantage
 promotes peace between nations
 competitive markets reduce monopoly profits
 has helped many of the World’s poorest countries to achieve high rates of growth
and reduce the number of people living in extreme poverty.
 it increases choice when buying goods and services
 and there are gains from a rapid pace of innovation driving dynamic efficiency
profits.

Disadvantages

 dumping of outdated technology to Third World countries.

 has led to rising inequalities in income and wealth
 less developed countries export cheaper raw materials and import very expensive
processed products or components.
 trade imbalances as some countries are running enormous trade surpluses or
deficits leading to protectionism.
 Unemployment-Jobs in developed economies will drain away to developing countries
with lower unit labour costs.
 robust global brands may dominate domestic market.
 home industries in developing countries may be squeezed out of competition by
MNCs.
 threats of irreversible damage to ecosystem, land degradation,deforestation,loss of
biodiversity and shortage of water.

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  financial crises generated in developed countries quickly spread affecting poorest
countries.

PROTECTIONISM

Tariffs

.are levies/taxes placed on imports.

Customs (import) duty

.a tax levied on imported dutiable goods.

Quotas

.are quantitative restrictions on imported goods.

Embargo

.this is a ban on imports from certain countries.

Foreign exchange control

.the central bank may ration or refuse to offer foreign currency to importers

Import licences

.the government may refuse to issue new licences or renew old import licences to reduce the
number of importers.

MULTINATIONAL COMPANY

Is a large limited liability business with subsidiaries operating in other countries and
headquarter in a parent country.

Characteristics

 subsidiaries are managed by local board of directors.

 subsidiary pays a royalty for use of a design or formula
 large capital outlay.
 brings new technology to the host country.
 centralised control by the headquarter
 subsidiary company repatriates some profits to the parent country.

Advantages

 pays tax to increase national revenue of the host country.

 creates employment to local people.
 brings new technology to the host country.
 the host country will earn foreign currency
 can subcontract local small firms.
 infrastructural development.
 enjoys economies of large scale production.

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  contributes towards the GDP

Disadvantages

 profits are repatriated to their mother country.

 exploitation of local natural resources.
 exploitation of local labour
 cultural dilution through unethical advertising and other promotions.
 may pose stiff completion to local firms.
 pollution through industrial fumes and disposal of waste.
 depletion of local natural resources.
 may interfere in politics of the host country by sponsoring rebels.
 creation of monopolies by MNCs.

Reasons for Overseas Expansion By MNCs

Pull Factors

 availability of cheap resources

 availability of cheap labour
 availability of new market
 less government restriction on pollution
 provision of government subsidies

Push Factors

 economic recession
 high labour costs
 stringent government control on pollution

Franchise

Is a legal contract between a franchiser and a franchisee whereby the latter is granted
exclusive rights to trade under the business name or logo of the franchiser e.g.Wimpy,Pizza
and Steers Zimbabwe operates as an Innscor franchise

Advantages to the franchisee

 might receive technical advice from the franchiser.

 use of a well established brand name or logo.
 less start up costs.
 all marketing is done by the franchiser.

Advantages to the franchiser

 franchiser saves on running costs.

 benefits from payment of royalties by the franchisee.

Disadvantages to the franchisee

 payment of royalties to the franchiser.

Disadvantage to the franchisor

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  they may under declare sales to reduce the payment of royalties.
 the two parties may have conflicting objectives.
 failure by franchisee would put the whole franchise into disrepute.

ECONOMIC SYSTEMS

There are basically three approaches to tackling the economic problem of scarcity and
choice faced by societies.

Market Economy

Is an economy where the allocation and utilisation of resources is determined by the

independent decisions and actions of individual consumers and producers in markets
guided by price signals.

Characteristics

 Resources are privately owned.

 Allocation of resources is determined by price mechanism.
 Factories are privately owned.
 Little government intervention.
 Consumer sovereignty.
 Efficient allocation of resources.
 Quality products and services due to stiff competition.
 Profit motive

Advantages

 Consumer sovereignty
 Quality products and services are produced
 Efficient allocation of resources
 Creation of employment opportunities
 Little government intervention

Disadvantages

 Promotes unequal distribution of income.

 Price instability due to price changes dictated by consumer taste and preferences.
 Market failure.
 Creation of monopolies due to less control by the government.

Command Economy

An economic system in which decisions about the allocation of resources is determined by

the government.

Characteristics

 Resources are allocated by central authority

 Resources are owned and run by the state.
 Factories are owned and run by the state

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  Price control
 Consumer protection

Advantages

 Low levels of inflation

 Provision of public goods
 Regulation of negative externalities
 Equal distribution of income and wealth
 Consumer protection

Disadvantages

 High levels of inefficiency.

 Poor quality goods and services
 Low levels of investment and employment
 Bureaucracy
 Artificial shortages of goods due to price control.

Mixed Economy

This represents a blend or hybrid of both command and free market economy.

Characteristics

 Both private and state ownership of factors of production

 Price control
 Consumer protection
 low levels of inflation
 Regulation of negative externalities
 Provision of public goods

Advantages

 Control of monopolies by the state’

 Price control
 low levels of inflation
 Provision of public goods and merit goods.
 Equal distribution of income and wealth.

Disadvantages

 Artificial shortages of goods due to price control

 Bureaucracy
 Creation of government monopolies like NRZ

SMALL FIRMS

Is a business that has small market share, without formal management but run and
managed in a personalised way by owners or part owners e.g. hair salon.

SIGNIFICANCE OF SMALL FIRMS

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  Allow entrepreneurs to exploit their entrepreneurial flair at a small scale.
 Offer a more personal service and are able to adapt to the whims of the customer
easily.
 Small firms can afford to band together to enjoy economies of scale through bulk
buying.
 Small firms also offer greater flexibility in the manufacture of products by allowing
for subcontracting.
 Small firms provide for the satisfaction of aesthetic needs thus those in the art
industry are able to provide services as interior design, paintings and crafts.
 Small firms contribute towards GDP through increased production.
 Small firms create employment opportunities.
 Small firms allow for innovation thus individuals and their business units provide
the major source of new ideas.
 Small firms allow for competition to prevail.
 Politically the government’s efforts of indigenisation of the economy will be best
served if small firms are created. They can be used as a vehicle of ensuring a more
equitable distribution of wealth.
 Small firms usually occupy niche markets to avoid head on clash with giant firms.
 Small firms provide a vital link of interdependence that ends in synergetic gains
which benefit the economy as a whole.
 Small firms are being encouraged to engage in the export business. Invariably this
will lead to the improvement of the BOP.

Advantages Of Small Firms

 Flexible working hours

 Little capital is required to start up the business
 Personal contact with workers and customers
 Management and control is retained by the owner thus reducing conflicts.
 Usually occupy niche markets
 Can be subcontracted by large firms

Problems Faced By Small Firms

 Do not enjoy economies of scale

 Problems of raising additional capital due to lack of collateral security
 Lack of business continuity if the owner dies
 Lack of management expertise
 Marketing risk arising from a limited product range
 Lack of management succession
 Face stiff competition from large firms

Survival Of Small Firms

Small firms may survive due to the following reasons:

 Joint ventures
 Supporting role that is supplying large firms with components and parts.
 Specialist service that is services such as legal advice can not be mass produced and
can only be provided by small firms
 Personalised service that small firms give personal attention to customers
 Small firms exploit niche markets to avoid stiff competition from giant firms

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Government Assistance To Small Firms

 SEDCO provides low interest loans to small and medium enterprises.

 Trade Exhibitions such as ZITF
 Providing land for infrastructural development
 Production subsidies
 The government urges Commercial banks to provide low interest loan to small firms.
 Provides information and advice through ZIMTRADE
 Training programmes funded the government.
 Assistance can be in a form of grant for building and equipment, low rent factories,
low business taxes or tax holidays
 Indigenisation policy empowers the locals to start up their businesses.

Growth Of Firms

Business growth means increasing scale of operation, expanding production and increasing
the sales and profits.

Reasons For Growth Of Business

 To boost sales and profits.

 To gain economies of scale
 To reduce competition
 To secure sources of supply or outlets for their products.

There are two main categories of growth strategies viz:

Internal growth

External growth

Internal Growth

It means expanding the business from within by using its own internal factors of
production. Internal growth strategies include:

 Opening new branches or outlets.

 Increasing the number of employees.
 Increasing the production of existing products
 Launching new products
 Increasing quantity of goods sold.
 Product innovation
 Continuous quest for original or novel ideas.
 Market development that is selling existing product to a new market.

EXTERNAL GROWTH

External growth is achieved through integration and takeovers.

Takeovers

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Occur when one firm purchases another firm from its shareholders, normally with the
agreement of the shareholders of the acquired firm. One business can acquire another
business by buying 51% of the issued shares either from the stock exchange or existing
shareholders. The company bought usually loses identity.

Reverse Takeover

Occurs when a small firm takes over a large one. It’s a friendly takeover as a small firm
does not have enough funds to buy a large firm against its will. The large firm may allow
this takeover due to the future potential of a small firm or due to unprofitable conditions of
a large firm.

Integration /Merger

Occurs when two or more firms agree to join their operations into a single unity.

Forms Of Integration

 horizontal
 vertical forward and backward
 lateral
 conglomerate

Horizontal Integration

Occurs when two firms which are in exactly the same line of business and at the same
stage of production process joined together eg a bakery merging with another bakery.

Advantages

 Common knowledge of the market in which they operate

 Reduced risk of failure
 Eliminates competition
 Possible economies of scale
 Increased supplies
 Similar skills of employees
 Less managerial problems
 Enjoys economies of scale

Disadvantages

 Leads to monopoly
 Control and management problems
 Split allegiance
 Previous relationships with suppliers of one of the firms might suffer
 Employees may lose jobs

Vertical Forward Integration

-Involves merging with a business at the next stage of production eg Bata shoe
manufacturing company and Bata shoe retail shops.

Advantages

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  Greater control of promotion and pricing of products.
 Greater confidence in production planning.
 Gives a secure competition free outlet
 Increased career opportunities

Disadvantages

 Lack of experience in this sector of the industry.

 can be very expensive to manage on its own

Backward Integration

Involves integrating with a supplier of the existing business. It is a move towards the source
of supplies eg a bakery and a wheat farm.

Advantages

 Control of supplies of raw materials.

 Improves control over quality, prices and delivery
 Eliminates profit margins demanded by another supplier.
 Ensures reliable supplies of raw materials

Disadvantages

 The business may lack experience in managing supplies.

 Suppliers may become relaxed as a result of having a guaranteed customer.
 Suppliers maybe more expensive compared to another supplier

Lateral Integration

Occurs when firms with similar but not competing products merge together eg a bakery and
a restaurant.

Advantages

 Enables the firm to diversify and offer a wide range of related products.
 Achieve economies of scale
 Creation of job opportunities
 Greater opportunity for career advancement for workers.

Disadvantages

 Control and management problems.

 Some employees may lose their jobs

Conglomerate/Diversification eg TN Holdings

Is the integration between firms in completely different lines of business. It. is a result of a
merger or takeover of firms in totally unrelated products

Advantages

 Risk bearing economies of scale.

 Increase financial strength
 Overcome problems of seasonal sales
 Control the development of rival industries

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  Guarantees business survival
 Offers a balanced product portfolio.
 Increased profit margins due to product diversification.

Disadvantages

 Control and management problems.

 Lack of managerial skills in the acquired business.
 Entry problems might occur
 Lack of clear focus and direction since the business is spread across

Reasons For Mergers

 Expectation of higher profits

 Reduces competition
 Increased globalisation
 Improvements in the information and communication technology
 To increase market share
 To avoid takeover by predator firms
 To enjoy economies of scale
 Is a way of asset stripping which is generally profitable
 A business might buy another to consolidate its position.

De-integration

I s the reduction in the scope of operation by a firm.

Reasons for de-integration

-to raise finance

-save management time

-increase efficiency

-to concentrate on core activities

Forms of De-integration:

De-merger

Is the creation of two quoted companies out of the existing one Shareholders receive shares
in the new company in proportion to their shares in the old one.

Divestment

Is the selling of subsidiary companies to get rid of parts of the group that no longer fit the
corporate strategy.

Contracting Out

This is when an organisation cedes some of its non core activities to another company so
that it can concentrate on core competences.

Management Buyouts

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Is the buying of shares by managers of a company from the company’s shareholders and
become owner-managers.

Advantages to the buyer

 raises cash
 reduces borrowings
 continuity of employment
 owner-managers have expertise
 they are free to pursue their own strategies
 there are strong incentive for efficiency

Management Buyin

Is buying of shares by external management team from the company’s shareholders and
become owners.

PRIVATISATION

Is the transfer of public sector resources to the private sector.

Is the process of selling the state owned and controlled business organisations to the
private sector.

Forms Of Privatisation

 Sale of nationalised industries completely.

 Sale of part of the nationalised industry
 De-regulation-involves lifting restrictions and lowering down barriers to entry in a
particular market.
 Contracting Out-the government cedes some of its non core activities such as
catering or cleaning to private sector.
 Sale of government assets-eg council houses ,land,
property etc
 Strategic partnership

Advantages of privatisation

 business becomes more efficient due to profit motive

 quality goods are produced due to competition
 distribution of wealth
 freedom from political interferences
 allocative efficiency
 source of national revenue through sale of government assets and taxation,
 improves service delivery
 creates employment
 eliminates bureaucracy by state owned entities.
 lower prices and wide choices for consumers.

Disadvantages of privatisation

 creation of monopolies leads to higher prices

 under provision of merit goods and overproduction of demerit goods.
 negative externalities eg pollution
 selling the family silver leading to wealth accumulation by the

21
 minority.

MANAGEMENT

EVOLUTION OF MANAGEMENT

 Classical Approach which entails

-Scientific Management
-Administrative Management
-Bureaucracy
 Human Relations
 Neo-Human Relations
 Contemporary Approaches

Scientific Management

Proponent F.W Taylor

Taylor proposed that scientific methods should be applied to factories to eradicate the level
of inefficiencies that existed in USA manufacturing industries. The theory of “economic
man” was widely held and Taylor supported the notion. In this regard man was viewed as
motivated by money alone and this formed the basis of paying labour premising on
output/units produced.

Taylor advocated for the following principles

-Develop a science for each element of an individual’s work to replace old rule of thumb.

-Scientifically select, and then train, teach and develop the worker.

-Heartily cooperate with the workers so as to ensure that work is done in accordance.

-Divide work and responsibility equally between management and workers.

Relevance Of Scientific Management

 piece rate system

22
  time rate system
 apprenticeship
 selection of candidates based on merit/qualification
 training and development of employees
 work study

Benefits

 improved working methods

 piece rate system provides an incentive to work hard
 eliminates idleness of resources
 improves efficiency and productivity

Limitations

 stresses on production rather than quality.

 jobs become more repetitive and boring

Administrative Management

Proponent H.Fayol

He identified the following management functions

 forecasting and planning

 organising
 commanding
 coordinating
 controlling

Fayol believed that management was not a personal talent but a skill that could be taught.
He developed the following 14 principles of management to serve as a guide to managers.
Division of work
Work should be divided among individuals to ensure that effort and attention are focused
on special portions of a task to increase efficiency and output.
Authority and responsibility
Authority is the right to give orders and the power to exert obedience. Responsibility is the
obligation to perform assigned task
Discipline
Employees must obey and respect the rules that govern the organisation.
Unity of command
Each subordinate should have a single superior
Unity of direction
It is imperative to ensure that employees work towards organisational goals.
Subordination of individuals
The interest of any employee should not take precedence over the interest of the entire
organisation.
Centralisation
The degree to which authority is concentrated or dispersed will vary with circumstances.
Scalar chain
Is the flow of authority down hierarchical levels.
Remuneration

23
Workers must be paid a fair wage for their services.
Order
People and materials should be in the right place and at the right time.
Equity
Managers should be kind and fair to all subordinates.
Stability of tenure
High labour turnover is costly and should be avoided.
Initiative
Subordinates should be allowed to take initiative.
Esprit de corps
Promotion of team spirit builds harmony and unity.

THEORY OF BUREAUCRACY

Proponent: Max Weber

Characteristics:

Division of labour

Jobs broke down into simple, routine and well defined tasks.

Authority/ hierarchy

Positions organised in a hierarchy with clear chain of command. Authority vested in

positions rather than individuals.

Formal rules and regulations

System of written rules and standard operating procedures. Written records of decisions
made.

Formal selection

People are selected for jobs based on technical qualification.

Impersonality

Rules and controls are applied uniformly, avoiding involvement with personalities and
personal reference of employees.

Career orientation

Managers are professionals rather than the owners of the units they manage.

CRITIQUE

Although many characteristics of Weber’s bureaucracy are still evident in large

organisations today, however many managers feel that a bureaucratic structure hinders
individual employee’s creativity and limits an organisation’s ability to respond quickly to an
increasingly dynamic environment.

24
On the other hand inflexible organisations of creative professionals such as micro soft,
Samsung, some bureaucratic mechanisms are necessary to ensure that resources are used
efficiently and effectively.

HUMAN RELATIONS APPROACH

Advocate: Elton Mayo

Mayo conducted a series of experiments at the Hawthorne factory whereby he isolated two
groups of women workers and studied the effect on their productivity levels changing
factors such as lighting and working conditions. He expected to see productivity kevels
declining as lighting and other conditions became progressively worse, however despite the
variations productivity levels increased.

Conclusions:

Elton Mayo branded man as “social” who is motivated by better communication between
managers and workers, greater manager involvement in employee working lives and team
work. Variations in working conditions and financial rewards have little or no effect on
productivity. Workers are motivated if management consults them and takes an interest in
their work. Team spirit can improve productivity. Workers being observed had formed
tightly knit groups. Groups can establish their own targets or norms and this is greatly
influenced by informal leaders.

NEO HUMAN RELATIONS

Theories of Motivation

Motivation is defined as a process of influencing employees’ behaviour through

identification and satisfaction of their deprived needs.

Content theories

-focus on what motivate people

 Maslow’s hierarchy of needs

 Herzberg Two Factor Theory
 McGregor Theory X and Y
 McClelland’s Theory

ABRAHAM MASLOW’S HIERARCHY OF NEEDS

Maslow was a psychologist who propounded that within every person is a hierarchy of
needs. He argued that each level in the hierarchy of needs must be substantially satisfied
before the next need becomes motivational. He classified the five needs into lower and
higher order needs.Physiological, security and social are lower order needs and are
predominantly satisfied extrinsically while esteem and self actualisation are higher needs
and are satisfied intrinsically.

CRITIQUE

25
Physiological needs-basic needs for survival eg the job, clothes, shelter.Salary must be
enough to meet these needs. Safety needs-offering a contract of employment with job
security, a structured organisation with clear lines of authority reduces uncertainty.
Ensuring health and safety at work place.

Self

Actualisation

Esteem needs

Social needs

Security needs

Physiological needs

Social needs-team work, social affiliation, sense of belonging.

Esteem needs –offer recognition for the work well done, promotion etc
Self Actualisation-offer challenging work that stretches the individual’s mental capacities.
This will give the employ a sense of achievement and opportunities to develop and apply
new skills.
However not everyone has the same needs as assumed by Maslow. Needs are not
hierarchical but situational. Self actualisation is never permanently achieved but jobs
continually offer challenges and opportunities.

HERZBERG TWO FACTOR THEORY

Herzberg distinguished between motivators which give positive satisfaction and what he
called hygiene factors. Hygiene factors do not cause job satisfaction but their absence cause
dissatisfaction.
Hygiene factors include:
-salary
-supervision
-company policy
-working conditions
-security
-interpersonal relationships

Motivational factors include:

-achievement

26
-recognition
-advancement
-promotion
-growth

McGregor’s Theory X and Y

Theory X depicts the economic man characteristic of Taylor’s scientific management.

Assumptions:
Theory X employee
-Is reluctant and lazy
-Inherently dislikes work
-Unambitious
-Is always late
-Needs to be supervised
-Needs coercion
The above assumptions result in autocratic leadership style, close supervision,
centralisation and coercion.
Theory Y employee
Assumptions
-Likes work and does not need supervision
-Is ambitious
-Always punctual for work
-Feels to be part and parcel of the organisation
This will result in democratic leadership and decentralisation

David McClelland’s Needs Theory

He is concerned with three needs.

 n-Ach-the need for achievement.

 n-Pow-the need for power
 n-Aff- the need for affiliation

The dominance of these needs influences the behaviour of individuals. N-Ach is a key factor
in human motivation and is developed by environmental factors such as parental
influences, education societal values. However people with high n-Ach are not team players.
N-Ach is not hereditary but results from environmental influences.

Alderfer’s ERG Theory

Alderfer categorised needs into three groups namely:

-Existence needs –Maslow’s fundamental needs
-Relatedness needs-need for interpersonal relations
-Growth needs-need for personal creativity
Alderfer stresses that needs are situational and change from time to time that is if higher
needs are satisfied lower needs become motivational.

Process Theories

Concern the process that influences behaviour.

Expectancy Theory

Advocate: Vroom

27
Effort is not just linked to the desire for a particular outcome but it is moderated by an
evaluation (expectancy) that if a particular course of action is followed, a particular outcome
will be attained.

Conclusions:

Individuals will only act when they have a reasonable expectation that their behaviour will
lead to a desired outcome.

Effort alone is insufficient. It has to be accompanied by ability and skill.

Job satisfaction results from effective job performance.

Job design is therefore crucial.

Equity Theory

The theory depicts that employees would adjust their behaviour according to their
perception of fairness to their effort/performance. Unfair reward means employees will
reduce effort to restore the balance between effort and remuneration.

Application of motivational theories to work place

-Financial rewards

-Non financial rewards

Financial Rewards
-wages and salaries
-bonuses
-commission
-profit sharing
-performance related pay

Non Financial Rewards

-job rotation
-job enlargement
-job enrichment
-team working
-Quality circles
-target setting
-delegation
-empowerment
-participation
Job design/job redesign

Involves structuring or restructuring of a job usually with employees’ involvement and

agreement to make the job so interesting, satisfying and challenging. A well designed job
will meet the following criteria.

 use the skills and abilities of the individual to their full potential.
 be reasonably challenging.
 provide some variety
 provide some degree of autonomy.
 provide opportunities for teamwork.
 be considered meaningful by employees.

28
  feedback about performance

Job design/redesign strategies

 Job rotation
 Job enlargement
 Job enrichment
 Autonomous group working
 Changing work schedules

Job rotation

Is increasing the flexibility of the workforce and the variety of work they do by switching
from one job to another.

Job enlargement

Attempting to increase the scope of a job by broadening or deepening the tasks undertaken.
Extra tasks of a similar level of work are added to a worker’s job description eg a
shopkeeper can arrange stocks on shelves, puts price tags, checks stock levels or place
orders.

Job enrichment

Involves the principle of organising work so that employees are encouraged and allowed to
use their full abilities. It involves adding tasks that require more skill and responsibility eg
a receptionist now word processing letters.

Principles or recommended practices in job enrichment:

-increasing the responsibility of individual workers.
-giving people a complete unit of work and thereby reducing specialisation.
-providing workers with more information.
-encouraging participation
-providing greater autonomy and responsibility.
-allowing workers to increase their expertise.
-direct feedback on performance to allow each worker to have an awareness  of their own
progress.

Autonomous group working

An experienced group of workers is given greater discretion in decision making. After a task
is set the workforce will decide on the best way of doing it. This requires an experienced
workforce willing to accept responsibility and as well as relinquishing authority over the
group. In this regard each team selects its own leader and work is allocated among team
members who set their own pace of work after establishing their targets. Members assume
full responsibility for quality control.

Changing work schedules

The management can adopt changing work schedules. Working days can be compressed
hence motivating workers with the prospects of increased leisure time.Flextime system of
working also allows workers within certain constraints to choose the starting and finishing
time.

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CONTEMPORARY APPROACHES TO MANAGEMENT

 System approach
 Contingency approach

Systems Approach

System is a set of interrelated and interdependent parts arranged in a manner that

produces a unified whole.

Open systems are influenced by and do interact with their environment.

Closed systems are not influenced or interact with the environment.

System boundary-is the demarcation between two systems.

Synergy-Combined effort being greater than parts. The working together of two or more
people, organisations or things, especially when the result is greater than the sum of their
individual effects or capabilities.

Systems Approach implies that decisions and actions in one department will affect other
areas therefore the management should view the organisation in a holistic manner,
coordinating activities from various departments.

ORGANISATION AS AN OPEN SYSTEM

The diagram shows an organisation from an open system perspective.

ENVIRONMENT

INPUTS TRANSFORMATION OUTPUT

Raw materials Employees’ work activities Products and

Human resources Management activities services
Capital
Technology
Information

ENVIRONMENT

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An organisation takes in inputs (resources) from the environment and transform them into
outputs that are distributed into the environment. The system is open and interacts with
the environment. Systems approach recognises that organisations are not self contained.
They rely on the environment for inputs and as outlets to absorb their inputs. No
organisation will survive if it ignores the government regulations, supplier relations.

Relevance

An organisation is made up of interrelated factors such as individuals, groups, attitudes,

motives, formal structure, goals, interactions and authority. Therefore managers should co
ordinate work activities in various parts of the organisation to ensure that all these parts
are working together to achieve organisational goals. In this regard no matter how efficient
is production department might be, it must liaise with the marketing department that
anticipate changes in customer needs.

CONTINGENCY APPROACH

The primary value of the contingency approach is that it stresses that there is no simplistic
or universal rules for managers to follow. There is no best leadership style that a leader can
adopt. It is contingency variables like organisational size, individual differences and
environmental uncertainty that determine the management style.

MANAGEMENT

Is the process by which human, financial, physical and informational resources are
employed for the attainment of the objectives of an organisation.

LEVELS OF MANAGEMENT

Top Management

Includes Board of Directors, Chief Executives responsible for planning, organising, leading
and controlling the whole organisation. The Chief Executives delegate duties to functional
specialists eg marketing, production

Middle Management

Consists of functional heads responsible for executing the policies, plans and strategies
determined by the top management eg production, marketing

Lower Management (First line managers)

Includes supervisors and foremen responsible for supervising day to day activities and
tasks of a particular section .The supervise closely the staff in their own subsections and
keep close control over the activities. They execute plans formulated by the middle
management.

Management Functions (POLC)

 planning

31
  organising
 leading
 controlling

PLANNING

Involves the formulation of goals/objectives. Goals and objectives are determined.

ORGANISING

Involves developing a framework/organisation structure to indicate how personnel,

equipment and materials are employed to attain predetermined goals. The human and
physical resources of an organisation have to be allocated by management to various
departments. Duties and procedures well defined.

LEADING

Connotes giving orders to human resources of an organisation and motivating them and
direct the actions in conformity with the goals and plans.

CONTROLLING

Managers constantly check whether the organisation is properly on course towards the
accomplishment of its goals. It ensures that the activities and performance conform to the
plans for attaining the predetermined goals. It enables management to detect any deviation
from the plans and to correct them.

MANAGERIAL SKILLS

Conceptual Skills

Is the mental capacity to view the organisation and its parts in a holistic manner. The
intellectual ability to see the organisation as a whole as a single unit.

Interpersonal Skills

Is the ability to work and communicate with others. To motivate groups as well as
individuals.

Technical Skills

Is the ability to use the knowledge/techniques of a particular discipline to attain ends eg

knowledge of accounting, computers, engineering.

MANAGERIAL ROLES

Advocate: Mintzberg

Mintzberg identified the 10 managerial roles that were classified into three categories i.e.
Interpersonal, Informational and Decisional roles.

Managerial Explanation Examples

Roles
Interpersonal

32
Figurehead Acting as a symbol of an organisation Attending funerals, meeting
undertaking legal and social duties shareholders

Motivating and encouraging

Leader subordinates Praise, criticism, promotion
and dismissal.
Connecting the organisation and outside
Liaison bodies who provide information. Relations with
clients,suppliers,community
Informational Searching for information on the Newspapers,journals,reports,
Monitor environment and the organisation to Discussion with customers.
predict future events.

Disseminator Transmission of information to Departmental meeting,

superiors, subordinates so that written report.
corrections are made.
Spokesman
Represents the organisation to outsiders Interviews with media,
or superiors. Meeting with stakeholders
Decisional
Entrepreneur Adapts organisation to meet dynamic Introduction of new projects,
environmental changes. Processes.

Disturbance Reacting to unexpected Strikes, complaints, breach

handler situations. of contract.

Resource Allocation of resources to various Budgets, time allocation.

Allocator departments.

Negotiator Mediate in internal and external Industrial relations

conflicts.

PLANNING

Is the systematic development of action programme aimed at reaching agreed business

objectives by analysing, evaluating and selecting among the opportunities which are
unforeseen. Involves defining organisational goals, establishing strategies for achieving
those goals and develop plans to integrate and coordinate work activities.

TYPES OF PLANS

Strategic planning (Long term plan)

-Crafted by top management e.g mission and vision of the organisation. Involves setting
long term goals
Tactical planning (Mid term plan)
-formulated by middle management e.g functional head like production manager
Operational planning (short term plan)
-crafted by lower level management e.g supervisors, foremen .Involves setting short term
objectives

33
SIGNIFICANCE OF PLANNING
-provides direction by formulating the organisations vision, mission and objectives
-promotes competition between the various departments
-forces managers to focus on the future
-promotes stability in the business
-helps to cope with risk and uncertainty
-technological changes in the business fraternity needs effective planning
-reduces overlapping and wasteful activities
-enables subordinates to know what is expected of them
-promotes cooperation among employees
-provides a sense of direction and unity
-planning involves setting objectives which clarify what must be achieved in the short term,
middle term and long term

BARRIERS TO EFFECTIVE PLANNING

-lack of knowledge of macro environmental variables
-lack of knowledge of micro environmental variables
-lack of experience
-reluctance by managers to establish goals
-resistance to change by managers
-lack of resources e.g human , financial
-type of leadership style
-lack of knowledge of environmental scanning

OBJECTIVES
-are goals or targets that an organisation seeks to achieve

Significance
-determination of the strategy
-providing a guide
-provides a sense of direction and unity
-provide a framework for decision making
-facilitates priorities
-measures and control performance
-provides a clear idea about the existence of the organisation
-motivates employees
-objectives highlight any short fall or deviation from the desired results
-managers improve their performance as spelt out in the objectives
-provide specific targets

CHARACTERISTICS
Objectives must be SMART
S-specific
M-measurable
A-achievable
R-realistic /result oriented
T-time framed
e.g by the end of the year the company must increase sales by 10%

PROBLEMS OF SETTING OBJECTIVES

-time consuming
-rigidity
-objectives cannot be coordinated if there are some problems

34
-if there is no democracy in the formulation of objectives managers will not have an active
role to play
-require experienced managers to formulate attainable and measurable objectives
-coordinating objectives of various departments
-may not be achieved due to environmental uncertainty ./environmental influence

PLANNING TOOLS
-Brainstorming
-Simulation
-Forecasting
-Budgets
-Delphi techniques
-Scenario
-SWOT analysis
-MBO

Forecasting
-refers to predicting ,projecting and estimating future events

Delphi
-Is a procedure of arriving at a consensus of opinion among a group of experts who are
given a detailed questionnaire about a problem .They give written responses to each other
panel members who then read and review their own ideas until they reach a consensus

-Brainstorming

Involves conducting a group of meetings on a problem and any idea is welcome however
strange. Many ideas are likely to be generated as there is much freedom to let ideas flow
until a solution emerges

-Budget

Is the formulation of plans for a given future period expressed in quantitative terms

-Scenario

Is a logical description of an event .It conveys the means that can be used to achieve a
certain desired goal after examining details of alternative events.

-Simulation

Intends to let management drive a contingency approach the future by forecasting the
effects of sales inflation profits and make alternative actions

SWOT Analysis

Is a strategic analysis of the main internal strengths and weaknesses and external
opportunities and threats that will influence the future direction and the success of a
business

STRENGTH
WEAKNESSES Internal

OPPORTUNITIES

35
THREATS External

STRENGTHS
-use of advanced technology
-managerial economies of scale
-good corporate government

WEAKNESSES
-poor quality products
-unskilled employees
-use of outdated technology

OPPORTUNITIES
-opening new markets
-a market vacated by an ineffective competitor
-joint ventures or strategic partnership

THREATS/CHALLENGES
-New entrants
-Price wars with competitors
-Unfavourable government tax

MBO
-Is a systematic and integrative approach that allows management to focus on achievable
goals and to attain the best possible results from available resources.
Is a system in which specific performance objectives are jointly determined by both
subordinate sand their supervisors and progress is periodically revealed

Characteristics
-Universal participation in planning process
-organisation overall objectives are well defined
-major objectives are allocated to departments
-periodic progress review and feedback
-specific objectives are collaboratively set for all departments
-actions plans defining how objectives are to be achieved are specified
-provides a means of performance appraisal

Advantages
-MBO ultimately helps to achieve the best resource allocation effort
-Helps in prioritising goals and resources
-Subordinates will know exactly what is required by the organisation
-Avoids conflicts as subordinates work towards the same overall target
-Assists inn measuring and controlling performance motivates employees
-Targets and objectives are agreed upon
-Facilitates communication
-Eliminates conflicts of interest due to the use of corporate objectives
-Greater participation in the formulation of goals

Limitations
-requires precise written description of goals
-goal incompatibility
-time consuming
-requires regular communication and feedback
-involves much paperwork
-objectives can be outdated as a result of dynamic environment

36
-setting objectives does not guarantee business success as adequate resources are required
-stifles individual innovation as it puts emphasis on strict adherence to preset objectives

Elements of effective MBO

-universal participation
-commitment to program by organisational members
-performance review there is need to review progress periodically
-well defined goals
-Autonomy in implementation of plans
-Top level goal setting normally done by top management
-clearly defined job responsibility.

ORGANISATION

Organisational structure
Is the way in which an organisation’s activities are divided, organised and coordinated.

Need for organisation

-To spot the formal channels of communication within an organisation.
-To find out any communication problem.
-To help employees to see and understand their positions in the organisation
-To show chain of command and span of control.
-To pinpoint areas where specialists are needed.
-To show different sections and departments.
-To minimise the confusion this might occur due to the lack of a good and   established
organisational structure.

Types Of Organisational Structure

Tall Organisational Structure

CEO

37
A tall organisational structure is characterised by a narrow span of control and many
hierarchical levels.
Flat Organisational Structure

CEO

A flat organisational structure is characterised by a wide span of control and few

hierarchical levels.

Organisational Chart
Is a pictorial or diagrammatic representation of an organisational structure.

C.E.O

Production Marketing Finance H/Resources

Characteristics of an Organisational Chart

Departmentation

Is the grouping into departments of work activities that are similar and logically connected.

Division Of Work

The breakdown of complex task into components so that individuals are responsible for a
limited set of activities instead of the whole task.

Chain Of Command

Is the flow of authority down hierarchical levels.

Hierarchy

Is the order of level of management in a firm from the highest to the lowest rank.

Clear lines of communication

Is the flow of communication up and down hierarchical levels.

38
Span Of Control

Is the number of subordinates reporting directly to an immediate superior.

Narrow Span Of Control

-Manager is responsible for a few subordinates.

-Low degree of delegation

-Greater supervision of workers.

-Better coordination of activities.

-Good communication with subordinates.

-Long chain of command

-Maintenance of quality

Wide Span Of Control

-Manager responsible for a large number of subordinates.

-High degree of delegation

-Less supervision of employees.

-Lower costs involved in supervision.

-Greater motivation as more trust is placed on employees.

-Short chain of command.

-Quality maintenance is difficulty.

Factors Influencing Span Of Control

 calibre of employees
 complexity of the task
 leadership style
 size of organisation
 degree of delegation
 degree of supervision

FORMAL ORGANISATIONAL STRUCTURE

By Function

MD

39
 Production Marketing Finance H/Resources

Advantages

 Increases expertise
 Efficient performance and specialisation
 It facilitates centralised control.
 Economies of scale are realised after specialisation.
 Clear chain of command and span of control.
 simple lines of control

Disadvantages

 Problems of communication and coordination among departments.

 Senior management needs wide experience to coordinate various departments.
 Overspecialisation leads to monotony.
 Decisions are centralised at the top.
 Slow to respond to changes.

By Product

     MD

Grocery Hardware Clothing Pharmaceut

Advantages

40
  Each department is responsible for a particular product.
 Promotes specialisation resulting in quality products being produced.
 Departments are responsible for profit centres and ease burden on top management.
 Cooperation may improve because each division is pursuing the same goal.
 Helps control and measure performance of each department.
 Promotes product innovation.

Disadvantages

 There may be duplication of functions in different departments.

 Competition between departments becomes counterproductive.
 Coordination problems
 Loss of control by management.
 managers respond differently to dynamic environment

By Geography/Region

Depicts growth of branches /subsidiaries.

MD

Mash-cent Mat-north Harare Manicaland

Advantages

 Local managers are well versed with their market environment and better decisions
are made.
 Lower operations costs as business functions are performed within the region.
 Improved communication
 It is able to serve needs of local people.
 Promotes competition between different regions.

Disadvantages

 Duplication of resources
 Loss of control by head office
 Conflicts may arise between Head office and Regional divisions
 Regional managers may introduce their own policies
 Coordination problem

By Customer

41
                                                              MD

Industrial consumer military pharmaceut

Advantages

 Customers get the best of specialisation

 Products are tailor made to suit the needs of customers.
 prevents products being promoted by wrong people
 Wide range of differentiated products.
 It enables target particular groups with particular needs.
 It would help gain greater knowledge about its customers.
 It enables to fulfil the needs of local people
 Better customer relationship

Disadvantages

 Coordination problems by top management

 Sometimes customers’ needs cut across several departments.

By Process

MD

weaving dyeing spinning packaging

Advantages

 Increases expertise
 Economies of scale realised due to specialisation

42
Disadvantages

 Leads to monotony.
 Coordination problems by top management

MATRIX STRUCTURE

MD

Prod Mkt Fin H/R

project
mgr

Matrix Structure
Exists when there is a project being undertaken. Specialists are drawn from various
departments.
Advantages
 Motivating and challenging
 Fosters creativity
 Develops managerial skills.
 Team work is encouraged
 Allows total communication between departments
 Fosters cooperation and coordination.
 Quick response to change in market and technological changes.
Disadvantages
 Conflict of management
 Split allegiance
 Overlapping authority.
 Costly to implement.
 Power struggle.
 Encourages discussion rather than action so decision making may be slow.
 Less direct contact so resistance can be there from top management..

43
  Routine work of the department might be disturbed.

Consequences OF Poor Organisational Structure

 Low motivation and morale
 Ineffective decision making
 Lack of coordination and control.
 Lack of cooperation
 Poor adherence to organisational objectives.
 Duplication of activities
 Inability to respond to changing conditions.
 Poor communication.
 Failure to provide opportunities for the development of future managers.

LINE AND STAFF ORGANISATIONAL STRUCTURE

MD

------------------------------- sec

production marketing finance H/resources

Authority
Is the ability to exercise influence over people and situations.
Is the right to give orders and the power to exert obedience.

Line Authority
Is a direct authority as it involves a right to give orders and have decisions implemented. Is
concerned in achieving specific goals of an organisation
Managers have line authority according to their positions in hierarchical levels. Line
authority concentrates on achieving central objectives.

Staff Authority
It is auxiliary authority and does not have the right to command. It primarily serves the
various lines of departments in the organisation. The staff authority cuts across the
organisation providing a wide range of specialist services and consultancy skills. Staff
personnel can be either assistant or specialist staff. Staff assistants perform their task
subject to the approval of their superior. They have no formal authority to act on behalf of
their bosses or command action. Staff specialists serve to assist line managers. They play
an advisory role to line managers giving them specialist advice. Staff authority may inject
new ideas into the business.

Advantages of line and staff authority

 It reduces workload to the managing director.
 Staff advices line managers
 Staff may generate new ideas.
 Staff authority provides advice and support to line managers.

44
  Line departments concentrate on achieving central objectives.

Disadvantages
 May lead to friction between staff and line authority.
 Staff personnel may get frustrated if their advice is unwelcome
 Decision making is delayed pending the advice from the experts.
 Line managers may feel their authority and responsibility are curtailed by the
appointment of specialist staff.
 Line managers may feel that staff personnel is being used by senior superiors.
Causes of Conflicts between line and Staff authority
 Staff personnel tend to assume that line authority overstep their bounds.
 Staff tend to assume that they are incapable of giving sound advice.
 Neglecting specialists in planning
 Resisting new ideas from staff authority
 Overworks key staff members.

Functional Authority
Is the right to control activities of departments.

Downsizing/Delayering
Is the process of reducing levels of management. It affects the chain of command and span
of control.

Centralisation
Refers to a relatively high degree of concentration of decision making and authority among
very few top managers.

Decentralisation
Refers to the dispersal or diffusion of decision making authority down hierarchical levels.

Advantages of Centralisation
 Greater control.
 Economies of staffing
 Economies of specialisation
 Improved communication
Disadvantages of Centralisation
 Excessively bureaucratic
 Rigidity
 Loss of initiative
 Delays decision making.
 Stifles personnel development
Advantages of Decentralisation
 Decision making takes place at the scene of action.
 Recognition of local conditions.
 Improved staff morale
 Personal development
 Quick and better decisions
 Offers training for junior managers.
Disadvantages of Decentralisation
 Loss of control
 Development of departmental view

45
  Divisions may pursue their own objectives
 Coordination problems by top management.

Factors Affecting Centralisation or Decentralisation

 Size of an organisation
 Complexity of task
 Diversity of product lines
 Geographical location of the business.
 Communication frequency and facilities.
 Philosophy of top management
 Nature of growth ie organic or external

Delegation
Is the act of assigning formal authority and responsibility for the completion of specific
activities to a subordinate.
Is the act of assigning duties to subordinates.

Reasons for Delegation.

 Enables management to concentrate on more important issues.
 Enables the decision to be taken at the point of action.
 It trains subordinates to make decisions and bear consequences.
 It provides flexibility by enabling decision making to be done at grass roots level.
 It enriches the experience of subordinates and create promotional prospects.
Effective Delegation
For delegation to effective the following should prevail:
 Subordinates should posses sufficient skills and experience.
 Objectives must be well defined.
 Subordinates must be given sufficient authority and responsibility.
 The procedure must be clearly understood.
 Management should decide who should be delegated the task.
 The subordinate should be given sufficient discretion to perform the task.
Barriers To Effective Delegation
 Reluctance by managers to delegate.
 Lack of delegatory skills.
 Lack of resources.
 Fear of accountability by senior managers.
 Delegation may be limited by training and ability of subordinates.
 Philosophy of organisation ie bureaucratic
 Senior managers may feel undermined if subordinates perform better than
themselves.
 Mistrust and suspicion about the ability of subordinates to perform the task.
 Power hungry managers want subordinates refer to them for consultation.
 Costs involved in the task being delegated may be high.
 Final accountability that lies with the managers.

Informal Organisation
Springs spontaneously from formal groups as employees interact during break time.
Informal groups constitute social relationships that develop as people interact with each
other and such relationships are not represented on the organisational chart. The groups
are formed based on common socio-economic background and interests without any formal

46
designation .The leader is chosen by group consensus or self imposed. The behaviour of the
group is guided by group norms and values rather than laid down rules.

Difference between Formal and Informal organisation

Formal Informal
-Clear lines of communication -grapevine

-Well defined objectives -ambiguous objectives

-Clear chain of command -no clear chain of command

-Clear span of control -no clear span of control

-Can be represented on a chart -cannot be represented on a chart

-Guided by laid down rules -guided by norms and values

Importance Of Informal Groups

 provide social satisfaction, status and security.
 Help to solve personal problems
 Perpetuate commonly held social and cultural values as members are likely to share
common norms and values.
 Grapevine may be used by mangers to transmit messages secretly.
 Improve group morale.
 Is a source of new ideas by senior managers.

Disadvantages Of Informal Groups

 Grapevine dispenses both true and false messages.
 Resistance to change.
 Production is lost through socialisation.
 Conflicts emanate from informal groups.
 Members of the group agitate demonstration if one member of the group is ill-
treated.

Management Triplets
-Responsibility
-Authority
-Accountability
Responsibility
Refers to the obligation to perform assigned task

Authority
Is the right and obligation to make decisions and act, to command or to give orders.

Accountability
Is the expectation that each employee credits or blame for the results of his work that is
subordinates should be able to account for what they have done.

LEADERSHIP

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Is the ability to influence individuals to perform assigned tasks to achieve predetermined
goals.
In order to appreciate the complex process of leadership one has to understand the aspects
of authority, power, influence, delegation. responsibility and accountability.

Authority
Denotes the right and obligation of a leader to make decisions and give commands to
subordinates.
Influence
Is the ability to use authority and power to move subordinates to action.
Power
Denotes the ability of a leader to influence the behaviour of others without necessarily
using authority. Research identifies the following kinds of power

Legitimate power

The influencer has the right or is lawfully entitled to exert influence within certain bounds.

Reward Power
Is based on the ability to reward a person for carrying out duties or withhold results.

Coercive power
Is based on the ability to enforce compliance or punish for not meeting the requirements.
Punishment may be loss of job

Expert power
Is based on the expertise .knowledge and professional ability of the influencer for example if
we follow the prescription of a medical doctor we are acknowledging his expertise.

Referent Power
Is based on the desire to identify with or imitate the influencer for instance popular
managers will have referent power if subordinates are motivated to emulate their work
habits.

LEADERSHIP STYLES
-refers to ways or tactics that are employed by leaders in trying to achieve their production
goals.

Autocratic Leadership style

An autocratic leader is the one who directs and expects compliance from subordinates. This
type is forceful, positive and dogmatic (not open to criticism).The leader exerts power by
giving or withdrawing rewards and through punishment. He gives little participation to his
subordinates in terms of targets setting and decision making. All policies are determined by
the leader. A leader tends to be personal in terms of praise and criticism. There is one way
communication .The leader supervises workers closely.

Possible Application
 Defence forces and police where quick decisions are needed and the scope for
discussions must be limited.
 In times of crisis or emergency when quick decision might be needed to limit damage
to the business eg fire brigade
 where employees are new to the job

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Drawbacks
 Demotivates staff who wants to contribute and accept responsibility.
 Unsound decision making due to lack of consultation.
 Creates frustration and resentment.
 Hinders employees’ development and impedes teamwork.

Democratic Leadership style

The leader believes in consulting employees and allowing them to share in decision making.
However he retains the ultimate responsibility for decision making. It encourages
participation and two way communication which allows feedback from staff. It increases
staff morale and causes greater commitment.

Possible Application
 where staff input or involvement is a prerequisite
 In a situation that demands novel ideas or a new solution.
 where there is an experienced and flexible workforce
 in businesses that accept workers to contribute fully in decision making.
Drawbacks
 It is time consuming
 There is danger of loss of management control
 Some issues might be too sensitive to allow discussion.

Laissez Faire/free reign

The leader sets clear objectives for subordinates and allows them within very broad
parameters, freedom and responsibility to achieve the preset goals. The leader delegates
virtually all authority and decision making powers. It motivates employees.

Possible Application
 Where managers are too busy or lazy.
 It is effective in cases of research and design teams
 Where employees are willing to assume responsibility.
Drawbacks
 It motivates enthusiastic workers but its success depends on the competency and
integrity of employees.
 Some workers may not appreciate lack of supervision by managers leading to a loss
of security.
 There is no close monitoring of progress by managers.

Paternalistic Leadership style

Managing by showing concern for workers’ welfare in return for loyalty and hard work.
Managers do their best for the employees. Some consultation may take place but ultimate
decision is taken by the manager.
It motivates and employees feel to be part and parcel of the organisation.

Possible Application
 When a manager has a genuine concern for workers ‘interests.
 When workers are young and inexperienced.

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Drawbacks
 Some employees will be dissatisfied with the apparent attempts to consult, while not
having real power or influence.

APPROACHES TO LEADERSHIP

Trait Theory
Focuses on characteristics of an effective leader. The following traits are associated with a
leader.
-self driven
-honesty and integrity
-self confidence
-intelligence
-job relevant knowledge
-energetic
-assertive
-visionary
-sociable

Behavioural Approach
Researchers have identified two leadership approaches which reflect different behaviour
pattern.
 Task Oriented
Managers monitor their subordinates closely to ensure that work is complete.
 Employee Oriented
Emphasizes on interpersonal relationship and taking care of employees’ needs.

CONTROLLING
Is the process of ensuring that actual activities conform to the planned activities. It involves
evaluating actual performance, comparing it to preset goals and taking corrective action
when there is a deviation from the norm.

Types Of Control

Pre control/proactive control

It takes place before work is done. It focuses on establishing conditions that will make it
difficult for deviations from the norm to occur for example inspection of raw materials
before processing.

Concurrent/Steering Control
It monitors ongoing operations to ensure that objectives are pursued. It is designed to
detect and anticipate deviations from standards at various points throughout the process.

Post control/Reactive control

It concentrates on past performance. It focuses on the end results of the process. The
purpose is to help prevent the same mistake in the future.

COMMUNICATION

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Is the exchange of information, ideas, opinions and feelings.
Is the passing of information from the sender to the receiver.

CLASSIFICATION OF COMMUNICATION
 Media
 Direction
 Degree Of Formality
By Media
 Verbal /oral ie meetings, telephone conversation, video conferencing
 Non verbal eg gestures, physical presentation, facial expression
 Written ie memos, reports, letters, notices
 Numerical
 Electronic ie fax, e-mail
 Visual ie films , videos, posters, charts, diagrams
By Direction
 Downward
 Upward
 Horizontal
 One way
 Two way
 Multi-direction

Degree of Formality
Formal communication networks stem from the rules, policies, procedures that govern the
distribution of authority within the organisation. It is arranged, approved and official.
Informal communication channels are paths or networks created by friends of the same
organisation.

Downward Communication
Takes the form of giving instructions, commands, orders, directions, assigning duties or
providing information to those delegated to perform the task.

Upward Communication
Takes the form of reporting back results to superiors, consultation, suggestions, airing
grievances.

Horizontal Communication
Refers to communication between people at the same level. Involves sharing of ideas or
information and solving problems across the organisational structure.

One way Communication

This is a situation whereby a reply or feedback is not feasible eg advertising notices. It is
associated with autocratic leadership style where the authority of the boss remains
unchallenged.

Two way Communication

Feedback is feasible and viable. Subordinates contribute to the process of decision making.
Matters can be discussed and solutions given.

Multi directional Communication

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Informal communication such as gossip and rumour flow in all directions. A grapevine
flourishes on misunderstanding and concentrates on sensational and often distorted
interpretations of the message.

Communication can be either external or internal.

External
Communicating with suppliers, customers, banks etc
Internal
Is when messages are sent between people in the same organisation through memos,
notices, radio paging etc

Oral Communication
eg face to face, Interviews and meetings
Advantages
 direct medium
 physical proximity
 instant feedback
 possible clarification of messages
Disadvantages
 no written record
 lengthens discussion
 disputes can arise
 audience difficult to control
Written Communication
eg letters, memos, notices, reports, journals
Advantages
 provides written record
 can be duplicated
 can relay complex ideas
 can be passed on for readership
Disadvantages
 no instant feedback
 problems of interpretation
 can be expensive
 difficult to modify once sent
Non Verbal Communication
eg visual, charts, pictures, body language
Advantages
 reinforces oral communication
 simplifies written and spoken word
 provides stimulations of situations.
Disadvantages
 charts and graphs are difficult to interpret
 can be expensive eg charts
 no feedback
Body language
The message can be passed by the use of a nod, wink, shrug, frown or glance. The attitudes
of people are frequently indicated by gestures and facial expressions. A touch of a hand may
communicate messages ranging from comfort to menace.

Factors That Influence The Choice Of Media

52
  immediate feedback
 distance
 cost of media
 reliability
 confidentiality of the message
 formality of the message
 impact of the media eg TV for greater impact
 coverage eg posters for local coverage
 literacy of the receiver
 degree of urgency

THE COMMUNICATION MODEL

Noise(barriers)

Sender Encodes Message Decodes Receiver

Decodes Feedback Encodes

Noise(barrier)
The communication process involves the passing of information in a two way process
starting with the message by the sender who transmits it to the receiver who in turn
decodes/interprets it and finally confirms to the sender that the message has been received
and understood.

Sender
Is the one who initiates and encodes the message.

Receiver
is the one who decodes/interprets the senders message.

Encoding

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Is the translation of information into a series of symbols for communication. In this case
the sender wants to establish mutuality of meaning with the receiver by choosing symbols,
usually words and gestures that the sender believes to convey the same meaning with the
receiver for communication to take place for example ‘YES’ in Bulgaria and some parts of
India is indicated by a side to side shake of the head whilst a ‘NO’ is indicated by a nod.

Encoding problems
 lack of planning
 use of technical jargon
 inappropriate choice of words
 use of poor expressions

Decoding
Is the interpretation and translation of the message into meaningful information. The
receiver must perceive the message then interpret it.

Decoding problems
 receiver’s past experience
 distractions
 information overload
 lack of interest in the subject matter
 misinterpretation of words

Message
Is the encoded information transmitted by the sender to the receiver.

Noise
Is anything that confuses, disturbs, diminishes and interferes with communication.

Effective Communication
Communication is said to be effective when it is received and understood in the manner
intended by the sender.

Purposes and Advantages of Effective Communication

 increased speed in decision making
 increased speed of reaction to changing conditions
 effective coordination between departments
 reduced levels of conflicts
 better developments of plans
 strategy and implementation policy becomes easier
 motivates employees
 leads to achievement of preset goals
 generation of quality ideas
 increased productivity
 improves the reputation and image of the company
 reduced delays in supplies and deliveries
 corrects any misunderstanding in the market

The model on the communication process can be used to analyse the causes of
communication breakdown and suggest remedies to improve the effectiveness of
communication.

Barriers to Effective Communication

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These are psychological, physical and semantic factors that disturb, impede and confuse
either the receiver and sender in making responses to a shared message.
Differing Perception
Interpreting messages according to our experiences, motives and viewing the message
differently.

Technical Jargon
Is a form of a short hand that can be understood by a particular department. It can confuse
the receiver.

Noise
Any factor that disturbs, confuses or otherwise interferes with communication.

Inappropriate Media
Messages are delayed by wrong choice of media

By Passing Chain Of Command

A barrier occurs when a subordinate ignores his immediate superior.

Status/Social distance
When a manager is discussing with a new recruit there can be a degree of stiffness which
impairs the discussion.

Bureaucracy
Communication breaks down due to many hierarchical levels.

Distraction Of the Receiver

The receiver can be distracted by family problems thereby not paying much attention.
Hostility Between Participants
Poor relationship tends to distort communication between people.

Grapevine
Grapevine or rumours thrive on distorted and sensational interpretation of information.

Inconsistent Non Verbal language

Includes body movements, posture, gestures, eye movements

Distrust
A sender’s credibility is determined by trustworthiness and sincerity

OVERCOMING BARRIERS TO COMMUNICATION

Differing Perception
Messages may be viewed differently. We all interpret messages according to our
experiences, motives, state of mind eg anger or suspicion. Pictures should be distinct.

Technical Jargon
Technical jargon should be explained in simpler terms.

Inconsistent verbal/Non verbal Communication

Be aware and guard against false messages, gestures, postures etc and should agree with
the message. Analyse verbal and learn to apply.

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Distrust
Creating trust or credibility is a process. Therefore good rapport with people can only be
developed through consistent performance.

Redundancy
Restating the message in a different form.

Inappropriate Media
The sender should choose the appropriate medium of communication.

Noise
Avoid distracting environment.

Problems That Lie With The Sender

-wrong body language
-unclear message
-message sent to wrong person
-message too long
-use of inappropriate medium

Problems That Lie With The Receiver

-lack of trust
-poor listening skills
-inferiority complex
-different perception

INFORMAL COMMUNICATION CHANNEL

Grapevine is the dominant means of communication. Even though the grapevine’s liability
can never be determined by complete certainty it does serve some useful functions.
-It satisfies personal needs
-It counters monotony at work.
-It provides a source of job related information that is not provided by a formal channel.
-It helps workers to make sense out of their work environment especially in interpreting  
unclear orders from superiors.
-It acts as a safety valve when people are confused and unclear about what is going to
happen to them. They use grapevine to release their anxieties.
-It is way of dealing with self doubt and insecurity.

COMMUNICATION NETWORK
Is a set of channels within an organisation or group through which communication travels.

Wheel/Star Chain

B C A

A C

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 E
E D

Is the entrepreneurial type of network with the leader at the centre. All employees are
directly connected to the leader eg Head office communicating with marketing mangers in
regions.

Advantages
-two way communication
-fosters quick decision making

Disadvantages
-dominated by the leader
-formal contact between employees is limited

Chain
Is used to transmit important messages from the top down hierarchical levels. This is an
autocratic type of network where the leader at the top starts off the message which is
passed down the lower levels. eg army

Advantages
-Quickens decision making
-speeds up performance

Disadvantages
-leads to low motivation
-low creativity and interactivity
-centralised decision making

The Y Network The Circle

A B A

C B C

D E
E

The Y Network
It combines the wheel and chain networks. The person ‘ C’ controls all others.

Advantages
-allows a degree of two way communication
-fairly centralised

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-moderate performance level

Disadvantages
-Originality of ideas is low
-isolation at the lowest level of network.

The Circle
In this network each person can communicate with only two others eg communication
between middle level managers.

Advantages
-members communicate freely
-members can adapt to changing circumstances
-high degree of interaction
-greater motivation and morale

Disadvantages
-no necessary leader
-slow decision making due to lack of coordination
-problems of agreeing at new strategies.

Integrated/All Channel Network

B C

D E

All channel network is used in small working groups. Information flows all around network
eg brainstorming for innovative ideas at departmental meeting.

Advantages
-participative style of decision making
-decentralised and democratic.
-two way communication.
-provides best solutions to complex problems.
-very high motivation, satisfaction and morale.

Disadvantages
-no necessary leader.
-slows decision making due to discussions.

Radial Network Direct network

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 A A

C D E B C D

The above networks are centralised. The individuals who occupy the central positions are
agreed to be leaders. There is very little group satisfaction as the leader use his discretion to
override discussion.

BUSINESS CORRESPONDENCE
Letters
 inquiry
 quotation
 order
 acknowledgement
 complaint
 adjustment

Memorandum
is normally used for communication within the organisation.

Purpose of a Memo
 A reminder of some business point previously discussed.
 A suggestion concerning some aspect of a project which merits consideration.
 A means of drawing attention to some situation.
 A means of conveying an instruction.
 A protective measure-a carefully filled memorandum is irrefutable argument against
the man who disguises his own short comings.
Advantages
 provides a written record for filling and goes to the intended person.
 draws attention to some relevant circumstances in the organisation.
Drawback
 impersonal and no instant feedback.
 may gather dust in the pending basket

THE PLUM TREE SPORTS CLUB

MEMORANDUM

TO         Office Manager

FROM      A. Dennison

DATE 20 December 2015

Employment of New Staff Members

59
As discussed at the last meeting, three typists have been appointed and will
be starting on 3 January 2016.

GENERAL MANAGER

THE PLUM TREE SPORTS CLUB

Notice Of A Meeting
TO All staff members
FROM H. Tickey
DATE 30 March 2016

AGENDA
1.The report of chairman
2.Election of new committee members

General Manager

REPORT WRITING
A report is a brief narration, outlining the information in relation to incidents, progress,
investigations, observations and recommendations.

Types of Reports
Letter report
Memorandum report
Schematic report

A report must have a heading, introduction, conclusion recommendations/suggestions then

finally signature and designation

HUMAN RESOURCE MANAGEMENT

People are an essential and valuable resource in an organisation. A business’s success
depends upon the calibre of staff it employs. The relationship between employees and
employers is very imperative.
Employees usually expect:
 fair wages
 fair treatment by managers
 good working conditions.
 holidays with pay.
 appropriate training and opportunities for promotion.
 to work reasonable hours in a safe and clean environment.
Employers in return could expect:
 punctuality and cooperation from employees.
 obedience to instructions.

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  careful treatment of facilities and equipment.
 loyalty and trustworthiness.
 adherence to the dress code at work place.
 performing the assigned task.
 notifying superiors for any absenteeism from work.

Human Resources Functions

 human resources planning
 recruitment and selection
 placement ie promotions, demotions or transfers.
 induction
 training and development
 staff welfare eg provision of canteens or medical aid facility.
 health and safety ie maintaining a safe working environment
 termination of employment.
 performance appraisal
 industrial relations ie negotiating with trade unions on matters relating to wages
and working conditions.
 labour remuneration

Human Resource planning

Human resource planning refers to intended actions to ensure that the right number and
quality of employees are available at the right time to help realise the current and future
objectives of the organisation.
The human resource department must determine the needs of the organisation and the
number of employees required will depend on:
 future demand of a firm’s product.
 the objectives of the firm ie the desire to expand.
 change of operations ie job to flow production.
 predicted labour turn over.
 change in technology
 changes in laws regarding workers’ rights.
 the need for skilled and multi-skilled workers.
 the need for promotion
 economic conditions
 government regulations
 trade unions

Benefits Of Human Resource Planning

 helps in attracting and retaining suitable staff.
 ensures sufficient labour is retained
 keeps control of human resource costs.
 determines current and future training needs.
 facilitates determination of wage bills.
Limitations
 reliability of manpower plan depends on accuracy of prediction.
 resources are needed in planning.
 plans might be rigid.
 finance department might not avail funds in accordance with human resource
plans.

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Performance Appraisal
Is the process of evaluating a worker’s job performance and potential for development.
Is a process whereby an individual’s performance is reviewed against preset goals for
promotional purposes or identifying training needs.
Advantages:
 helps identify training needs
 maybe used as a basis for remuneration.
 motivates workers who achieve targets.
 might be a basis for promotion or demotion.
 helps career development.
 improves current performance
 improves productivity
Limitations:
 might be based on personal traits or subjective i.e. gender, age, race, religion etc.
 It is costly to hire experts for the exercise.
 demotivates workers who fail to meet their targets.
 does not consider relative worth of jobs.
 lack of uniform rating standards is unfair and makes it difficult to decide who to be
rewarded.
 halo effect-is to rate the subordinate high or low on all performance measures based
on one of their characteristics eg an attractive popular worker might be given a high
overall rating.

Job Evaluation
Is a systematic comparison of jobs which aims to place them in rank order based upon the
demand the job places on the individuals. It considers jobs not job holders.

Advantages:
 determine pay structure.
 solve problems of pay disputes.
 provides a rational basis for pay differentials.
 helps a firm decide which jobs might be outsourced.
 Is based on job content, not personal merit.
 rankings are updated to consider changes in work content.
 ensures that there is no discrimination in pay between the sexes.

Disadvantages
 It results in pay that does not commensurate with individual performance.
 does not explain reasons for disparity in pay levels in the same grade.
 does not consider individual performance in each post.
 workers might resent it if they think it is biased.

Job Analysis
Is the process in which all relevant information on a specific post is gathered. It has two
components:
 Job description
 Job specification

Job Description
Refers to the job content itself eg title, duties, responsibilities, working conditions etc. A job
description may be used inter alia to compile a job specification to serve as the basis for
training or conduct job evaluation.

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Job specification
Refers to the outline of what the incumbent needs to be able to perform the job eg training,
skills, experience, intelligence, physical ability, education, personality traits etc

Recruitment and Selection

Recruitment
Is attracting a pool of suitable candidates after defining the job to be filled and the calibre of
the person to fill it. It is attracting and maintaining a pool of applicants for current and
future jobs.

Selection
Refers to choosing the best candidate for the job after interviews and short listing.

Methods of Recruitment
Internal
External

Internal Recruitment
Refers to filling a job vacancy from a pool of existing workforce.
Advantages
 It is quicker and cheaper.
 Applicants are already aware of the organisation’s culture.
 The selection panel knows the skills of the applicants and attitude towards work.
 It reduces induction training costs.
 It gives internal staff career hopes and real chances to promotion.
Disadvantages
 Relying on existing employees may lead to a stagnation of ideas and approaches
within the organisation.
 Existing workers may not have the required skills.
 There may be some resentment from those not offered the job.

External Recruitment
Is when a vacancy filled by someone who is not an existing employee and will be new to the
business.
Advantages
 New ideas may be brought into the organisation.
 Candidates may have the necessary skills.
 There is a wide pool of candidates.
Disadvantages
 It can be costly and time consuming process.
 It demotivates existing employees who might have missed the opportunity.

Training and Development

Is work related education to increase workforce skills and efficiency

Describes all activities involved in bringing a person to a desired degree of proficiency in the
skills, attitude and knowledge required for the job.

Advantages to the Employer:

 increased efficiency and productivity.
 reduction in rework costs.

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  improved quality of output.
 reduction in accidents
 improved motivation and morale among employees.
 easing skills shortage.
 reduction in supervisory costs.

Disadvantages
 It may be costly.
 loss of output whilst training.
 employees may leave for better earnings elsewhere.
 may raise employee expectations of promotion.

Advantages to the Employee

 acquisition of new skills.
 increase in employment prospects.
 improved promotional prospects.
 increased job satisfaction
 ability to use new technology.
 improved earnings

Disadvantages of Training (employee)

 may be asked to undertake additional duties
 may be moved to a different job.
 may have salary cut during training.

Types Of Training
 Induction training
 On the Job training
 Off the Job training
Induction training
Is an introduction given to new appointed employees familiarising them with the key
aspects of the organisation like culture, premises, procedures and other fellow workers.
Advantages
 Newly appointed employees will quickly and comfortably settle into their jobs.
 New employees are integrated as quickly as possible.
 New employees will feel comfortable ,motivated and productive as soon as possible.
On the Job training
Employees receive instructions while still carrying out their job. A person is trained by
watching more experienced worker doing the job. Common methods are mentoring,
coaching, job rotation, do it yourself training etc
Advantages
 less expensive than off the Job training.
 provides hands on experience.
 Is directly relevant and based on the real problem facing the employee.
Disadvantages
 trainers will be less productive as they will be busy training others.
 trainers may pass bad habits to the trainees.
Off the Job training
This involves any course of instruction away from the workplace eg work related college
courses. Common methods include lectures, discussions, projects etc
Advantages

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  Employees can be taught a variety of skills.
 provision of an outside perspective and credibility based on experience and
knowledge.
 trainees will concentrate fully on learning.
Disadvantages
 training might be insufficiently tailored to the requirements of the organisation.
 more costly than On the Job training.
 Involves a temporary loss of production.

Contract Of employment
When a successful candidate is selected is offered a contract of employment which spells
out terms and conditions of employment for date of commencement, hours of work,
sickness pay pension etc.

Part-time employment contract

Part-time workers are employed:
 to match staffing levels to demand.
 to retain valued staff.
 because are less likely to be unionised.
 to reduce pay and non monetary benefits.
 because have fewer statutory rights.
 staff can be assessed before they are offered full time employment.
Disadvantages
 Increased supervision.
 motivation levels may be adversely affected because part time workers may feel less
involved to the business.
Advantages to the Worker:
 Is suitable for students or parents with young children.
 enables one to work two jobs with different firms.
Disadvantages to the Worker
 they will be less earning than full time staff.
 may be paid a lower rate than full time workers.
 no job security
Temporary employment contract
Employment contract that lasts for a fixed time period eg 6 months.
workers are employed :
 to provide short term cover.
 to match staff to demand.
 because of less unionism.
 to reduce pay and other terminal benefits.
 to relieve permanent staff on vacation leave.
Flexi-time contract
Employment contract that allows staff to be called in at times most convenient to both
employers and employees eg during peak hours
NB Advantages and disadvantages refer to part time employment contract.

Outsourcing/Subcontracting
Letting out other internal activities to be carried out by other organisations.

Differences between core and periphery workers

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Periphery
 Temporary
 Part time
 Flexi- time
 Self employed
Core workers
 Full time
 Permanent

Non Standard Contract

Other work patterns have been designed by employers to manage seasonal variations in
work without incurring excessive costs. These include:
Flexi-time
Allows staff to decide starting and finishing time.
Term time work
Facilitates employment of people with children.
Job Sharing
Facilitates employment of people with young children.
Zero hours contract
The worker is not guaranteed any work, but must wait on standby until required.
Annual hours
working a specified number of hours per year at management’s discretion.

Measuring and Monitoring Employee Performance

There are a number of indicators that management can use to assess the effectiveness of
the Human Resource department.
 Labour productivity
Is the output per worker in a given time period.

Labour productivity=total output per period

total staff employed
The high the productivity the better it is performing

 Absenteeism
Measures the rate of workforce absence as a proportion of total employees.

Absenteeism = Number of staff absent X 100

total number of staff

 Labour turn over

Measures the rate at which employees are leaving the organisation

Labour turn over=number of staff leaving the firm per year X 100
average number of staff

If the result is high and increasing it is a good indicator of staff discontent and low morale.

Causes Of High Labour Turnover

 ineffective recruitment
 poor remuneration
 bad industrial relations

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  ineffective communication
 inappropriate leadership style
 lack of promotional prospects
 lack of job security etc
Measures management may employ to reduce high labour turnover:
 revising remuneration system
 adopting appropriate leadership style.
 improving communication skills.
 improving working conditions
 adopting worker participation schemes eg MBO

Methods used to promote cooperation between management and employees:

 Management By Objectives
 Quality Circles.
 TQM
 Worker participation in decision making process.
 Autonomous group working etc

Labour Remuneration
 Time based
 Piece rate based
 Performance related pay
 Commission
 Bonus
 Fringe benefits
 Profit sharing
Time Based
Earnings are calculated based on time taken at work eg
If an employee is paid $10 per hour and he works for 40 hours then he will be paid $400.
Time Sheet
Name:
Employee No:
Department:
Standard Rate of Pay: $10 per hour
Overtime Rate of Pay: $15 per hour
Basic number of hours per week: 40
DAY START TIME FINISH TIME TOTAL HOURS
Monday 0800 1600 8
Tuesday 0800 1600 8
Wednesday 0800 1600 8
Thursday 0800 1600 8
Friday 0800 1600 8

Total hours for the week: 40

Gross pay: $400

Advantages:
 easy to calculate
 easier to negotiate rate of pay with trade unions.
 less inspection required
 no need to keep record of work of individuals.
 it creates less stress for workers particularly the less able.

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  the system is less harmful to quality.
Disadvantages
 does not motivate employees.
 no incentive for employees to work hard.
 hard workers are not rewarded for their efforts.
 it encourages time wasting by prolonging the work.
 encourages unnecessary errands.
 labour costs are increased since workers forcefully exceed standard hours of work.
(overtime)
Piece Rate Based
The earnings of an individual are based on the quantity of items produced.
Straight Piece Rate
Workers are paid an agreed amount for every completed unit of production.
ie units produced x rate per unit
Advantages
 wages are paid proportionate to production.
 wages are easy to calculate.
 encourages greater efficiency
 time wasting is discouraged.
Disadvantages
 only suitable for standard items.
 workers are unfairly penalised when production is halted.
 increased costs of supervision.
 compromises quality standards.

Differential Piece Rate

This is a variation of the straight piece rate system in that wages are governed by an
individual’s output.
The scheme is as follows:
Up to 50 units per day $0.50
51—70 $0.60
71—80 $0.65
80--100 $0.70

His daily output for 5 day week

Day Units
Monday 68
Tuesday 83
Wednesday 59
Thursday 94
Friday 47

Calculate his gross pay for the week.

DAY CALCULATION $
Monday (50x0.50)+(18x0.60) 35.80
Tuesday (50x0.50)+(20x0.60)+(10x0.65)+(3x0.70) 45.60
Wednesday (50x0.50)+(9.0.60) 30.40
Thursday (50x0.50)+(20x0.60)+(10x0.65)+(14x0.70) 53.30
Friday (47x0.50) 23.50
Gross payment per week 188.60

Advantages
 provides a strong incentive to achieve targeted number of units.

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  attracts the best workers.
Disadvantages
 strenuous to calculate.
 requires proper record keeping of individuals.
 informal groups might set a pay effort norm.
 workers cut corners to achieve higher outputs.

Illustrations of Various Piece Rate System

(a)
$
wage

output
This shows a linear relationship between output and remuneration with no guarantee of
basic pay.

(b)
$
wage

output
The above shows a piece rate as a supplement to a basic minimum wage rate.

$
wage

disincentive to exceed it
standard performance
incentive to reach standard performance

basic minimum pay

output
Piece rate designed to control effort. To discourage excessive effort and output there is a
variation on this combination of rates. Output beyond the standard performance is
discouraged by a lower piece rate above this level of output.
BONUS SCHEMES

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Merits
 increases productivity.
 improves worker morale.
 motivates workers since extra efforts are rewarded.
 there is an incentive to worker harder.
 staff contentment increases even the less able workers receive a guaranteed wage
while the more able are offered more chances of higher wages.
Demerits
 Increases cost of production.
 strict control must be exercised over production to ensure that the quality of work
does not suffer in an attempt to increase bonus.
 can create stress for workers particularly pitched at very competitive level.

Halsey Premium Bonus Scheme

The bonus is calculated on the basis of time saved. The scheme allows for 50% bonus and
Halsey Weir allows for 30% bonus.
Halsey Bonus=(Time saved x Time taken) +50%(Time saved x Time rate)
worked example:
Time allowed 50 hours
Wage rate/hour $3
Time taken 42 hours
Calculate bonus and total earnings
Bonus =50%(TS x TR)
= 0.5(8x3)
=$12
Total earnings =(TR x TT) +50%(TS x TR)
=(3 x42) +0.50(8 x3 )
=$138

Halsey Weir Bonus Scheme

Bonus =30%(TS x TR)
Total earnings =(3 x 42) +0.3(8 x3)
=$133,2
Rowan Bonus Scheme
Bonus =Time saved X Time taken X Time rate
Time allowed
Example:
Time allowed 50hours
Wage rate/hour $3
Time taken 42 hours

Bonus =8 X42 X3
50
=$20.16
Total earning =(TT X TR) + bonus
=(42 x3) +(20.16)
=$146.16
Barth Scheme
Bonus= RH x std hrs x CHW

=3 x 50 x 42
=$137.5

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Total earnings =(TT x TR) + bonus
=(42 x 3) + $137.5
=$263.5

Commission
Is payment related to the number of sales made. It can also be paid in addition to a basic
salary.

Profit Sharing
Involves distributing part of the company’s profits to workers.

Performance Related Pay

Is payment related to the effectiveness of the worker. The employee is rewarded for above
average performance.

Fringe Benefits
Are non financial rewards given to employees eg company car, free transport, free
accommodation, medical aid facilities and education etc.

EMPLOYEE PROTECTION
Employees need protection in the following areas.
 against unfair discrimination at work.
 health and safety at work.
 against unfair dismissal
 wage protection
Protection against unfair discrimination
It is unethical or illegal to discriminate workers because they are:
 are of different race
 belong to a different religion
 are of the opposite sex
 are considered too old or young for the job.
 are disabled in some way
Health and Safety at work place
Employers should ensure that they:
 protect workers from dangerous machinery.
 provide safety equipment and clothing.
 maintain reasonable workplace temperature.
 provide hygienic conditions and washing facilities.
 avoid excessively long working hours.
Protection against unfair dismissal
Redundancy-takes place when a job is no longer required, so the employee doing this job
becomes redundant through no fault of his own.
Dismissal-being sacked from a job due to incompetence or breach of contract.
Unfair dismissal –terminating a worker’s employment contract for a reason that the law
regards as being unfair for example if one is late, a woman gets pregnant etc.
Wage Protection
Employers should not exploit workers by underpaying them.

TRADE UNION
Trade unions are organisations whose aims are to protect the interests of workers eg ZCTU
and ZFTU
The Role Of Trade Union

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Through collective bargaining with employers they act on behalf of their members to:
 increase the wages of their members
 improve working conditions
 fight job losses
 prevent unfair dismissal.
 secure additional working conditions
 provide safe working conditions.
 maintain pay differentials between skilled and unskilled labour.
Collective bargaining is the process whereby procedures are jointly agreed and wages and
conditions of employment are settled by negotiation between employers and the union.

Basis of pay claims

 rise in the cost of living.
 the need for attractive rates of pay.
 the need to maintain pay differentials.
 productivity rises
 the need to compensate workers.
Problems of Trade Union
 triggers industrial action.
 interrupts production during demonstrations.
 pay claims maybe based on money illusion.
 increases cost of production
Industrial disputes/action
Failure to negotiate leads to industrial disputes/action that might take the form of:
 go slow
 strikes
 sabotage
 demonstrations
 work to rule
 overtime ban
Resolving disputes
Collaborating
This attempts to fully address the concerns of both parties involved in the conflict.

Conciliation
Assist the two sides to reach a mutual agreement.

Arbitration
This approach attracts a third party to make an award based on justice of the case. An
arbitrator listens to both sides, the trade union and the employer and then gives a ruling on
what they think is fair to both parties.

Mediation
Seeks to guide both parties towards a compromising agreement.

MANAGING CHANGE
is the process of planning and implementing changes in strategy or working methods.
Resistance to change
Individuals can react to change differently as depicted below.
Acceptance
 enthusiasm
 cooperation

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  passive resignation
Indifference
 apathy
 minimal contribution
Passive resistance
 regressive behaviour
 non learning behaviour
 protest
 working to rule
Active resistance
 strikes
 boycott
 sabotage
 go slow
 stay away
Key drivers/causes of change
 competition
 global pressure
 political factors
 economic environment
 demographic trends
 technological changes etc

Causes of resistance to change

Structural inertia
-change threatens the way things are done in an organisation.
 Power blocks
-change threatens those whose power is most threatened. They will be fear  of loss of
power.
Economic
 fear of job loss
 fear of reduction in earnings.
 reduced promotional prospects.
Social
 threat to vested interest
 break up of work groups
 fear of increased supervision
 different personal ambitions.
Psychological
 fear of insecurity
 fear of unknown
 loss of previous freedom
 fear of inability to cope
Strategies To Overcome Resistance To Change
 consulting people before implementing change.
 identifying the advantages of change.
 building up trust
 involving employees in both planning and implementing change.
 offering extra incentives
 providing adequate information.
 retraining and counselling employees.

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  educating people before implementing change.
 in case of poor timing-delay change and wait for appropriate time.
 in case of insecurity-clarify intentions.
 co opting key employees in implementing change.

CONFLICT
Is a disagreement or clash between ideas, principles or people.
Sources of Conflicts
 personal difference
 ineffective communication
 goal incompatibility.
 unequal distribution of resources.
 leadership style
 unfair remuneration.
 poor working conditions.
Conflict management
Force
Is done by using formal authority or coercion or ignoring the claims of one part against the
other.

Accommodation
This attempts to satisfy both parties and maintain harmonious relationship.

Avoidance
This approach neglects the interests of both parties by side stepping the conflict or
postponing the solution.

Compromising
It attempts to obtain a partial satisfaction for both parties. Both parties will make a
sacrifice to obtain a common gain.

Check also collaboration, conciliation, arbitration and mediation.

MARKETING
Is a management process responsible for identifying, anticipating and satisfying customer
requirements and profitability.
It is a process of researching to identify consumer needs and apply suitable price, product,
place and promotion strategies to satisfy these needs profitably.
Market
Is a group of consumers having similar needs.
Two groups of markets
 business market
 consumer market
Business market includes organisations which buy products to manufacturers other
products eg textile manufacturers buy machines for textile.
Consumers are the ultimate users.

Six categories/philosophies Of Marketing

Production Orientation
The emphasis is on production and it does not take into account the needs of consumers. It
is appropriate where we have shortages/demand exceeds supply.
Product orientation

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Places emphasis on product design, quality etc.
Sales Orientation
Subscribers of this concept focus on selling what is made. Emphasis is on increasing sales
and profits.
Market Orientation
Businesses pay more attention to customers and satisfaction of their needs.
Financial Orientation
Focuses on return on investment.
Societal Orientation
Caters for societal interests eg sponsoring soccer, athletics and avoiding environmental
pollution.

The Role Of Marketing

 focuses on customer needs and to ensure that these needs are satisfied.
 identify opportunities and threats
 decide on the marketing instruments.
 organise and coordinate the activities in the marketing environment.
 implementing marketing strategies.
MARKETING OBJECTIVES
 increase sales turnover by 10%
 increase promotional budget by 5%
 increase market share by 10% etc
MARKET SEGMENTATION
Is a process of dividing the whole market into different subgroups according to their
respective similar or homogenous characteristics.
Is a process of dividing heterogeneous market into subgroups of homogenous
characteristics.
Market Segment
Is a subgroup of the whole market in which consumers have similar characteristics.

Basis For Market Segmentation

Geographic
-region, urban or rural, climate etc
Demographic
-age, gender, family size, family life, income, education, religion, race etc
Psychographic
-lifestyle, personality ie gregarious, impulsive or ambitious etc
Behaviouristic
 Purchase occasion: ie special occasion
 Benefit sought :ie convenient,speed,prestige etc
 User status: ie regular user
 Attributes ; ie positive, indifferent etc
Advantages Of Market Segmentation
 more efficient use of resources.
 gain competitive edge in part of the market.
 Beneficial for small firms to concentrate their efforts for product tailor made to meet
demand.
 facilitates identification of marketing opportunities.
 increases sales by getting a large share of a business.
 reduces the diversity of a broad market and consider single markets and potential
buyers.
 a greater degree of consumer satisfaction can be achieved.

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  leads to identification of new opportunities.
Disadvantages
 increases R and D costs
 developing different market offering is very expensive.
 it will be costly in the long run due to changes in consumer needs and preferences.

NICHE versus MASS MARKETING

Niche Marketing
Involves identifying and exploiting one segment of a large market. Is a strategy of
concentrating on a particular segment to avoid head on clashes with giant firms in the
market.
Mass marketing
Involves selling the same products to the whole market with no attempt to target separate
groups.

Niche Market
Advantages
 products are customised and sometimes made to order.
 avoids head on clashes with giant firms.
 customer needs are met.
 efficient allocation of resources.
Drawbacks
 there is no way of cutting down costs.
 increases R and D costs.
 consumer needs and preferences change over time.
Mass Marketing
Advantages
 mass market, mass produce and mass promote so huge profits can be
realised.
 products are standardised so majority of the members can utilise it eg coca cola
 firms benefit from economies of scale due to mass marketing.

Disadvantages
 there is a lot of competition.
 products are not tailor made to meet customer needs.
 inefficient allocation of resources.
Market Share
Is the proportion or percentage of sales of a firm as compared or with respect to the whole
market size.

market share =sales of business X 100

sales of industry

Market Growth
Is the rate at which total sales in the market are rising or falling each year.

Target Market
Is the group of customers to whom a company wishes to appeal. Once a market has
developed a complete profile of various segments in the market he has to select one or more
to concentrate his market offering on.
Marketing Plan

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Is a logical sequence and series of activities leading to the setting of marketing objectives
and formulation of plans for achieving them.

Marketing Strategy
Is a coordinated plan of action to identify, anticipate and satisfy customer demand and
thereby achieve organisational goals.

Marketing Mix
Refers to variables which can be adjusted to increase customer appeal and sales. It also
refers to those elements of marketing strategy which are designed to meet customer needs.
Originally the marketing mix has been simplified to 4 ps.
-product
-price
-promotion
-place

MARKETING MIX

product price promotion place

-quality -basic price -personal selling -stock available
-brand image -discounts -advertising -transportation
-brand name -credit terms -sales promotion -delivery            
methods
-packaging -cost based - public relations -distribution
channels
-PLC stage

The need for extra Ps is in response to the increasing service operations business for which
the traditional model does not fully address.

The 7 Ps
 product
 price
 promotion
 place
 physical evidence
 process
 people

Physical evidence
A successful marketer will ensure that he impacts physical evidence by providing
decorations, painting offices etc to give specific information.

People

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Refers to employees in the firm. To retain specialists there is need for competitive wages
and fringe benefits.

Process
This looks at the way the service is delivered and the customer is always making judgement
during service. Our services should be accessible and conveniently presented.

Factors On Which Marketing Mix Depends:

 nature of product
 type of market
 degree of competition
 marketing mix of rivals
 business sixe
 position of business within the industry.

PRODUCT 1ST P OF MARKETING MIX

Product is anything that can be offered to a market for attention, acquisition, use or
consumption that might satisfy a want or need of consumers. It can be a good, place,
person or idea.
Product Attributes
 packaging
 price
 quality
 brand name
 appearance
 performance etc
Classification of Products
Goods can be classified into consumer and producer goods.
Consumer goods can be classified into:
 Consumer non durable eg food, clothes etc
 Consumer durable eg car, TV set etc
Producer/Capital goods-are used to produce other products eg tractor, hoe etc
Further classification
Consumer convenient goods
Goods that are frequently bought at the nearest retail outlet eg newspaper
Shopping products
These are products consumers shop around making comparisons in terms of quality and
price. etc

Speciality goods
These are unique, special goods for which consumers have strong brand preference eg
jewellery

Unsought goods
These are products that consumers do not yet know or want hence are not yet sold eg new
products.

Personal services
Services that are offered directly to consumers.

Classification of Industrial Products

 raw materials

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  fabricating materials eg grease
 operating supplies eg fuel, bulbs etc
 accessories eg word processors
 industrial services eg laundry etc

BRANDING
Is the practice of giving a distinctive identification to a product through promotion.
Is a form of product differentiation which helps consumers to identify the product they
want.
Brand
Is a name, term, design, or symbol that identifies an organisation’s product from those of
competitors.
Brand name
Is that part of the brand that can be vocalised or talk about eg Nissan, , Toyota etc
Brand mark
That part of the brand which can be recognised but which is not utterable such as logo,
symbol, design, colour etc
Trade mark
Protects the sellers’ exclusive rights to use the brand name through copyrights law.
Is part of the brand that is given legal protection.
Characteristics of A Good Brand
 short and simple
 easy to spell and read
 easy to recognise and remember
 easy to pronounce
 suggestive of product benefits
 not offensive

TYPES OF BRANDS
Manufacturer brand
brands owned and used by the producer of the product eg Nestle, Nike
Distributor brand
brands that carry distributor’s symbol eg Spar , Pick n Pay
Co branding
putting two brand names on a product eg Bell Equipment markets its products with John
Deere as Bell Deere.
Generic brand
There is no identification other than a code or description of the contents of a product.
Individual brands
A separate brand assigned to an individual product in a product line ie Chibuku brewery eg
castle, black label etc
Family brands
The brand is assigned to the entire product line/product mix eg Philips family brand has
radios, light bulbs ,TV sets etc
Company Name With Brand Name
Producers use company name with an individual brand name for each product line eg
Mazda, VW polo.

Advantages of Branding
 Reduces the amount of persuasive advertising
 It enhances product positioning
 A business that has established brand has high market share.

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  Branding satisfies consumer needs.
 It makes advertising easier
 Facilitates market segmentation.
 Facilitates self service.
 Special promotion becomes so practical.
 New products can be introduced so readily.
 Personal selling effort is reduced because a product will sell itself.
 Product identification becomes easier.
 Branding can satisfy self expressed status needs eg a certain brand indicates class.
 Branding helps to reduce price comparisons between products.
 leads to repeated buying.
 It provides sales force a basis for selling.

Disadvantages of branding
 brand imitation.
 Any defect ultimately tarnishes the brand image.
Packaging
Refers to wrapping, covering and bottling of a product.
Functions:
 Facilitates the safe and easy dispatch, storing and handling of a product.
 Packaging communicates a specific product image through its design, label, colour,
brand name and display.
 Protects the product from damage.
 Gives information/instruction about a product.
 Supports the image of the product.
 Makes the product convenient to use.
 Increases the durability of the product.
 The selection of the package design, colour, shape, material enables the firm to
direct its products to specific market segments.
Drawbacks
 Is costly and increases the price of the final product.
 Some packages may poison food if exposed to adverse conditions.
 Bottles are fragile therefore leading to unbearable expense to the organisation.

Product Positioning
Is set of perceptions, impressions and feelings that customers hold for the product
compared with other competing products eg Mercedes Benz is positioned as of status
symbol.
Refers to the way customers perceive a product in terms of its attributes relative to other
competing products.

Labelling
Is the wrapping on the product container that carries brand name and important
information about product use.
Types of Labels
The brand name/mark appears on the product.
Grading Labels and brand labels
Indicate the quality of the product.

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Informative Labels eg labels on chemical containers maybe purple for
extremely dangerous.

Product Mix
Is the complete range of products supplied by a firm.
Is a set of all product lines that a particular seller offers for sale to the buyer.
Product line
Is a group of product items which have similar characteristics or use in fulfilling consumer
needs eg men’s clothing, tooth paste etc

The 3 Dimensions of Product Mix

Width
Is the number of product lines found in the mix.
Depth
How many versions, brand names, flavours are offered in each product line.
Length
Is the total number of items the company carries.

PRODUCT DEVELOPMENT STAGES

Introduction Growth maturity Decline

- market testing/pilot study

- product development

-market strategy analysis/profitability analysis

-concept development

-idea screening
- idea generation

Sources of New Ideas

Customers, suppliers, internet, competitors, magazines, trade journals , newspapers ,
employees R and D etc

NEW PRODUCT
Is a product that is perceived as new by potential customers/consumers.
Categories of New Products
 New to the world products
 Improvements on existing products
 Additions to existing product lines
 New product lines
 Repositioning

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  Cost reduction
 An innovation
 An imitative product
Challenges to New Product Development
 product not well designed
 high development costs
 rivals fight back harder than expected
 market overestimated.
 incorrect positioning
 capital shortage
 shorter product life cycle etc
Causes of New Product Failure
 inadequate market research
 misleading market findings
 defects in the product
 stiff competition
 distribution problems
 government policies
 PEST constraints
 incorrect positioning etc
Adoption
Is an individual’s decision to become a regular user of a product
Innovation.
Is any good, service or idea that is perceived by someone as new.

PRODUCT INNOVATION/ADOPTION CURVE



13.5% 34% 34%

2,5% 16%

Innovators Early Adopters Early Majority Late Majority Laggards

Innovators- young, high status, high income, contribute 2.5%

Early adopters-are influential within the society.

Early majority-are deliberative and take time to decide’

Late majority- below average income and constitute 34%

Laggards-low income group, very sceptic and contribute 16%

PRODUCT LIFE CYCLE (PLC)

Is an analogy that illustrates the stages undergone by a product and the revenue that it
might earn for the business .The PLC shows the different stages that the product passes
through and the sales that can be expected at each stage.

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Sales

Introduction Growth Maturity Decline

sales

INTRODUCTION

-The product is new on the market ie just launched.

-Sales are low
-High risk of failure
-Product not yet profitable
-Intensive advertising to create awareness
-Adoption of penetration and skimming pricing

GROWTH
-The brand is established
-Consumers are aware of the product
-Sales begin to increase.
-Product is bought by early adopters.
-Firm attempts to build customer loyalty
-Advertising to remind customers
-Advertising insertions will be more informative.
-Prices may decrease if the firm adopted skimming at stage one,

MATURITY
-Sales increases at a declining rate.
-Sales level off due to competition.
-Product is bought by majority
-Packaging is very important
-Stable market share
-Product modification

DECLINE
-Sales and profits decline
-Substitutes appear
-Product becomes obsolete
-Firms seek to cut losses and have two options:
 Elimination of the product
 Extension- extending the product life cycle

EXTENSION STRATEGIES
 opening up new markets
 repackaging
 rebranding
 repositioning

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  improvements on ingredients.
 product modification.
 developing a wider range of products.

SIGNIFICANCE OF THE PLC

 it gives an indication of the profitability of the product at each stage of its life cycle.
 identifies how cash flow might depend upon the life cycle.
 it identifies the points at which extension strategies may need to be introduced.
 it helps in planning the marketing mix decisions.
 it helps the business to manage its product portfolio.

DRAWBACKS
 Not all products pass through the same product life cycle. There is need for market
research.
 The marketer must also take into cognisance the political, economic, social and
technological factors that impede the outstay/life of the product.

TYPES OF PRODUCT LIFE CYCLE

sales sales





classic Gimmick

sales sales

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 Life cycle with extension Leap frog

sales

Continuous growth Plateau

sales sales

False start and relaunch Flop

Technological products eg mobile phones when sales increase suddenly and fall suddenly
as well as fashion will have the following PLC shape.

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 Flop

Few products like coca cola always increase. It may be due to continuous introduction of
extension strategies. In this case the product will have the plateau shape

PRODUCT PORTFOLIO ANALYSIS

 BCG matrix
 Ansoff matrix
 Product Life Cycle

BCG matrix

Relative market share

High Low

High STARS QUESTION MARKS/

Market PROBLEM CHILD

Growth
CASH COWS DOGS
Low

Firm’s product mix can be

classified into four categories.

Question Mark/Problem Child

 Has low market share but high market growth.

 All new products will start from this box.
 To increase market share there is need for much cash injection.
Stars
 Are successful products.
 Have both high market share and high market growth
 Are profitable products.
Cash Cows
 Have high market share but low market growth.
 Generate funds to finance development of new products or improvements on other
existing products,
Dogs
 Have both low market share and low market growth.
 There is very little to gain from these products.

Significance of The BCG Matrix

 Helps to identify strengths and weaknesses of products.
 It helps to forecast the firm’s product position
 Helps in the allocation of resources.
 Helps in the management of cash flows.
 Assists in determining the marketing strategy.
Limitations Of The BCG Matrix
 Relative market share and market growth are not the only measures of product
success.

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  These limit the creativity within the organisation and if not prepared in an accurate
way then wrong decisions can be made.

ANSOFF MATRIX
Analyses the options in terms of markets and products.

PRODUCTS
Existing New

Market Product
penetration development Existing

MARKETS

New
Market extension/ Diversification
development

Market Penetration

In this regard the marketing mix ( 4 ps ) are manipulated to increase the sales of an
existing product in an existing market. This strategy is successful if the overall market is
growing and the company is unwilling to develop a new product or diversify.

Product Development

A new product is sold in an existing market. The strategy can be adopted if there is
potential market growth and the firm holds a high market share and there is strong
preference for new products by the clientele base,

Market Extension/development

Depicts selling existing products to new markets or new segments. This is done to increase
sales, gain competitive edge and exploit new market opportunities. In this respect it will be
costly to the organisation to produce a new product.

Diversification

The firm will be producing new products for new markets. This strategy will enable the firm
to increase sales and profit levels to avoid dependence on a single product ie risk bearing
economies of scale. This enables the firm to stay in business without booted out of
competition by rivals.

PRICE 2nd P OF MARKETING MIX

Price is the amount of money paid for a product or service or it is the value attached to the
product or service.

Factors Influencing Pricing Decisions

 business objectives
 costs of production
 demand of a product
 supply in the market
 competition
 market conditions eg monopoly
 stage of product life cycle

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  scale of operation ie large or small scale
 product positioning
 economic situation
 elasticity of demand

PRICING METHODS

COST BASED

Absorption Cost pricing

Assumes that the price of a product consists of both direct and fixed costs. It covers all
costs of production. It maximises long run profits.

Drawbacks
 Results in overpricing
 Does not consider demand changes
 Ignores competition
 Does not consider the level of activity which commensurate with production costs.
Marginal Cost Pricing
Assumes that the cost of a product consists of direct/variable costs only. Costs vary with
the level of activity.

Application
 Make or buy decisions
 Pricing decisions
 Acceptance of order below normal selling price.
 optimum use of scarce resources
Drawbacks
 Considers fixed costs as irrelevant.

MARKET ORIENTED PRICING

Price Skimming
Normally used when a new product is launched onto the market. Initially a higher price is
charged and the price is lowered gradually during the product’s life cycle.

Advantages
 R and D costs are recovered quickly.
 Attracts the elite who commensurate price with quality.
 High profit margin

Drawbacks
 Attracts new competitors to the market because of lucrative profits.
 Attracts only high income earners.

price
$ penetration

skimming

Time

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Penetration Pricing

The marketer decides to launch the product at a low price and then gradually increase the
price after they have penetrated the market.

Advantages

 It makes it difficult for competitors to enter the market.

 Entry barriers are high.
 A firm gains competitive edge in terms of market share and sales volume.

Drawbacks

 There are few profit incentives

 Is less attractive as consumers perceive the product as of poor quality.
 It is a high risk strategy if the product is expected to have a short life span.
 It does not provide sufficient time to recover R and D costs

Both penetration and skimming are applied when launching a new product.

Price Discrimination

Involves charging different prices to different market segments. A higher price is charged to
a segment where demand is inelastic eg bus fares, travelling during peak hours etc

Advantages

 The firm is able to raise total revenue if different prices are charged to different
markets.
 Uses price elasticity knowledge to charge different prices to increase total revenue.

Drawbacks

 administrative costs of having different pricing levels

 customers may switch to lower priced markets
 consumers paying higher prices may object and look for alternatives

COMPETITOR BASED PRICING

The marketer sets prices based on his competitor’ prices.

Destroyer pricing

Is an aggressive price cutting to eliminate rivals

Perceived value pricing

The price is placed upon the product that reflects its value as perceived by customers in the
market. The more prestigious brand for example Mercedes Benz the higher the price that
might be set.

OTHER PRICING METHODS

Loss leader pricing

The product is charged a price at or below costs to attract customers.

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Promotional pricing

Is used to clear excess stock by discounts.

Bundle pricing

The price of marketing two or more products in a single price package eg a bundle of
Colgate and tooth paste

PRICE ELASTICITY OF DEMAND (luxuries and necessities)

Measures the responsiveness of quantity demanded to changes in price.

PED = % change in QD

% change in price

If the coefficient of elasticity is:

Greater than 1 it is elastic
Less than 1 it is inelastic
Equal to 1 it is unitary
Zero it is perfectly inelastic
If the coefficient or demand is inelastic increase the price to increase total revenue.
Reducing the price will reduce total revenue. If demand is inelastic means that % change in
demand is less than % change in price.

If it is elastic reduce the price to increase total revenue. Increasing the price will reduce
total revenue. If demand is elastic means % change in demand is greater than % change in
price.

If demand is unitary means that there is a proportionate change. A fall or rise in price has
no effect.

Elastic demand Inelastic demand

D D

P2 P2

P1 P1

Q2 Q1 Q2 Q1

DETERMINANTS OF PED

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  consumer income
 nature of the product ie necessity or luxury
 habit forming
 time horizon
INCOME ELASTICITY OF DEMAND ( normal and inferior goods)
Is the responsiveness of demand to changes in income.

YED =% change in QD
% change in income
If the coefficient is positive denotes a normal good and a negative sign an inferior good.

CROSS ELASTICITY OF DEMAND ( substitutes and complements)

Measures the sensitivity of the demand for one good to a change in price of another.

CED =% change in QD for good X

% change in price for good Y

A positive coefficient suggests that the two goods are substitutes. If the price for product Y
increases consumers will switch to product X.
A negative sign means the goods are complements ie if the price of good Y rises less people
will buy good X because they have joint demand.

PROMOTIONA ELASTICITY OF DEMAND

Is the degree of responsiveness of quantity demanded to a change in promotional
expenditure.

PED =% change in QD
% change in promotional spending
If the coefficient is greater than 1, demand is said to be elastic/responsive following a
change in promotional spending. If it is less than 1,then demand is inelastic and there
might be little point in increasing promotional expenditure. The business should increase
spending on those products with a higher promotional elasticity of demand and to cut back
expenditure on those with low elasticity.

APPLICATION/USES OF ELASTICITY OF DEMAND

Price Elasticity of Demand
 to determine pricing strategy.
 production planning
 price discrimination
 government tax purposes
 used to determine producer revenue and consumer spending.
 trade unions to determine a rise in wages following a high demand for a product.
Cross Elasticity of demand
 firms can estimate the effect on their demand of a competitor’s price cut.
 firms can estimate impact on demand for their product if they cut price of a
complement eg if they cut the price of computers how will demand for soft ware
increase.
Income Elasticity of Demand.
 can determine which goods to produce
 can help firms plan production and employee requirements as the economy grows.
 can help firms estimate any potential changes in demand.

LIMITATIONS

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  demand may be perfectly inelastic that is change in price has no effect on the
quantity demanded.
 demand may be perfectly elastic that is demand is infinite to any change in change
in price.
 the percentage change in quantity demanded may be proportionate to percentage
change in price of a good.
 calculation of elasticity is not a once off event, there is a need for continuous
calculation as demand changes over time.

PROMOTION 3rd P OF MARKETUNG MIX

Promotion
Is the communication of information about a good or service between sellers and buyers in
an effort to influence attitude and behaviour.

Promotional mix
Is a combination of promotional techniques used to increase sales of a product. This
includes advertising, personal selling, sales promotion, publicity, sponsorship and direct
marketing.

Purposes of Promotion
 reminds consumers of existing products.
 informing potential customers about the benefits of a product.
 informing consumers about a new product
 to change the position of a product
 to fight competition
 to create the product identity
 to correct misleading information ( disparaging )
 to increase consumer awareness
 to show the superiority of the product over its competitors.
Advertising
Is the spreading of information and the drawing of attention of the public.

Types of Advertising
 Informative
 Persuasive/competitive
 Collective/generic
 Institutional
Importance To Consumers
Informs consumers about:
 prices of good
 new product
 changes in the product
 variety of goods
 events taking place eg soccer
Importance to the producer
 attracts customers
 boost sales
 increases profits
 maintains sales
 fights competition
 improves corporate image
 counters adverse publicity

Disadvantages
 leads to overspending
 leads to impulse buying

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  interrupts TV programmes
 undermines social standards
 if unsuccessful becomes expensive.

FUNCTIONS OF ADVERTISING AGENCIES

 carry out market research
 create the advertisement
 produce the advertisement
 to book space and time for advertisement
 to place the advertisement
 to monitor success of advertisement

Advertising Media
Print media -newspapers
Electronic media—TV
Outdoor-posters

Factors Influencing The Choice of Media

 size of market
 cost of advertising
 expected profit
 effectiveness of the media
 target group
 urgency of message
 accessibility
Ways to measure the effectiveness of an advertising campaign
 sales performance after the advertising campaign
 consumer awareness data
 response rate to advertisement
Personal Selling
It is the most action oriented promoted technique eg door to door selling. Producers use
sales representatives to sell goods to retailers. However it is expensive if it is done on a large
scale.
Sales Promotions
Is used to provide the volume of sales eg providing free samples, coupons, point of purchase
displays
Publicity
The aim of publicity is to establish and improve a firm’s image eg assisting less privileged
families.
Sponsorship
By sponsoring events, companies hope to increase brand awareness eg soccer
Direct Marketing
Is an interactive marketing system that uses one or more advertising media to affect a
measurable response at any location. It involves:
-catalogues
-direct mail
-telemarketing
-e-mail and internet etc

PLACE THE 4th P OF MARKETING MIX

This refers to channels of supply which provide the links between the producer and
consumers.
Is making the product available to the market.

Channels of Distribution

PRODUCER

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 WHOLESALER

RETAILER

CONSUMER

Factors influencing the choice of distribution channels

 nature of product
 cost involved
 methods adopted by competitors
 degree of control required
 geographical placement of the market
 rate of use of the internet
 legal constraints eg licence required for arms and ammunition business
 type of intermediaries involved

Types of distribution of channels

Direct distribution channels

The producer supplies straight to the consumer
Advantages
 less cost involved
 allows the business to be sensitive to consumer needs
 there is direct contact with customers
Disadvantages
 use of catalogues is costly
 customers are not able to touch or feel the product

Indirect distribution channel

In this case the producer channels his product through middlemen or intermediaries to the
final consumers.
Advantages
 allows self service
 goods are well displayed to allow price comparison.
 facilitates window shopping.
Disadvantages
 the producer cannot be sensitive to the needs of customers unless otherwise
informed by intermediaries.
 there is no direct contact with customers.

Distribution in terms of market coverage

Intensive distribution
Denotes a situation where as many suitable and available intermediaries as possible are
used eg coca cola distributes its products through café, liquor stores, filling stations and
supermarkets.

Exclusive distribution
Occurs when the producer limits the number of intermediaries to handle his products to
specific intermediaries who undertake not to stock other competing products eg exclusive
products like men’s wear.

Selective distribution
Refers to choice of only those intermediaries who will distribute the product more effectively
eg medicines are distributed through pharmacies because pharmacists are the most
qualified people to distribute medicines effectively.

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Functions of middlemen
 provide market information
 they promote producer’s products
 negotiate with customers
 share risk
 they make products readily available.
 advertise on behalf of producers or principals.
Examples: broker, factors, delcredere, forwarding agents

MARKET RESEACH
Is a systematic design and objective collusion and analysis and evaluation of information
relating to markets and marketing findings and data.
Is the process of collecting, recording and analysing data about the customers and
competitors.

Purposes of Market Research

 reduces risk of product failure
 helps in development of a successful new product
 helps in development of the most effective marketing strategy.
 target markets can be identified
 to understand demographic trends of the market
 to cope with increasing technological advancements.
 to identify customer needs and wants.
 to identify suitable outlets and competitors’ strategies.

Scope of market research

Market research
-size of market
-customer profile
-customer behaviour
-market segments
Sales research
-identifying suitable outlets.
-analysing distribution channels
-assessing effectiveness of sales people.
Production research
-examining existing products
-product variations
-packaging research
-pricing policy
Business economics research
-research on macro and micro environmental variables.
Motivation research
-analysis of customer perception.
-research into the activities of competitors.

DATA
Refers to unprocessed facts/raw facts.

Discrete data
A random variable whose observations can only take specific values usually integer values
eg number of students in a class.

Continuous data
A variable whose observations can take any value in an interval eg the mass of a vehicle.

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Primary data/Field research
Is data which is captured at the point where it is generated eg personal surveys, interviews,
observations.

Advantages
 directly relevant to the problem at hand.
 is more accurately
 up to date
Disadvantages
 can be time consuming
 more expensive to collect.

Secondary data/Desk research

Is data collected and processed by others for the purpose other than the problem at hand.
The data is already in existence eg past sales reports, government publications, trade
journals, newspapers etc.

Advantages
 the data is already in existence
 access time is relatively short.
 less expensive to acquire
Disadvantages
 data may not be problem specific.
 data may be inappropriate.
 it is difficult to assess data accuracy
 data is not subject to further calculation.

RESEARCH INSTRUMENTS
The main research instruments for collecting primary data /field research:
 Questionnaire
 Experiment
 Observation
 Interviews

Questionnaire
Is a data collecting instrument used to gather data in all interview situations.
Characteristics of a good Questionnaire
 redundant questions be avoided.
 ambiguous questions must be avoided
 questions should be arranged in a logical order
 technical jargon should be avoided
 questions should not require calculations.
 instructions must be clear and explicit
 questions must be specific and addressing one issue only.
 emotive language should be avoided to prevent biased response.
 questions on sensitive issues should be carefully worded.

SAMPLING OF DATA
Is a process of selecting a representative subset of observations from a population to
determine the characteristics.
Sample
Is a segment or portion of a population.

Sampling error
Is the difference between the estimate of a value obtained from a sample and the actual
value.

SAMPLING METHODS

Non Probability Sampling

96
Is any sampling method in which observations are not selected randomly.

Judgement sampling
Is used by a researcher to select the best sampling units to include in a sample eg a
medical doctor can pick an HIV/AIDS patient using professional skills.

Quota Sampling
The population is divided into segments and a quota of observations is collected from each
segment. The researcher interviews a prescribed number of people in each category eg
according to age groups or socio economic backgrounds.
Advantages
 the field work maybe done quickly
 costs may be low
Disadvantages
 it is not possible to estimate the sampling error.
 interviews may fail to secure a representative sample of respondents.
 interviewers find it difficult to recognise large class or groups.

Multistage Sampling
This is a series of samples taken at successive stages eg
-A country may be divided into geographical regions.
-A limited number of towns /rural areas are selected in each region.
-A sample is taken of people/households in a selected town eg a town is  divided into 1800
areas from which a sample of 200 is chosen.
-Selected areas are divided into districts ‘
-From each district 20 households are selected.

PROBABILLTY SAMPLING METHODS

Observations are selected randomly.
 simple random sampling
 systematic random sampling
 stratified random sampling
 cluster random sampling

Simple random sampling

Is used when it is assumed that the population is relatively homogenous with respect to the
random variable under study.
Advantages
 easy to administer
 eliminates bias
 less cumbersome
 less time consuming
Disadvantages
 is cumbersome when dealing with a large group.

Systematic random sampling

Is a random sampling involving a system. The sampling framework is taken and a name is
chosen at random. Then from this chosen name every tenth item is selected throughout the
list. The first observation is selected randomly.

Merits
-eliminates bias
-is not time consuming
-less cumbersome
-it is sufficiently random to obtain an estimate of the sampling error.

Drawbacks
-is not fully random
-is cumbersome when dealing with large groups.

97
-there can be problems if particular characteristics arise in the list of names  or units at
regular intervals which could create bias

Stratified random sampling.

Is dividing of population into segments or strata where the sampling units in each stratum
are relatively homogenous.
Random samples are selected from each stratum eg in a market survey the sales of
cigarettes in a variety of outlets maybe investigated by dividing the retail outlets into large,
medium and small outlets.
A sample is taken based on each category. Subsets can be based on income, gender ethnic
groups etc

Advantages
-provides a more accurate impression of the population.
-is cost effective
-less cumbersome

Disadvantages
-if a stratum cannot be clearly defined it may overlap reducing the accuracy  of results.

Cluster sampling
Clusters are formed by breaking the area under survey into smaller areas and a few of these
are randomly selected and interviewed. eg
A map of certain town is divided by a grid and random selection is done.

A B C D E
F G H I J
K L M N O
P Q R S T
U V W X Y

A, M and X may be selected.

Advantages
 it is viable and feasible
 interviews are done in few areas thereby saving travelling time.
Disadvantages
 clusters may comprise people with similar characteristics eg A and B
 it is difficult to estimate sampling errors.

Reasons for sampling

-it is cheaper to gather a sample data.
-sample data can be gathered more timeously.
-more accurate data is obtained from a sample

DATA PRESENTATION
Data collected can be presented in different ways which communicate the information and
enable conclusions to be drawn.

Ways of presenting data:

 table
 chart
 graph
 pictogram
Table
Is usually used to record data in its original form. It is also used when a wide range of
results need to recorded. It is more accurate to take results fro the table than a graph.

Bar charts

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used when the magnitude of the results need to be presented and compared. Component
and percentage bar charts are used to show how the total figure is made of different
variables. Charts are eye catching and enable data to be shown clearly.

Multiple bar chart showing sales trend for Company X ($m)

4
chicken
3
beef
2 pork

0
2012 2013 2014 2015

Line graphs
Used when time is one of the variables
When the trend and regular variations need to be identified. It easier to see trend of sales
over time

sales($m)

4
beef
3
chicken
pork
2

0
2012 2013 2014 2015

Pie Chart
Is used to display data that need to be presented in such a way that proportions of the total
are clearly shown

99
 Sales

1st Qtr
2nd Qtr
3rd Qtr
4th Qtr

It is useful to show the relative importance of segments out of a total result. It is a useful
way of showing the changing relative importance of values overtime. However it is less
effective when comparisons between totals are needed or when precise comparisons
overtime are required.

Histograms
They can be visually used to present frequency data when the range of data has been
broken into class ranges. They can be used for some simple statistical analysis such as
identifying the modal class.

Pictograms
They are useful when the user wants to attract the reader towards looking at the data.
However they are often rather imprecise when using one symbol to represent a large
number of results. It is not ideal when presenting data that involves odd numbers such as
5,679 etc.

FORECASTING
Refers to predicting, projecting or estimating future events.
It is an attempt to predict the future behaviour of variables as a basis for decision making.

Types of forecasting
Sales forecasting
Production forecast
Human resource forecast
Inventory forecast etc

Uses of forecasting
 Planning production schedules
 Inventory control
 Procurement schedules
 Recruitment
 Provides a basis for planning
 Cost projection
 Investment appraisal

Limitations
 Basis for forecasting might be wrong leading to poor forecast.
 The future may change very much making forecast unreliable.
 Reusability of past data.
 Accurate measurement.

Factors affecting forecast

 political instability

100
  demographic trends
 economic recessions
 technological changes
 national income

FORECASTING METHODS

Qualitative techniques
-are based on individual perception.

Quantitative techniques
-are based on mathematical models and are objective.

Qualitative techniques
 single expert opinion/personal insight
 panel consensus
 market survey
 historical analogy
 Delphi technique
 brain storming
 scenario

Single expert opinion

Is based on individual perception. An expert can determine sales trend basing on
experience.

Panel consensus
The panel of experts will discuss, pooling knowledge and ideas and reach at a consensus.

Market survey
Involves carrying out a market research eg sampling a population representative to respond
to questions regarding their expectations about the economy or personal incomes.

Historical analogy
This provides a model to help understand likely trends in demand for a product eg product
life cycle. The performance of one product can provide an analogy to predict trends in a
similar product.

Delphi technique
Involves a panel of experts responding to questionnaires. Experts are asked independently
and individual responses are presented anonymously to other panel members until a
consensus emerges

Brain storming
Generating creative ideas spontaneously ,usually for problem solving and especially in an
intensive group discussion that does not allow time for reflection.

QUANTITATIVE TECHNIQUES
 Time series analysis
 Regression analysis

Time series analysis

Is set of observations of a random variable arranged in a chronological order.

Components of Time series

 Trend (T)
 Cyclical Variations (C)
 Seasonal Variations (S)
 Irregular/Random variations ( I )
Trend

101
Is defined as a long term smooth underlying movement in a time series.

Causes
-population growth
-urbanisation
-technological improvements
-shifts in habits and attitudes.

sales
$ Trend

time

Cyclical Variations
These are medium to long term deviations from the trend.

Causes
-trade union
-sanctions
-monetary policy
-fiscal policy
-world organisations
-mass psychological hysteria

sales
$

Time

Seasonal Variations

These are fluctuations repeated periodically usually weekly, monthly, yearly etc
Causes
-climatic conditions
-public and school holidays
-special events like Easter, Community carnival

sales
$

102
 Time

Irregular/Random Fluctuations

These fluctuations attributed to unpredictable occurrence.

Causes
Floods, drought, fire, strikes, boycotts, accidents, violence, war, riots etc

sales
$

time

TREND ANALYSIS

Two methods for trend isolation

 Moving average
 Regression analysis

Moving Average

Given the following data determine the trend using 3 Period moving Average.
January 7 July 12
February 3 August 4
March 5 September 10
April 9 October 13
May 7 November 9
June 9 December 10

Month Sales 3 Period Moving Total Moving Trend Cyclical

average variation
Jan 7
Feb 3 7+3+5=15 15÷3=5 5 -2

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Mar 5 3+5+9=17 17÷3=5,6 5,6 -0,6
Apr 9 5+9+7=21 21÷3=7 7 2
May 7 9+7+9=25 25÷3=8,3 8,3 -1,3
Jun 9 7+9+12=28 28÷3=9,3 9,3 0,3
Jul 12 9+12+4=25 25÷3=8,3 8,3 3,7
Aug 4 12+4+10=26 26÷3=8,6 8,6 -4,6
Sep 10 4+10+13=27 27÷3=9 9 1
Oct 13 10+13+9=32 32÷3=10,6 10,6 2,4
Nov 9 13+9+10=32 32÷3=10,6 10,6 -I,6
Dec 10

Using 4 Period Moving Average

Period Sales Uncentred 4 Centred 2x4 Centred Cyclical

moving total moving total moving variation
average
Jan 7
Feb 3
24
Mar 5 48 48÷8=6 -1
24
Apr 9 54 54÷8=6.75 2.25
30
May 7 67 67÷8=8.3 -1.3
37
Jun 9 69 69÷8=8.6 0.4
32
Jul 12 67 67÷8=8.3 3.7
35
Aug 4 74 74÷8=9.25 -5.25
39
Sep 10 75 75÷8=9.37 0.63
36
Oct 13 78 78÷8=9.75 3.25
42
Nov 9
Dec 10

Significance

 quantitative and objective

 reliable for short term forecasting

Limitations

 not suitable for long term forecasting.

 reliability depends on the accuracy of data
 gives equal weighting to all values in different quarters irrespective of how outdated
the values might be otherwise recent data is more reliable.
 data for other periods may not be given hence accuracy and reliability of the forecast
is affected.
 the greater the number of moving averages the greater the smoothing effect.

Regression Analysis

104
Is a quantitative method according to which forecasting model is formulated by means of
statistical method and which attempts to fit the best curve to observe the data in the short
to medium term.

Uses of regression analysis

 to find a linear function which best fits the actual observations.

 is fairly accurate for short term forecast.
 can be used as a cost model.
 can be used in production planning, takeover estimates, capital budgeting.

Limitations

 regression attaches equal weight to observations to time series irrespective of the

fact that they present recent observations.
 if present data should differ from recent data then regression would not provide very
good estimates.
 it does not automatically adopt forecast latest particulars and allocate greater weight
to them.

Regression function

To find a linear relationship between variables we use the equation of a straight line.
y=a+bx

where: y= dependent variable

x= independent variable

a= y intercept

b= gradient

To find the line of best fit you must know the values of a and b.

a = ∑ y- b ∑ x b = n∑ xy – (∑ x )(∑ y)

n n(∑ x²) –(∑ x )²

Find the line of best fit through the following data for the budget and units sold. How many
units will be sold if the advertising cost is $30 000

Month Advertising budget $000 Units sold

1 20 120
2 40 170
3 60 210
4 80 230

x y xy x²
20 120 2400 400
40 170 6800 1600
60 210 12600 3600
80 230 18400 6400
∑200 730 40200 12000

105
b = 4 (40200) – (200)(730)
4 (12000) –(40000)

b = 14800
8000

b =1.85

a=∑y–b∑x
n

a =730 – (1.85) 200

4
a = 90
y = a+bx
=90+1.85(30)
=145.5
=146000 units sold

Comment
This means that every unit increase in advertising will lead to 1.85 increase in sales.
Units estimates y =90+1.85x where x should be between 20 ≤ x ≤ 80
Values which are outside will give biased or meaningless information.
Trend line is determined by y =90 +1.85x Where x =20 in month 1 and 40 in month 2 etc.
The forecasting of y values from within a range of available x values is referred to as
INTERPOLATION

Any projection/prediction/estimation outside the range of available x values is called

EXTRAPOLATION. Future predictions are based on past results.
When actual results are plotted on a time series graph, the line can be extended or
extrapolated, into the future along the trend of the past data.

PRODUCTION/OPERATIONS MANAGEMENT

PRODUCTION
-Is the provision of goods/services to satisfy human needs and wants.
-Is the conversion of raw materials to semi finished and finished products to  satisfy human
needs and wants.
-It is a broad term used to cover all the processes of adding value in the  provision of goods
and services.

INPUTS OUTPUT
Raw materials
Components Goods and
Land services
Labour CONVERSION
Capital
Information

Added Value/Value Added

-Is the process of adding value in the provision of goods and services.

106
-Is the increase in the value of goods as a result of production process.
-Is defined as sales receipts minus the cost of brought in materials.

Cost of Brought In Sales Receipts Value Added

FARMING ----------------------- 300000 300000
MANUFACTURING 300000 750000 450000
RETAILING 750000 1000000 250000
1000000

Suppose a farmer has already acquired the inputs that is seed and equipment. The farmer
has no need to buy any materials during the period under consideration. The farmer grows
beans and sells to manufacturers for $300000. This contributes value added of $300000
since the cost of brought in is zero. The manufacturers in turn pack and sell the beans to
retailers for $750000. The retailers store and display the beans and sell to consumers for
$1000000.
In converting inputs to output producers add value to goods and services they supply.

Ways of Adding Value

 value analysis
 investment in training
 better marketing
 research and development
Reasons for Adding Value
 survive and grow
 meet consumer requirements
 fight competition
 to obtain better prices
 improve profit levels
 gain competitive edge
Distribution of Added Value
 wages and salaries for workers
 taxes
 interest paid to lenders
 paying off debts
 dividends paid to shareholders

Branches of production
 Industry
 Commerce
 direct services

Industry
Is a group of producers who provide a particular range of goods which are often named after
the principal product eg shoe industry. Industries include primary, secondary and tertiary.
Commerce
Is the distribution of goods and services to satisfy human needs and wants.
Commercial services are concerned with the movement of goods from the producers to the
final consumers. This will involve aids to trade like transport, communication etc
Direct services
Is the provision of services which are of personal nature. The services are provided
personally. eg doctors, teachers and artists offer direct services.

Stages of production
 primary/extractive
 secondary/manufacturing/constructive
 tertiary
Factors of Production
Land, Labour, Capital and Entrepreneurship

107
ORGANISATIONAL CHART SHOWING THE PRODUCTION FUNCTION
.
MD

PROD MKT FIN HR

R&D Inventory value engineering

control

FUNCTIONS OF PRODUCTION DEPARTMENT

 to process raw materials.
 inventory control
 add value to products
 quality control
 maintenance of machinery and equipment
 value engineering
 production planning
 work study programme
 production planning
 research and development

METHODS OF PRODUCTION

Job production
Involves the production of goods as per customer order and specification. Industries
produce products according to the requirements of the customer eg construction of a
house.

Characteristics
 product produced as per customer specification.
 the product has an element of uniqueness.
 several jobs can be worked out under one roof.
 the product is not for mass production.
Advantages
-each task is planned and controlled separately
-no repetition of products.
-provides ready market
-goods are produced as per customer requirements.
-reduces holding costs
-products are tailor made to meet individual needs.

Disadvantages
-is most expensive.
-is labour intensive
-requires technical skills.

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-production does not commence until an order has been made.
-high start up costs.
-the labour needs to be highly skilled and versatile.

Batch Production
Is the manufacture of different versions of the same basic product in batches eg different
colours, sizes, bakeries ie all items in a batch are processed simultaneously.
Characteristics
 repetition of products
 production is not continuous
 production is done for stocking
Advantages
-all batches are processed simultaneously
-it saves time ie production runs are shorter
-variety of products are produced
-it increases experience and expertise due to repetition of production
Disadvantages
-wastage of resources
-increases holding costs
-repetition of production becomes monotonous
-loss of value of goods in warehouses
-changeover between batches means that resources are idle at times.

Flow Production
A single product is manufactured on continuous basis from one machine to the other until
a finished product is obtained eg manufacture of fluids ie Delta, oil refining etc

Characteristics
 capital intensive
 high start up costs
 division of labour
 mainly skilled labour to monitor the process
 production of fluids
Advantages
-division of labour
-cost effective due to introduction of robots
-costs are kept low and therefore prices are also low.
-reduces labour costs.
-goods are produced cheaply and quickly.
-saves time as production processes are done from one factory.
-enjoys production economies of scale
-large quantities are produced in a relatively short time.
-quality tends to be consistent and high and its easy to check quality at   various points.
Disadvantages
-high initial set up costs
-breakdown of machinery will disrupt production.
-products are made to stock.

Line Production
A single product line is produced eg car assembly

Characteristics
 special machine is used

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  highly capital intensive
 products made for stocking
 layout of the factory will be by process in a logical sequence
Advantages
-with long production runs unit cost is low.
-specialisation increases high quality output
-meets unexpected rise in demand
Disadvantages
-line producers must invest heavily in stocks of raw materials
-high holding costs
-high start up capital

Project Production
Is used large scale projects made to customer requirements eg civil engineering project.

Characteristics
-made as per customer requirements.
-mainly used in large scale projects
-is capital intensive.
-labour mobility because people move from one place to another.
-quantitative techniques such as network analysis are used.
Advantages
-product made as per customer requirements
-cheap labour especially in civil engineering.
-quantitative techniques are used.
Disadvantages
-requires highly qualified managers.
-is very expensive
-exploitation of labour through low wages.

JUST IN TIME (JIT ) PHILOSOPHY

The philosophy of JIT is that materials should be delivered to the factory Just In Time to be
used and production should be completed Just in time for goods to be sold. The JIT
philosophy can be applied to the system of :
 purchasing
 handling
 production
 delivery of materials and components
JIT Production
Is a constant flow from one process to another with production in a process scheduled to be
completed Just as it is needed for the next process downstream and purchases of raw
materials/components needed in a process to arrive in time.

JIT versus Batch production

JIT constant flow system of production is contrary to batch production system. JIT requires
much smaller stocks of materials than and work in progress than is usual in batch
production.
Requirements for JIT Production
 excellent relationship with suppliers
 multi -skilled employees to be able to switch jobs quickly
 Modern/computerised machinery is required to produce a wide variety of products
just by changing single software.
 accurate demand forecasts

110
  computerised record of sales
 reliable suppliers
 electronic communication with suppliers.
 motivated employees
 strictly quality control( zero defect)

Benefits of JIT
-less scrap/paperwork
-less storage space
-prompt delivery of materials
-finished goods inventories are minimised.
-the goal of JIT is zero inventory with 100% quality.
-right quantities are produced/purchased at the right time.
-less chance of stock being obsolescent
-less stock reduces risk of damage and wastage
-reduction in manufacturing lead time.
-increased equipment utilisation.

Limitations
-response to changes in demand will be limited if the firm possesses  insufficient stock of
material
-less stock of materials may disrupt the production process.
-reliable procurement of materials depends on the willingness of the supplier  to cooperate
with delivery schedules required.
-it requires well coordinated production system.
-poor relationship with suppliers will lead to stock shortages.
-defective supplies will affect the production system.
-no contingent stocks are maintained.
-the philosophy requires proper future projection relating to manufacturing,  supplies etc.

Lean Production
Refers to multi-practices aiming at reducing waste and maximising quality.
Lean production entails the following:
 simultaneous engineering
 kaizen production
 kanban system
 team working
 Quality Circles
 Total Quality Management
 Cell production
 flexible specialisation
Advantages
-effective use of resources
-less factory space is used
-eliminates wastage of resources and time.
-better quality products are produced with fewer resources.
-lead times are cut down.
-improves productivity.

Disadvantages
-full commitment by employees.
-unreliable supplies may disrupt production.
-defective raw materials will affect the production system.

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-requires well coordinate production system
The choice of production process is determined by:
Size of order, volume of output, product range, product variation, flexibility of process,
process time, level of labour skill, costs of set ups, dedication of machinery, economies of
scale, capital investment, make to order/stock etc

LABOUR AND CAPITAL INTENSITY

Capital Intensity
This is when a company relies more on capital investment compared to labour

Advantages
-production rate is faster
-less intervention of trade unions
-hours of production are flexible
-enjoys economies of scale ie cost reduction.

Disadvantages
-high fixed costs
-large capital to secure equipment.
-high maintenance costs of equipment
-highly skilled engineers are needed.
-changes in technology can affect production.
Labour Intensity
This is whereby a firm mainly relies on labour compared to amount of capital.
Benefits:
 contribution of ideas
 quality decisions
 it can switch from one job to another
Disadvantages
 disputes may rise
 increased training costs
 retirement of employees
 on job leisure
Factors effecting the decision to be capital or labour intensive
-financial resources ie if a firm has poor financial base will employ labour intensive
techniques.
-need for training labour ie labour intensive technique involves high costs of  training.
-need to adjust to ever changing technological world.

IMPROVEMENTS IN TECHNOLOGY
Automation
Is whereby the equipment used in the factory is controlled by a computer to carry out
mechanical process eg painting spray on a car assembly. The production line mainly
consists of machines and few people to monitor.
Mechanisation
Is when production is done by machines but operated by people eg printing by people.
Computer Aided Design ( CAD)
Is a computer software that draws items being designed more quickly and allows them to be
rotated to see them from all sides instead of having to draw it several times. It is used to
design new products or redesign existing products.
Computer Aided Manufacture (CAM)

112
Is whereby computers monitor the production process and control machines or robots on
the factory floor eg on car assembly, car plant computers will control the robots that spot
weld the car body, spray paint etc.
Computer Integrated manufacture (CIM)
Is the integration of both CAD and CAM . The computers are directly linked.
Mass Customisation
Is a highly capital intensive production system but done in a way that allows products to
have their own individual feature fro the menu choice usually computer controlled.
Process Innovation
Is the use of new or improved production methods pr service delivery eg robotics in
manufacturing, computer tracking of stock using bar codes or using internet to track
parcels being delivered.

EFFICIENCY
Level of production
Is the measured quantity of output that a firm produces in a given period of time. Is the
number of units produced during a given period.
Effectiveness
Is concerned with the achievements of objectives.

Formular = actual output X 100

expected output
NB The closer the result to 100% the greater the effectiveness.

Efficiency
Is producing output without the excessive use of resources.

Formular = Resources actually used X 100

Resources planned to be used
Productivity
Is a measure of efficiency with which a firm turns inputs into output. It is output per unit of
input.

Measures of productivity
Labour productivity = Total output in a given period
Quantity of labour employed
ie output per employee per hour.

Capital productivity = Total output

Value of capital employed

Material productivity = Total output

Material used
NB output per unit of materials used.

Plant productivity is output per machine hour

Multi-factor productivity = Total output

cost of labour, capital and Rm used

Ways of Increasing Productivity

 training and development to raise skill levels.
 purchase of more advanced technology to increase capital productivity.

113
  improve employee motivation
 work study programme
 improve working conditions
 division of labour
 change the layout of work
 efficient management eg effective maintenance of machines etc
NB Raising productivity is not always a guarantee for success. It does not create demand
among the customers so it is the quality of management which determines the success of
any policy.

WORK STUDY
Is a scientific study of work undertaken to devise the best methods of working and
measure the output for targeting, setting, and calculation of pay rates.
It is an analytical technique used to determine the most efficient use of labour in relation to
other inputs in the organisation or productive process.

Components of Work Study

 Method Study
 work measurement/Time study
Method Study
Is the systematic recording and evaluation of ways of doing work both existing and
proposed in a bid to develop easier, more effective methods and thereby reducing costs. In
this case there is an assumption that there is the best way of performing the task.
Main Stages(SREIDIM)
S- select the job to be studied
R- record information about the job
E- examine the information
I- identify ways of improving the method
D- develop improved methods
I- implement the new method
M- measure/evaluate the new method and make adjustments

Work measurement/Time study

Is a technique used to establish the time for a qualified worker to carry out a particular job.
The time required to perform the job is measured and compared by the time taken by a
quailed worker.
Main stages (SDMOE)
S-select the work to be measured
D-define the basis for measurement
M –measure the time taken to perform the task
E-obtain details of work giving allowances for interruptions and errands
E-establish a standard time and standard performance

Synthetic timing -The is broken into its components and a tome is

calculated for each component.
Analytical estimating-It is an approximate based on the knowledge of
operations and skills.
Pre-determined motion-It is the synthesis of times for the basic human
motions that build up into jobs. It requires                                        identification of basic
human motions to which                                        times are attached to build a complete
time.

Benefits

114
  improved workflow
 closer control of work
 improved performance
 better utilisation of resources
 increases efficiency and productivity
 provides a basis for pay rate system
 improves worker motivation through incentive payment.
 improves production plan
Limitations
 work measurements assumes that the job is already being performed and is
repetitive. It is applied to non-existent job. Workers hate change, fear of losing jobs


ECONOMIES AND DISECONOMIES OF SCALE

Economies of Scale
Is the reduction in long run average costs due to an increase in output/level of
activity/scale of operation.
Are cost advantages that a business can exploit by expanding the scale of production.
Numerical example of economies of scale:

Long run output(units) Total costs($) Long run average costs($ per unit)
1000 8500 8,5
2000 15000 7,5
5000 36000 7,2

Illustrating economies of scale

AC

Economies of scale Diseconomies of scale

Internal Economies of scale

Arise from an increase in the scale of operation in the firm itself irrespective of outside
influence. Examples include:

115
[a] Technical economies of scale
Large businesses can afford to invest in expensive and specialist capital machinery or
technology .
[b] Marketing economies of scale
A large firm can spread its advertising and marketing budget over a large output.
[c] Managerial economies of scale
Large firms can afford to employ specialist to supervise production systems and human
resources. 
[d] Purchasing economies of scale
Large firms can purchase its inputs in bulk at negotiable discounted prices if it has
monopsony power in the market. The bulk purchase will result in lower unit costs as a
result of discounts.
[e] Financial economies of scale
Large firms are usually rated by financial markets to be more credit worth and have
access to credit facilities with favourable rates of borrowing.
[f] Risk bearing economies of scale
A large firm has the capacity to diversify or produce several product lines to spread risk
of failure eg TA holdings

External economies of scale

Are advantages in the form of lower average costs which a firm gains from the growth of the
industry. For example the relocation of component suppliers and other businesses close to
the main centre of manufacturing are also an external cost saving.

Diseconomies of scale
Refers to an increase in long run average costs due to an increase in scale of production.
Diseconomies of scale might be caused by :
Control
Monitoring the productivity and the quality of output from thousands of employees in big
firms is imperfect and costly.
Cooperation
Workers in large firms may feel a sense of alienation and subsequent loss of morale.
Loss of control over costs
big firms may lose control over fixed costs such as expensive head offices ,management
expenses and marketing costs.

SCALE OF OPERATION
Is the maximum output that can be achieved using the available resources.
Factors influencing the scale of operation
 Owner’s objectives-to keep the business small.
 Capital-less capital to expand the business.
 Size of the market-small markets will require small scale operation.
 Number of competitors-a firm may not increase scale of operation if there are many
rivals in the market.
 Economies of scale- if they are substantial the business is likely to operate on a
large scale.
Ways of increasing the scale of operation
 employing more of all inputs.
 employing more staff.
 acquiring latest technology
 motivating staff.
 purchasing land, building and equipment.

CAPACITY UTILISATION
Refers to the ability to use all resources at disposal on the most efficient way.

Capacity utilisation = current output x 100

maximum possible output

116
If a firm is capable of producing 10000 units but only produces 5000 then:
Capacity utilisation = 5000 x 100
10000
= 50%
This means that the firm is just producing at half its capacity. This is wasteful of resources
because it will continue to incur costs on its unused capacity that is insurance, rent, rates
will be paid on buildings that have shut down. The firm operating with spare/unused
capacity has a major problem that it has to incur fixed costs associated with unused
capacity. If a firm is working at full capacity it is achieving 100% capacity utilisation. There
is no spare capacity.

Drawbacks of operating at full capacity

 raises stress levels due to work problems.
 insufficient time for maintenance of machinery.

Ways of increasing capacity utilisation

Rationalisation
Is reducing capacity by cutting overheads to increase efficiency of operations ie closing a
factor or office department often involving redundancies, job loss, failure to meet
unexpected demand.
Advantages
 reduces overheads.
 higher capacity utilisation
Disadvantages
 redundancy costs for staff payment.
 lack of job security
 failure to meet unexpected rise in demand.
Subcontracting
Refers to outsourcing of supplies, components or finished goods.
Advantages
 No major capital investment is required.
 Offers much greater flexibility
Disadvantages
 less control over quality of output.
 increases transport costs
 requires reliable delivery
 higher unit costs due to supplier’s profit margin.
Introduce greater flexibility into the production processes ie employing part time or
temporary labour contracts.
Advantages
 production can be reduced during slack periods.
 reduces stock build up.
Disadvantages
 staff maybe demotivated if employed on temporary basis.
 increases training costs for staff to be adaptable to changes.
Capital investment
Injection of capital to purchase new equipment and revamp old equipment.
Advantages
 long term increase in ca pacity
 firm is in control of quality
Disadvantages
 capital costs maybe too high
 incapacity to raise capital
 takes time to build up new facility

Research and Development

Advantages
 replaces existing products
 prompt introduction of a new product prevents rationalisation.
Disadvantages

117
  R and D is expensive.
 May take too long to prevent rationalisation.
Maintain output and produce for stock
Advantages
 no part time for workers
 job security for staff
Disadvantages
 Unsuitable for perishable stock.
 increases stock holding costs

APPROACHES TO QUALITY MANAGEMENT

Quality- fitness for the purpose.
-meet customers’ expectations therefore fit for the purpose
Quality assurance –refers to the implementation of systems to assure customers that
quality standards will be met.
Quality control –Is the inspection of samples to maintain the intended fitness.

Quality Control Techniques

Control process
Input Production process Output
Raw materials conversion process Goods and services
Human resources
Machinery

pro-active  concurrent reactive

pre-control  steering post control
feed forward feedback
eg inspection of raw eg quality checkpoints eg final inspection
  materials of output

Quality Circles
Is a group of 8-10 people who voluntarily meet on regular basis to discuss quality issues
and present solutions.
Aims
 to increase motivation.
 to improve productivity
 to improve on quality
 create greater awareness of the product.
For Quality Circles to be effective
-members must be volunteers and committed.
-training in methods of quality control.
-the right leader must be chosen
-management must consider members’ solutions and make recommendations.
-full support from top management
-organisers to monitor the programme
-Quality Circles members to implement recommendations.

Benefits
Quantitative
 increased output
 increased profit
 increased productivity
 reduction in employee grievances.
 reduction in number of accidents
 reduction in rework costs
 cost saving
Qualitative
 improved attitude

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  increased personal growth
 decrease in interpersonal conflicts
 increased motivation/morale
 formal recognition of the Quality Circles
 facilitates effective teaching
Pitfalls
 lack of coordination among group members
 requires clearly defined goals.
 goal incompatibility
 requires effective training programmes
 wrong choice of leaders
 lack of commitment by group members
 Lack of support by top management

Total Quality Management{TQM}

Stresses on the idea that the responsibility of achieving quality lies with all employees. TQM
means managing an organisation so that it exceeds in all dimensions of production. It gives
everyone in the responsibility for quality delivery to the final consumer.
Benefits
 improved quality
 increased productivity
 increased market share
 competitive advantage
 improved motivation
 reduced waste as a result of zero defect
 a release of employee potential
 motivated workforce
For TQM to be successful
 efficient leadership
 good communication
 recognition and reward
 recognition of quality in all aspects of leadership
 employee participation
 training for the workforce
 willingness to contribute
 acceptance and responsibility
 change in culture
Pitfalls
 TQM will not operate well in a rigid and autocratic structure
 It cannot be introduced in one section of the business since defective products may
come from other departments.
 goal incompatibility
 lack of commitment will lead to a flop

Benchmarking
Involves comparing standards with other renowned, giant firms to identify areas of the
business that requires improvement.
It is a management tool that helps companies to improve their performance subsequent
comparison of standards/performance with other companies.

Types of bench marking

competitive benchmarking
Is comparing product performance with that of other competitors.
Internal benchmarking
Comparing one part of the organisation with similar practices in other parts of the same
organisation.
Functional benchmarking
Is the comparison of a function eg “ invoicing ” in two or more organisations.
Generic benchmarking
comparing with the practices of the World class organisation.

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Benefits
-identifies the best practice
-facilitates the setting of performance goals.
-is a proactive improvement process involving learning from others.
-avoids complacency by companies
-motivates employees by showing them what is possible.
-results in a continuous updating of performance.
-helps a business to increase global competitiveness.

Disadvantages
-simply copying ideas and practices of other firms stifles initiative and originality.
-the costs of comparison may not be recovered by the improvement obtained.
-the process depends on obtaining relevant and up to date information.

Kaizen {continuous improvement}

Kaizen is a Japanese term meaning continuous improvement. The philosophy assumes that
all workers have something to contribute to improve the way the business operates and the
way the product is made. The one who is at work every day is likely to know much better
how to change it to improve quality and productivity. Therefore individuals with hands on
experience must be given within very broad parameters much freedom to take decisions
regarding workplace improvements This principle emphasizes on continuous improvement
because customer’s perception about the product/service is dynamic.
For Kaizen to be successful:
-management culture must be directed in involving workers in decision making
-teamwork to suggest discuss new ideas to improve quality and productivity.
-empower the group to make decision regarding quality.
-all staff should be involved in the Kaizen programme.
Advantages
 Its focus is on the elimination of waste.
 workers who have hands on experience are the best ones to think of ways to
overcome the problems.
 worker participation in decision making increases motivation/morale.
 increased productivity
 work in progress is reduced
 reduced amount of space needed for the production process.
Disadvantages
 resistance by senior management to such a programme.
 important changes are only done during the Kaizen programme and later changes
can be less significant.
 involves training costs and loss of output due to regular meetings.

STOCK /INVENTORY MANAGEMENT

INVENTORY
Consists of goods and materials held for later use. It may be in the form of spare parts in
engineering workshop, raw materials in a factory , food and drink in a supermarket.
It may be classified into 3 categories:
 Raw materials- waiting to be processed
 Work In progress- goods partially processed
 Finished goods- awaiting sale/dispatch
Reasons for holding stock
 speculative motive
 transactional motive
 precaution motive
 for valuation purposes
 to meet production requirements
 to meet customer demand
 to support sales and production
 to control cash tied up in stocks

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Advantages of holding large stocks
 large orders mean that favourable prices can be negotiated with suppliers.
 large stocks mean that orders are placed less often.
 large stocks remove fear of stock out
 large stocks act as a hedge. against inflation if prices rise.
Costs associated with holding high levels of stock
 opportunity cost as capital is tied up in stock.
 storage costs
 spoilage costs
 risk of theft
 risk of obsolescence
 risk of deterioration
 costs of spillage and pilferage
 costs of operating the store that is ,rates, insurance, rents etc
Costs of holding inadequate stock levels
 stock out costs
 idle production resources.
 sudden orders can be very expensive.
 failure to meet unexpected demand
 loss of purchasing economies of scale
Methods a business might use to manage its inventory{ stock }
 stock control chart
 JIT philosophy
 kanban (Two Bin System)
 Economic Order Quantity

Stock Control Chart

550

500- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - max stock level

450

400

350

300 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - re order level

-
250 -
-
200- - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

150 lead time buffer stock

0
1 2 3 4 5 6 7 8 9 10 weeks

 Vertical lines depict new delivery/purchase

 Downward sloping lines represent usage/sales or depletion of stock.
 The rate of depletion of stock is depicted by the gradient of the slope that is the
steeper the gradient the faster the depletion.
 When stock falls to re order level a new batch is ordered.
lead time Is the time taken to place an order pending delivery of stock.
buffer stock-stock reserve/the minimum stock to be held. Minimum level of stocks
considered desirable.

Reasons for holding buffer stock

-to prevent stock out
-to meet unexpected demand

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-to prevent production stoppages
Lower levels of buffer stock will result in:
 lost production
 loss of customer goodwill
 high costs associated with urgent purchases
 loss of purchasing economies of scale
maximum stock levels
Is the maximum stock that can be held in store.
factors to consider:
 Rate of consumption
 risk of deterioration
 risk of obsolescence
 storage costs
 storage space available
Minimum stock level
Is the minimum stock that should be held in store to ensure that production process
continues in case of delay in delivery of raw materials.
Factors to consider
 rate of consumption
 delivery time/lead time
 variation in delivery time
Re order level
Is the level whereby a new purchase is initiated. Is the level of stock at which a new order is
placed before the minimum level is reached.
Factors to consider
 rate of consumption
 delivery time
 variation in delivery time.
 transport costs
 bulk discounts
Re order Quantity
Is the quantity that is ordered at the re order level. Management will seek to discover the re
order quantity that minimises the total costs of holding and ordering stock. If stocks are
purchased from an outside supplier the optimum level is known as Economic Order
Quantity. If the orders are obtained from internal supplies the equivalent is known as
Economic Batch Quantity.

ECONOMIC ORDER QUANTITY

EOQ is the order quantity which minimises the balance of costs between stockholding costs
and re order costs. It is the point where holding costs and ordering costs are minimised as
illustrated

cost total costs

$
Stockholding costs

Ordering and delivery costs

122
 EOQ
order size

2PD

EOQ = √ c

Where c =carrying costs/holding costs/per annum

p =procurement/ordering costs per batch
d =annual demand
Assumptions of EOQ
 holding costs per unit will be constant
 as the order quantity increases holding costs also increases.
 ordering costs decline as order quantities are increased
 the total cost line is the summation of both ordering and holding costs.
 EOQ occurs at a point where ordering and holding costs intersect.
A hardware company is deciding to purchase order size for its standard line sockets.
Annual demand 36000 units
cost per purchase order $32
storage costs per socket $3 p.a
Hardware uses an EOQ model in its purchasing decisions. The store is open 360 days p.a
A unit of socket cost $2.50

EOQ =√ 2 P D
C
=√2x32x36000
3
=876.35 units

Number of orders per annum

Annual demand
EOQ
= 36000
876.35
=41.08 times
Task: A firm uses 500units of a substance each year. The cost of procuring each batch is
$600 and the cost of holding each unit is $300.
Calculate EOQ
Application of EOQ
-Can be adapted to determine the optimum length of production run when set up cost is
incurred once for each batch produced.
-Is used to determine the optimum number of units that should be manufactured in each
production run..
-Is applied when a firm attempts to minimise total cost that is storage costs such as
warehousing, insurance, pilferage, deterioration against costs of ordering such as
transport, administration etc for example the larger the order the lower the unit cost due to
discounts.
Limitations
It ignores the lead time needed for stock replacement and therefore buffer stock may need
to be kept which will represent a further cost.

Kanban (Two Bin system )

Is a system of ordering that is operated alongside JIT production. It operates by having two
component bins /containers one on the production line and the other one pending. Bin 1 is
used on the production line until it is empty. Bin 2 is then taken to the production line
when Bin 1 is empty. This reduces the amount of part finished stock and means that
everyone has to work together and efficiently so that production is not held up.

JIT INVENTORY CONTROL

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JIT involves both production and stock control techniques. For this workflow has to be
scheduled very precisely so that minimal amount of work in progress has to be held. JIT
does not require any buffer stock to be held. The components just arrive at the time they
are needed and the finished goods are delivered as soon as they are completed.

VALUE ANALYSIS
Is a technique used in product design whereby expensive materials or components are
substituted by less expensive materials of the elimination of non essential requirements and
make use of cheaper components without impairing the product’s safety, quality or
performance. Value analysis essentially asks whether the same function can be performed
for less cost after substituting the expensive material. Therefore value analysis team is
required:
Purchasing manager –with knowledge of sources of supplies.
Designer- for product development knowledge
Marketing manager-for awareness of consumer needs
Production engineer-to advise on production process
Accountant-to calculate costs.

Benefits
 unique products need to be produced economically to allow reasonable prices to set.
 the product produced will also meet the legal requirements.
 profits can increase whilst still giving value for money
 eliminates non essential requirements
Drawbacks
 when the product does not have competitors, appearance and cost will be less
important than reliability and performance.
 it might be necessary to “over engineer” the product to ensure high safety and
quality standards.
 benchmarking with other competitors is necessary.

PRODUCTION COSTS
Cost accounting
Is concerned with the determination and analysis of costs.

Management accounting
Is concerned with the provision of accounting information to the people within the
organisation to help them make better decisions and improve the efficiency and
effectiveness of existing operations. It is internal reporting.

Financial Accounting
Is concerned about the provision of data to external parties outside the organisation as a
legal requirement. It is external reporting. It also involves the classification and recording of
monetary transactions of an entity in accordance with established concepts, principles,
accounting standards and legal requirements.

Cost—Is the amount of expenditure incurred/attributed to the specified activity.

Cost centre—Is a collection point for costs in an organisation eg department. It describes a
location to which overheads are assigned.
Cost unit—It is the unit of product /service in relation to which costs are ascertained eg
tonnes of maize.
Unit cost –Is the cost of producing one unit.

CLASSIFICATION OF COSTS
 By nature of resources- ie materials, labour and other expenses.
 By function- ie production, selling, administration and distribution.
 By behaviour ie fixed, variable, semi-variable
 By type ie direct and indirect

ECONOMIST’S VIEW

124
cost/ D TC
revenue

C
B

TR





A--------------------------------------------------------------------------------------------- FC

Qty

 Total Revenue (TR) line is assumed to be curvilinear.

 Selling price per unit has to be reduced to increase quantities of output.
 T0 increase sales selling price per unit must be reduced resulting in TR line rising less steeply and
eventually begin to decline.
 Between A and B TC rises steeply as the from operates at lower levels of the volume range.
 Between points B and C the TC line begins to level out and rise less steeply that is the firm is
able to operate the plant within the efficient operating range and can take advantage of
specialisation of labour.
 Between points C and D TC line rises more steeply as the cost per unit increases because
output per direct labour hour declines when the plant is operated beyond the activity level
for which it was designed, bottle necks develop, plant breakdown begin to occur.
 NB The cost per unit of output increases and causes the TC line to rise steeply. There are two
breakdown points. VC per unit is higher at lower level of activity causing TC line between A
and B to rise more steeply.

ACCOUNTANT’S VIEW

TR

TC

125
 VC

FC

An accountant assumes a linear relationship between TR ,TC and output.

BREAK EVEN ANALYSIS

Is a technique used to study the relationship between the total cost (TC), total revenue
(TR ),total profits/losses over the whole range of a stipulated output.

Assumptions Underlying Breakeven Analysis

 All costs are separated into fixed and variable costs.
 Variable cost per unit remains constant and total variable costs vary in direct
proportion to the volume of production.
 Total fixed costs remain constant.
 Selling price does not change as volume of output changes.
 There is synchronisation between production and sales.
 Productivity per worker does not change.
 No change in the general price level.

BREAK EVEN CHART

$ Relevant range
cost/ -------------------------------------------------------------- TR
revenue
------------------------------------------------------------------------------------

TC

margin of safety profit area

00

------------------------------------ BEP Angle of incidence

Loss area FC

margin of safety

O Qty

BEP output current output

Break even chart portrays:
 breakeven point
 profit/losses at different levels of output
 relationship between FC and VC
 the margin of safety
 the angle of incidence
 the amount of contribution at various levels of sales

126
Breakeven point
Is a point at which neither profit nor loss is made.
Margin of safety
Is the difference between the actual output and the output at breakeven point that is Actual sales less
breakeven point sales.
Angle of incidence
Shows the rate at which profits are being earned once the breakeven point has been reached. The wider the
angle , the greater the rate of earning profits. Therefore the aim of management is to have as large the angle
as possible. It is important in boom period when sales are expanding..
Relevant range
Refers to the output range at which the firm expects to be operating within a short term horizon. The Cost
Volume Profit analysis can only be used for decisions that result in outcomes within the relevant range.
Outside the relevant range the unit selling price and the variable cost are no longer deemed to be constant
per unit and any results obtained from the formula that fall outside the range will be incorrect. Linear
relationship occurs within the relevant range.

Uses of breakeven analysis

 To determine the breakeven point.
 To determine the selling price which will give the desired profit.
 To determine the cost and revenue at different levels.
 To determine the comparative profitability of each product line.
 To study the effect of change in selling price or of price differentiation in different
markets eg home and foreign trade.
 To determine the increase or decrease in FC and VC on profits.
 Comparing profitability of various firms.
 Helps in Make or Buy decisions.
 To determine cash requirements at different levels of operation.
Limitations
 FC are likely to change at different levels of activity.
 Assumes that there is linear relationship between cost and revenue and output yet
selling price can change at any level of production.
 Linear relationship does not hold at all output levels ie as sales increase existing
plant and equipment are worked beyond capacity thus reducing their productivity.
 Neither variable cost nor sales are likely to be linear. Discounts and overtime
payments contribute to non linearity.

Calculation of Breakeven

BEP(units) =      FC or FC
SP –VC contribution/unit

BEP(sales) = breakeven (units) x Selling price per unit

or = FC
1- V
S

Margin of Safety (units) =Actual output less Breakeven point (output)

Margin of Safety (sales) =Margin of Safety(units) x Selling price per unit.

Units to be produced = FC + target profit

Contribution/unit

The following information relates to one product made by Taylor Ltd

Production/Sales 5000 units
Selling price/unit $20,00
Variable cost per unit $10.00
Fixed costs $20.00

127
Calculate
(a) BEP
(b) Margin of safety
(c) Units to be produced to make a profit of $50000

(a) BEP (units) = 20000

20-10

= 2000 units

BEP (dollars) =$20 x 2000 units

= $ 40000
(b) Margin of safety (units) = 5000 -2000
= 3000 units
Margin of safety (dollars) =3000 units x $20
=$60000
(c) Units to be produced = FC +desired target
Contribution/unit
= 20000 + 50000
10
= 7000 units

Question
City Links run day trips for tourists to Vic falls. The following information is available.
Coach capacity 50 people
price per ticket $20
Daily cost of coach $170
Other costs $10 per person

(a) Calculate the breakeven number of passengers. ( 3)

(b) How many passengers must be carried to make a 40% profit on costs. (5 )

ABSORPTION/FULL COST/TOTAL
Is the sum of the fixed overheads and variable cost. All costs are incorporated in the
production of the product. Involves apportionment of all costs both fixed and variable costs
to units of output. It is a method of apportioning costs to cost centres.

Full Costing Statement

Brand A Brand B Brand C
Direct labour 1000 2000 2500
Direct material 1500 2000 3000
Direct expenses 1000 3000 3500
Apportioned overheads 1000 1000 1000
Total 4500 8000 10000

Question
A tea packaging plant makes tea bags in boxes that are in a number of different brands, all
produced by the same company. There is no difference in the sizes of tea bags or boxes and
the same machine is used. The total cost of running and acquiring the machine is $20000.
Brand A uses the machine for 40% of the time, Brand B 30% and Brand C 30%
respectively.
How should the cost of running and acquiring the machine be allocated to each brand.

Brand A 40% of $20000 =$8000

Brand B 30% of $20000 =$6000
Brand C 30% of $20000 =$6000

Basis of Apportionment
-Duration of activity ( time )
-Space occupied

128
-Power (wattage )
-Usage
-Number of employees
-Value of plant/machinery
Cost Basis of Allocation
Lighting/heating area/space occupied
Canteen/pay roll office number of employees
Depreciation value of machine

Where Absorption Costing is appropriate

 Calculating the profitability of the product
 To control expenditure by comparing actual expenditure and anticipated
expenditure.
 Provides data for price setting.
 For inventory valuation.
 When to ensure that all costs are fully recovered.
 Relevant for a single product.
Limitations
-Methods of overheads allocation result in inconsistencies between department and
product.
-Allocating overheads on the same basis is necessary to avoid discrepancies

Contribution/variable/direct costing
Assumes that the cost of a product is made up of variable costs only. It is a contribution
technique and positive contribution is viable for investment in the light of decision making.
Sales 10000
Less Direct labour 1000
Direct material 2000
Direct expenses 1000
Variable manufacturing overheads 500
Variable selling expenses 500 5000
Contribution 5000
Less Fixed costs
Manufacturing costs 500
Administration expenses 1000
Selling expenses 1000 2500
Net profit 2500

Significance Of Contribution Costing

 Pricing decisions
 make or buy decisions
 Acceptance of an order below normal selling price.
 Optimal use of scarce resources
 To cease or continue production
Limitations
 Ignores fixed costs
 Contribution may force mangers to continue producing provided there is positive
contribution.
 Qualitative factors must also be considered eg Goodwill.

Acceptance or rejection of an order

The following data relates to one product by Taylor Ltd
Selling price $120
Average variable costs $75
Average fixed costs (at current output level of 1000 units $30
Total capacity 2000 units

A new customer offers to purchase 500 units at a price of $100 each.

129
 (a) On financial terms alone explain whether you would advise the firm to accept this
order (3 )
(b) State 3 factors other than costs which should be considered before taking such
decisions. ( 3 )

Sales ($100 x 500 units) 50000

Less variable costs($75 x 500 units) 37500
Contribution 12500
Less Fixed costs (1000 units x $30 30000
Net loss 17500

Though a firm would make a net los of $17500 by accepting an order the firm should accept
the order. If the firm does not accept the order it has to incur a loss of $30000 of fixed costs
even if it is not producing anything. If it accepts the order it earns $50000 which will cover
all variable costs and offset part of fixed costs thereby incurring a lower loss of $17500
instead of $30000 if it rejects the offer.

Assignment
Battani Furniture Ltd
2004 budget based on forecast of output of 900 units of office furniture.

Direct labour 1240000

Direct material 360000
Variable overheads 200000
Fixed overheads 360000

A Chinese company has offered to supply Battani company with office furniture of similar
design for $2100 per unit.
Using quantitative information only should Battani furniture accept or reject the offer.

Cease or Continue Production

A company is making three products A, B. C .The following information relates to the three
products
A B C
Sales 32000 36000 39000
Total costs 36000 32000 37000
(4000) 4000 2000
Variable costs contribute 2/3 and fixed costs 1/3
The directorate has argued that the product A is making a loss and should be dropped.
Variable costs are less than total sales hence give a positive contribution which is viable for
investment.

Make or Buy
Circumstances favouring making
 cheaper to produce
 Excess capacity
 Unreliable supplier
 The product is unique and is not produced elsewhere.
 Expensive to buy from external sources.
Circumstances favouring buying
 Cheaper to buy in
 Reliable supplier
 Lack of capacity
 Quality of components
 Making would require additional machinery.

130
  Purchasing might improve cash flow eg credit supplies

Taylor Ltd manufactures U boxes. The budget for March 1994 is as follows:
$
Direct material 10000
Direct labour 15000
Factory overheads: variable 5000
Fixed 7000
Administration expenses: Fixed 32000
Planned output for March-2000 boxes and each box is sold for $45
Taylor Ltd can buy U boxes from Mayo Ltd at a cost of $14 per box.
Required
A financial statement to show whether Taylor should buy or make U boxes.

Marginal cost of producing

$
Direct material per box 5
Direct labour per box 7, 50
Factory overheads: variable 2, 50
15
Taylor Ltd should discontinue because it is more expensive to produce than to buy from
Mayo Ltd at $14 each.

Variable selling and distribution expenses are ignored as these will presumably still be
incurred anyway. They are only included in the calculation of marginal cost of sales to
finally get the net profit.

Pricing Decisions
Mukanya Ltd manufactures a kind of shoes which sells at $40. Monthly turnover is 200
pairs of shoes. The marketing manger considers that if the price of shoes is reduced to $39
a pair the sales would increase to 400 pairs per month.
A further reduction to $38 per pair will give a turnover of 600 pairs a month.
The monthly budget for the production of 200 pairs of shoes is:
$
Direct materials 3000
Direct labour 4000
Selling and distribution expenses: variable 400
Fixed overheads/month 500

Solution
Total variable expenses $
Direct materials 3000
Direct labour 4000
Selling and distribution; variable 400
7400

Selling price per pair $40

Variable cost per pair (7400÷200) 37
Contribution per pair 3

Total contribution from 200 pairs sold at $40 each =$600

If price is reduced to $39 per pair, total contribution on 400 pairs of shoes will be $39 -
$37=$800
If the price is reduced to $38 per pair total contribution on 600 pairs of shoes would be $38
-$37 =$600
The best option will be to sell 400 pairs of shoes at a439 per pair

Optimum Use of Scarce Resources

131
Taylor ltd manufactures 3 products A,B,C
Planned production for the three months to 31 March 1991 is
A 10000 units
B 7000 units
C 4000 units
The following information is available:
Per unit A B C
Raw materials (xylem) 5kg 6kg 4kg
Man-hours (at $8 per hour) 10 8 12
Other variable expenses $115 $144 $78
Selling price $800 $880 $670

Xylem cost $100 per kg and 108000kg are needed to produce budgeted output. Only
96000kg will be available in the three months to 31 March 1991.

Fixed overheads amount to $300000 per month.

Required
Revised production budget
Cost of producing each unit
A B C
Direct material 500 600 400
Direct labour 80 64 96
Other variable expenses 115 144 78
Marginal cost 695 808 574

Selling price 800 880 670

Contribution 105 72 96

Contribution per kg 5 6 4
$21 $12 $24
Ranking 1 $24
2 $21
3 $12

Revised production budget

Kilos Total contribution
96000 $
4000 units: C (16000) 4000 x$96 = 384000
80000
1000 units: A (50000) 10000 x $105= 1050000
30000 1434000
5000 units B (30000) 5000 x $72 = 360000
Less Fixed overheads (3 x $300000) 900000
Net profit 894000

132
BUSINESS FINANCE

Need for Finance

 For starting up a business

 To finance the working capital ie to pay daily expenses. For business expansion both
internally and externally.
 For research and development
 For sudden losses and decline in sales.
 For capital and revenue expenditure.

Sources of Finance

Internal External

 Retained profits
 Sale of fixed assets
 Reduction in working capital
 Sale of shares to existing Short term Medium term Long term
shareholders( rights issue) -bank overdraft leasing mortgage
-trade credit hire purchase debentures
-credit cards medium term Issue of
- debt factoring        loan   shares
-short term loan Long term

133
 loan

Internal Sources

Retained profits
An established business might be able to make sufficient profits to enable it to provide its
own additional finance.
Sale of assets
A company may sell machinery, equipment, surplus land or buildings not fully utilised or
no longer in use.
Reduction in working capital
Firms can generate funds by reducing stock levels, delaying payments to its creditors or
enabling prompt payment by debtors. However if the money is used to pay fixed assets it
then be difficult for it to meet its short term obligation.
Rights issue
Existing shareholders are given the option to buy additional shares in the company at a
discount to market price. It does not result in dilution of capital. However shares will be
sold at a price lower than what the public offer could fetch.

Short Term Sources

Debt factoring
The business sells its debts to the debt factoring company at a discount and in this case
immediate cash is obtained. The company seeking repayment does not receive all the
money owed to it.
Bank overdraft
Is an informal way of borrowing. A bank allows customers to draw cheques which take more
money out of their current account than they have in it. Over draft is usually cheaper than
bank loan because the size of an overdraft fluctuates as cheques and other items are in and
out of the account. Interest is charged daily but on the balance outstanding. However it is
unsuitable for the purchase of fixed assts.
Trade credit
Involves deferred payment of supplies. Suppliers provide goods without receiving immediate
cash.

Medium Term Sources

Hire purchase
Is a payment of a fixed asset by instalments
Advantages
 No need for a buyer to save full amount for the goods
 Can buy expensive goods
 Buyer can use the goods whilst paying for them.
 The buyer is afforded legal protection against unlawful repossession of the goods.
 Seller insures the goods during hire purchase period.
 Instalments are spread over a longer period.
Disadvantages
 Goods are expensive due to finance charges.
 Seller may repossess the goods if the buyer defaults payment.
 Buyer becomes the owner of the goods upon the payment of the last instalment.
 The buyer possesses goods without owning them.
 May overspend by impulsive buying.
Leasing
Involves acquisition of an asset but ownership does not pass to the user. Rentals are made
for the use of the asset for example office building.
Advantages
 There is no need for a deposit.
 It minimises initial outlay
 The equipment can be updated to avoid obsolescence.
Disadvantages
 Payments will be greater in the long run.
 The user does not benefit from the residual value when the equipment is upgraded.

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  The lease might place limitations on use.
Sale and leaseback
A business sometimes sells its assets usually premises and as part of an agreement lease
them back for an agreed period of time.
Advantages
 Provides immediate cash.
 Solves liquidity problems.
 It is a useful way of raising funds for other purposes
 It releases capital for use in the business.
Disadvantages
 The business no longer owns the asset and it must pay the rent.
Medium Term Loan
Is a formal way of borrowing money from banks. It is a fixed sum of money lent for a stated
period of time.
Advantages
 Loans are usually arranged to finance specific capital expenditure.
Disadvantages
 The business must repay the loan in a comparatively short period of time to get rid
of interest charges

Long Term Sources.

Two main sources are:
Debt/loan and equity
Debt finance increases the liability of a business eg mortgage, debentures and long term
loans

Mortgage
Is a loan available from a building society which is secured against land and buildings. It is
debt finance for housing and property buying.
Advantages
 Mortgage makes ownership affordable.
 Mortgage allows you to purchase a house without having to pay the full price in
cash.
 Using your mortgage frees up your available income for other projects.
 A mortgage loan in good standing on your credit report, improves your credit score.
 A history on time mortgage loan repayment improves your credit and is a
consideration of creditors looking to extend additional credit to you.
 Income tax deductions are available if you have a mortgage loan and tax liability is
reduced.

Disadvantages
 The mortgage amount does not change even if your house loses value.
 You may end up with a mortgage value greater than the value of the house.
 Getting mortgage loan is a complex process.
 The house is collateral for the mortgage, it’s pledged to the lender to guarantee
repayment of loan.
 The lender has the right to grab your home if you stop paying the mortgage and lose
that you have already paid.

Debenture
It is a long term loan capital which is normally secured by a charge on the property of a
company.
Advantages
 Debenture holders receive a fixed rate of interest.
 Is a safe form of investment
 May be mortgaged against company’s assets.
 A debenture holder receives interest whether the company has made profits or not.
 Debenture holder is entitled to all remedies of a creditor.
 No dilution of equity.

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  Lenders have no voting rights at the AGM.
Disadvantages
 Debenture holders can force a company into liquidation if interest is not paid.
 There is increased risk of company failure due to high interest payments.
 Most assets will be pledged hence losing control over them.
Sale of shares
Share is a unit of capital and owners of shares are called shareholders. Companies can
issue shares to the public.
Types of shares
Ordinary shares
These shares are also referred to as equities.
Preference shares
Receive a fixed rate of dividends which is paid before all other classes of shareholders.
Issue of shares
Advantages
 Issue of shares makes investors willing to make huge investments since the
company is openly traded.
 Issue of shares helps the business to raise additional capital.
 Once a business issues its shares, they can utilise it for purchasing other
companies.
 An organisation can issue shares for paying incentives and bonuses to employees.
 Prevents the company from taking on debts.
Disadvantages
 Issue of shares relinquishes some company control to external parties as it be
dispersed widely among numerous people.
 Profits are shared with a wider pool of investors.
 Equity share do not enjoy preferential rights with regards to repayment of capital
and dividends.

Sale of an equity
Means giving up a share of control and profit.
Advantages
 The business is not committed to meeting regularly interest payment.
 The equity will reduce the gearing of the firm.
 Lower gearing makes it easier to raise debt finance.
 Venture capitalist will provide management advice to strengthen the business.
Different types of equity issues
Bonus issue
Bonus shares are issued free of cost by a company to existing shareholders in proportion
to their holding eg 1 bonus for every 10 held. A bonus issue does not involve any cash
outflow. It does not affect the liquidity position of a firm. However it reduces the earnings
per share and existing rate of return.

Rights issue
Existing shareholders are given the option to buy additional shares at a favourable price. It
does not affect the controlling power of existing shareholders. However if a shareholder fails
to exercise his rights within a stipulated time, his wealth will decline. The company also
loses cash as shares are issued at concessional rate.

Offer of sale
The company sells shares to an issuing house or merchant bank which in turn offers them
to the public at a higher price.

Public issue
A company can appeal to the public to purchase shares usually by means of issuing a
prospectus.

Tender
Investors are invited to submit bids with shares being sold to the highest bidders.

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Placing
Shares are sold privately to clients of the issuing houses that handle the issue. The cost of
an issue is lower and is the most commonly used method.

Scrip issue
Sometimes instead of paying a cash dividend, a company offers shareholders a choice of
receiving it in the form of extra shares.

Equity Shares
Equity shares are the main source of business finance.
Advantages
 Are very liquid and can be easily traded in the capital market.
 In case of high profit, shareholders get dividend at a higher rate.
 Equity shareholders have the right to control the management of the company.
 Large equity capital base increases the creditworthiness of the company among the
creditors and investors.
 They are a permanent source of capital.
Disadvantages
 Equity shareholders get dividend only if there remains any profit after paying
debenture interest, tax and preference shares.
 Equally shareholders bear the highest degree of risk of the company.
 Market price of equity shares fluctuate very widely and erode the value of
investment.
 Issue of fresh shares reduces the earnings of existing shareholders.

Difference between shares and debentures

Shares Debentures
-share capital   -loan capital
-earn dividends -earn interest
-dividends may fluctuate for ordinary shares -earn fixed rate of interest
-Shareholders are owners -debenture holders are creditors
-risk form of investment -a secure form of investment
-ordinary shareholders have voting rights - debenture holders have  no voting
rights
-not entitled to remedies of a creditor - Is entitled to all remedies of a
creditor
-Shareholders cannot force a company into - Debenture holders can force
liquidation. a company into liquidation.

Venture capital
Is equity investment in an unquoted company.

Seed capital
Is finance for development of ideas or new start up business.

Authorised share capital

Is the maximum amount of share capital that a company can raise and issue. ie 100000
ordinary shares of $1 each= $100000 .$1 is a par value /nominal value.

Issued share capital

Is the amount of share capital that has been actually issued out of the authorised share
capital eg $40000 ordinary shares sold.

Unused share capital

Is the difference between the authorised share capital and the issued share capital eg
$100000-$40000= $60000 unused share capital.

Called up capital

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Is the part of the issued share capital that shareholders have been asked to pay ie $40000
ordinary shares, a company can need 50c instead of $1 then divide $40000 by 50c which is
$20000.

Uncalled capital
Is the difference between the issued share capital and the called up capital. The share
capital that shareholders have not asked to pay at a particular time.

Calls in arrears
The share capital that shareholders fail to pay by a given date.

Gearing
Is the extent to which a firm is financed by debt.
Advantages
 No dilution of equity.
 Lenders have no voting rights at the AGM
 Interest on loan is an expense for tax purposes whereas individuals are paid after
tax
 Loans will be repaid at last so there is no permanent increase in the liabilities of the
business.
Disadvantages
 Increased risk for shareholders as they can lose their investment in the company
during liquidation.
 There is increased risk of the company failure due to high interest payments.
 Most assets will be pledged thus reducing control over them.
 It reduces prospective creditor willingness to grant further loans.

Factors Influencing Choice of Finance

 Time period for which finance is required.

 Amount required
 Risk involved in the investment( to be financed by internal sources)
 Status and size of the business.
 Cost involved – interest costs
 Use of funds – revenue or capital
 Gearing ratio –Which helps to decide between loan and share capital
 Terms and repayment period for loan
 Availability of different sources of finance
 Relative cost of different sources.

Capital and money market

Money market
Refers to those institutions that are engaged in the borrowing and lending of large sums of
money for short period of time eg Commercial banks. Merchant bank and Building societies
Instruments
 treasury bills
 bankers’ acceptance
 negotiable certificates of deposit
Capital market
Is concerned with the provision of long term finance/securities like debentures, preference
shares and ordinary shares eg Zimbabwe Stock Exchange

Functions of Zimbabwe Stock Exchange

 listing companies after examining their performance
 delisting companies
 Controls and regulates admission of new members.
 a market for buying and selling shares

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  quotes and publishes share prices
 provides investors with names of reputable companies.
 approves shares of companies to be bought and sold.
 educates the public through outreach programmes on investment of shares.
 monitors the performance of companies
 prepares reports and information on companies dealing on the stock exchange
 sets out code of conduct for dealers to protect investors against unfair business
dealings.

Functions of central bank( RBZ)

 Issues notes and coins
 bankers’ bank ie it keeps minimum deposits for commercial banks.
 banker to the government
 lender of last resort to commercial banks
 controls the lending rate
 Controls and regulates the supply of money.
 withdraws and replaces worn out notes and coins
 keeps state departments accounts
 a custodian of the nation’s gold reserves.

The Role of IMF

 To promote international monetary cooperation.
 To facilitate the expansion and balanced growth of international trade.
 To provide exchange rate stability
 To assist in setting up a multilateral system of payments.
 Helps countries to finance and correct BOP deficit.
 Offers financial assistance to developing countries to boost economic growth.

Capital expenditure
Is spending on fixed assets or acquisition of fixed assets. It is entered in the balance sheet
as the value of an asset. eg buying of a building or machinery, add to the value of an
existing noncurrent asset, bringing them into the business and legal costs of buying
buildings.
Revenue expenditure
Is incurred in running the business on day to day basis eg repairs and maintenance, fuel
cost for vehicle, salaries and wages. Revenue expenditure is entered into the profit and loss
account.
Effect on balance sheet and income statement.
If capital expenditure is incorrectly treated as revenue expenditure or vice versa.

Working Capital
Refers to capital needed to pay for raw materials, day to day running costs and credit
offered to customers. Working capital is current assets less current liabilities. Sufficient
working capital is necessary to prevent a company from becoming illiquid. Too much
working capital creates an opportunity cost of capital tied up in stock, debtors and idle
cash. Working capital requirements depend on the length of the working capital cycle.
Over trading
Occurs when a firm expands without adequate and appropriate funding or sufficient
working capital. A business which is fundamentally sound might have difficulties in raising
sufficient funds to repay its debtors as they fall due.

Working capital cycle

 borrowing
 purchases
 sale of goods
 cash collections
 repayment cash

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 sale on credit material/stock

production

Cash Injections

 loans
 new capital introduced
 sale of fixed assets
 grants /donation
 interest from banks

Cash drains

 dividends
 taxes
 acquisition of fixed assets
 drawings

Importance of working capital

 To purchase stock of raw materials.

 To pay dividends, taxes and additional replacement of capital assets.

Managing Working Capital

 A shortage of cash should be tackled by reducing debtors or debtor payment period,

reducing its stock held in hand or increasing its creditors.
 Any cash surplus is an opportunity cost to the firm especially if bank interest are
low therefore it should be used to make early payment to creditors to claim
discounts.
 Delaying payment to creditors.
 Excessive stock levels represent a substantial financial burden therefore the firm
should maintain an optimum balance between excessive investment in stocks and
stock out.
 Encouraging prompt payment by debtors.
 Minimising bad debts through tightening of systems on credit references.
 Ranking debtors in order of age of debts to identify long outstanding debts to
concentrate efforts on recovering this money.
 Ranking creditors in terms of length of credit to identify those owed money for the
longest period.

BUSINESS ACCOUNTING

Financial accounting
Is that part of accounting that is concerned with external reporting to various stakeholders.
Management accounting
Is concerned with internal reporting to managers for decision making.

The difference between financial and management accounting

Financial accounting Management accounting
-preparation of published reports and accounts -preparation of financial information
for managers on business aspects
-information is used by external groups -information is only made available to
internal users.

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-accounts are prepared once/twice a year -accounting reports are prepared when
required by management.

-preparation of accounts is done in accordance -no set rules/standard

with conventional accounting standards.
-covers past period - covers both past, present and future period.

Internal users
 managers
 employees
 owners
External users
 government
 tax collectors
 banks
 investors
 competitors
 communities
 customers
Stakeholders and their interests in business
Stakeholder Interests
managers Measuring business performance.
Setting goals/targets
making investment decisions
creditors Deciding whether or not to lend the
business.
To see if the business is secure and
liquid enough to pay off its debts.
banks To decide whether to lend money or not.
To decide whether to continue with
loan  or overdraft facility.
community Employment creation
clean environment
Social responsibility
workforce Fair remuneration
Job security
Good working conditions.
government To monitor if the business is operating
within the law.
   To calculate how much tax is due from
the company.
investors Assessing the value of the business and
their investment in it.
   Determining the profitability / viability
of the business.
customers Expect quality products/services
Reliable supplies

owners Profits and return on capital.

Major Financial Accounts

 Profit/loss account (Income statement)
 Balance sheet ( Statement for financial position )
 Cash flow statement

Profit and loss account( Income statement )

Records the revenue, costs, and profit of a business over a given period of time.

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Uses
-It can used to measure and compare performance overtime or with other businesses.
-The actual profit data can be assessed in comparison with expected level of the business.
-Bankers and creditors need the information to decide whether or not to lend money to the
firm
-Identifying trends in revenue can provide evidence about the success of the business.
-Income statement also gives details of how well the company is controlling its costs.
-The income statement provides an insight into the performance of the business.
Limitations
-Does not show details of the sales and profitability of individual goods or services.
-Profits can be under cast by discretionary costs like depreciation.
-Profit figures can also be window dressed to attract potential investors.
-Does not reflect the performance of particular departments.
-High profit figure may result for the sale of a valuable asset for more than its expected
value and this is low quality profit that is a once off profit that cannot be repeated or
sustained .

Window dressing
-Window dressing means presenting company accounts in such a manner as to flatter the
financial position of the business.
Common forms of window dressing include:
 Inflating the value of stock levels.
 Not showing realistic figures for bad debts.
 Reducing the depreciation figure which will increase profits.
 Improving the liquidity position by selling assets at the end of the financial year to
increase cash position and make it more attractive to investors.
 Bringing forward sales and deliveries at the end of the financial year to increase
revenue and profit in the current year.
 Not paying bills or operating expenses until after the annual accounts have been
published which means that the profits are being overstated in the current year.

INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2008

        $          $
Revenue 100000
Opening inventories 20000
Purchases 55000
75000
Closing inventories (15000)
Cost of sales 60000
Gross profit 40000
Rental income 2000
42000
Less expenses
Office salaries 4100
Selling expenses 4000
Delivery costs 800
Insurance 4300
Provisions for bad debts 900
Loss on sale of non current assets 1000
Depreciation:
Delivery vehicle 2900
Office equipment 2000
(20000)

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Profit from operations 22000
Finance cost(bank interest) 3000
Profit before tax 19000
Taxation 5000
Profit for the year attributable
to equity shareholders 14000

Statement of Financial Position as at 31 December 2008

Assets

Non Current Assets Cost Dep NBV

Fixtures 6000 4200     1800
Freehold land 35000 -----   35000

Motor vehicles 11200 7840   3360

52200 12040 40160
Current Assets
Inventory 18000
Trade receivables 12000
Other receivables 120
Cash and cash equivalents 4440 43560
Total assets 74720
Equity and Liabilities
Ordinary shares of $1/share
capital 20000
Share premium 2200
Revaluation reserve 3000
General reserve 2800
Retained earnings 17870
45870
Non current liabilities
12% Debentures 16000

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 Current liabilities
trade payables 9600
Other payables 2160
Taxation 1090 12850
Total Equity and Liabilities 74720

Assets
Are items of value possessed or owned by a business
Liabilities
Anything owed by a business.
Non current assets/ Fixed assets
Take the form of tangible and intangible assets
Tangible assets
These are assets with a physical substance and can be touched such as land, building and
vehicles’ Land and buildings maybe freehold or leasehold. Freehold means that they totally
belong to the owners of the business. Leasehold means that they are owned by someone
else and the business is renting the property.
Intangible assets
Are assets without physical form and have income generating value such as goodwill,
patents, trademarks and copyrights.
Goodwill
Is the value attaching to a business for good reputation.
Is the difference between the purchase consideration and the value of saleable assts.
Example:
K Kate’s a sole trader decided to sell her business to M More as a going concern on 1
January 2010. K Kate’s balance sheet on 31 December 2010 was as follows.

Capital         10000 Fixed assets 9000

Creditors       2000 Current assets 3000
12000 12000

M more paid $11000 for K Kate’s business.

(a) calculate the value of goodwill.
(b) prepare M More’s balance sheet after the transaction.

Goodwill = Purchase price – net assets

=$11000 – ( 12000 – 2000 )
=$1000

Balance Sheet

Capital 11000 Fixed assets 9000

Creditors 2000 Goodwill 1000

Current assets 3000

13000 13000

The goodwill of a firm might be as a result of good existing customer base, reputation for
quality, business networks or calibre of management and workforce.

Current assets
Items that can be easily converted to cash in the normal course of the business such as
stock, debtors

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Current liabilities
Immediate obligations of a business to be settled within 12 months.
Long term liability
Are dues repayable over a long period eg debentures and mortgage
Cash is the liquid resource eg cash in hand and cash at bank.
Debtor is someone who owes money to the business.
Creditors is someone to whom the business owes money such as suppliers.
Drawings represent money taken out of the business during the trading period.
Working capital is the difference between current assets and current liabilities.
Share capital
Is the total value of capital raised from shareholders by the issue of shares.
Shareholders’ equity
Is the total value of assets - total value of liabilities.
Accounts receivables (debtors) – the value of payments to be received from customers who
have bought goods on credit.
Accounts payables (creditors ) – value of debts for goods bought on credit payable to
suppliers.
Gross profit
Is total sales revenue less cost of sales.
Retained profit
Is the profit left after all deductions including dividends have been made.
Net profit
Gross profit minus overhead expenses.
Dividends
The share of profits paid to shareholders as a return on investment in the company.
Sales revenue
Is the total value of sales made during the trading period.

Uses of a balance sheet

 Shows assets, CapitaLand liabilities of a business.
 Shows net worth of a business as at a given date.
 Can be used as a basis for acquiring loan.
 May be used to determine a business’s tax obligations.
 Analysis of a balance sheet provides an insight into the strengths and weaknesses of
a business, its potential for growth, its stability and how it is financed.
Limitations
 It is just a snap shot in the sense that it shows net worth of a business at given date
yet financial situation can change within a very short time.
 It is subject to window dressing.
 Often does not include current value of assets unless property is revalued to show
current value.
 Should be used with other accounting statements to provide a full picture of
financial stance.
 It ignores qualitative factors such as the level of motivation of workers.
The balance sheet does not record the value of the business unless it includes the value of
intangible assets especially goodwill.
 Net book value of fixed assets varies with the method of depreciation used.

Statement of Cash Flows

Is the one that lists the cash flows of a business over a period of time usually the same
period as that covered by the income statement.

Cash flow
Is any increase or decrease in cash in a business.
Cash equivalents

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Are short term investments that can be easily converted into cash such as money held in a
term deposit account that can be withdrawn within three months as well as bank
overdrafts.

The main categories of Cash flow Statement

Operating activities
The main generating activities of the business together with payment of interest and tax.
Investing activities
Refers to the acquisition and disposal of non current assets and other investing activities
including interest received and dividends received.
Financing activities
Include cash proceeds from issue of shares and debentures and cash payments for
redemption of shares, debentures, repayment of amount borrowed and dividends paid.

Importance of Cash Flow Statement

 Shows the movement of cash for the year.
 Provides information to users about the company’s ability to generate cash and cash
equivalents.
 Serves as a link between two Statements of Financial Position and helps to measure
performance.
 Provides information that helps to assess the relationship between the profitability
and the liquidity of the firm.
 Helps creditors to assess the ability of the business to pay debts.
 Shows how additional noncurrent assets have been financed.
 It directs attention to cash flow on which a business’ survival depends.
 Provides useful information as a back up to profit and loss account and balance
sheet.
Limitations
 It ignores the accruals and matching concepts that is cash flows may relate to
previous accounting year.
 Ignores non cash items for example a bonus issue of shares are not highlighted on
the face of the statement.
FORMAT

$ $
Cash flows from operating activities

Operating profit before taxation and interest xxxx

Adjustment for non cash items:
Depreciation of noncurrent assets xxxx
Loss on disposal of non current assets xxxx
Goodwill written off xxxx
Bad debts written off xxxx
Increase in provision for bad debts xxxx
Profit on disposal of non current assets (xxxx)
Decrease in provision for bad debts (xxxx) xxxx

Working capital adjustment:

Increase/decrease in inventory xxxx
Increase/decrease in trade receivables xxxx
Increase or decrease in trade payables xxxx xxxx
Cash generated by operations: xxxx
Tax paid (xxxx)
Interest paid (xxxx)
Cash drawings (xxxx) xxxx
Net cash inflow/outflow from operating activities xxxx

Cash flows from investing activities

Interest received

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Purchase of tangible noncurrent assets xxxx
Sale of tangible noncurrent assets (xxxx)
Net cash inflow/outflow from investing activities xxxx xxxx

Cash flows from financing activities

Ordinary dividend paid
Preference dividend paid (xxxx)
Issue of ordinary share capital (xxxx)
Redemption of preference shares xxxx
Redemption of debentures (xxxx)
Repayment of loan (xxxx)
Issue of debentures (xxxx)
Net cash inflow/outflow from investing activities xxxx xxxx
Increase or decrease in cash and cash equivalents xxxx
Cash and cash equivalents b/f xxxx
Cash and cash equivalents c/f xxxx

STATEMENT OF CASH FLOWS FOR SOLE TRADERS.

Example.

The statements of financial position of Craig Mlambo as at 31 December 2001 and 31

December 2002 are as follows.

31 December 2001 31 December 2002

Noncurrent assets $ $ $ $
Plant and machinery at cost 60 000 80 000
Less depreciation to date 30 000 30 000 38 000 42 000
Motor vehicles at cost 90 000 108 000
Less depreciation to date 25 000 65 000 38 000 70 000
Office machinery at cost 85 000 95 000
Less depreciation to date 35 000 50 000 40 000 55 000
145 000 167 000
Current assets
Inventory 46 000 50 000
Trade receivables 54 000 46 000
Bank 75 000 175 000 180 000 276 000
320 000 443 000
Equity and liabilities
Capital at 1 January 330 000 280 000
Add net profit 50 000 80 000
380 000 360 000
Less drawings 100 000 120 000
Non current liabilities 280 000 240 000
10% loan from father - 150 000
Current liabilities 390 000

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 Trade payables 40 000 53 000
320 000 443 000

Additional information.

The loan from Craig’s father was received on 1 January 2002.

You are required to prepare a statement of cash flows for the year ended 31 December
2002.

Statement of cash flows for the year ended 31 December 2002.

$ $
Cash flows from operating activities
Profit before interest 95 000
Adjustment for non cash items:
Depreciation of noncurrent assets (8 + 13 + 5) 26 000
121 000
Working capital adjustment.
Increase in inventory (4 000)
Decrease in trade receivables 8 000
Increase in trade payables 13 000 17 000
Cash generated by operations: 138 000
drawings (120 000)
Interest paid ( 15 000) (135 000)
Net cash inflow from operating activities 3 000

Cash flows from investing activities

Purchase of noncurrent assets( 20 000 + 18 000 + 10 (48 000)
000)
Net cash outflow from investing activities (48 000)

Cash flows from financing activities.

Increase in loan 150 000
Net cash inflow from financing activities 150 000
Increase in cash and cash equivalents 105 000
Cash and cash equivalents b/f 75 000
Cash and cash equivalents c/f 180 000

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Please note that in the case of sole traders, drawings are part of operating activities. They
are part of the cash outflows.

Statement of Cash Flows for Limited Companies

Income statement (extract) for the year ended 31 December 2014

$000
Profit from operations 282
Finance charges 16
Profit before tax 266
Tax 80
Profit for the year 186

Statement of changes in equity for the year ended 31 December 2014

$000
Retained earnings
Balance at 1 January 2014 270
Profit for the year 186
456
Dividends paid 90
366

The statement of financial position of Casual Ltd showed the following

31 December 2014 31 December 2013
Non-current assets
Intangible assets 1000 190
Tangible assets
Plant and Machinery 1224 1080
Depreciation 600 624 560 520
1624 710

Current assets
Inventories 218 198
Trade receivables 158 134
Cash and cash equivalents 64 84
440 416
Current liabilities
Trade payables (158) (140)
Tax (80) 202 (76) 200
1826 910
Non-current liabilities
5% Debentures 160 140
1666 770

Equity
Ordinary shares of $1 1300 500
Retained Earnings 366 270
1666 770

NB There was no disposal of non current assets during the year.

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Required Prepare a statement of cash flows.
Reconciliation of Profit from Operating to Net Cash flows from operations
        $00
$000 0
Profit from operations 282
Depreciation(600 -560) 40
Increase in inventories (20)
Increase in trade receivables (24)
Increase in trade payables 18
Cash flows from operations 296
Finance charges (16)
Tax paid (76) (92)
Net cash flow from operating activities 204
Cash Flows From Investing activities
Cost of tangibles (810)
Purchase of plant and machinery (144) (954)
Cash Flows from financing activities
Proceeds from issue of shares 800
Dividends paid (90)
Issue of debentures 20 730
Net decrease in cash and cash equivalents (20)
Cash and cash equivalents at 1 January 2014 84
Cash and cash equivalents at 31 December at 2014 64

Accounting Concepts
Going Concern
A balance sheet is prepared on the basis that a business will continue with current
activities into the future as a going concern.

Accruals Concept
All transactions relating to a particular trading period must be shown in the accounts
whether payments have been made or not.

Realisation Concept
Sales revenue is based on figures produced when they have been invoiced even though cash
might not have been received. Sales are recorded when the goods /services have been
provided to the customer.

Consistency concept
Accounts have to be based on consistent methods if they are to be useful in comparing
performance over time.

Prudence Concept
Accounts should always reflect the least favourable position in business that is under-
estimate rather than over-estimate.

Matching Concept
Is concerned with matching the revenue earned in an accounting period with the
expenditure incurred earning that revenue.

Verification Concept

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All statements in the accounts should be based on verifiable evidence and proved to be true
by stakeholders..

Money Measurement Concept

Accounts should be expressed in monetary terms.

Separate business entity

Accounts should be treated from business point of view and not the owners regardless of
the legal entity.

Double entry
All accounts are looked at from two sides that expenditure of money and acquisition of
assets and recorded in two ways leading to balancing of accounts..

DEPRECIATION
Is the loss in value of a fixed asset due usage during its lifetime.

Causes of depreciation
 Wear and tear: assets become worn out through use.
 Obsolescence: Due to technological changes machines may become outdated.
 Depletion: mines depreciate as minerals are extracted from them.

The most common two methods are:

 Straight line
 Reducing balance

Straight line
A constant amount of depreciation is subtracted from the value of the asset each year

Depreciation – Cost – Residual value

Life span

A machine costing $20000 is expected to have a useful life of 5 years and at the end of
which time it is expected to be sold for $5000.

Annual depreciation = 20000 – 5000

5
= $3000

COST DEP NBV

Year 1 20000 3000 17000
Year 2 20000 6000 14000
Year 3 20000 9000 11000
Year 4 20000 12000 8000
Year 5 20000 15000 5000

Advantages
 It results in steady reported profits as the same amount of depreciation is charged
throughout.
 It is useful for assets which provide equal benefits each year like machinery.
 Is relatively simple to calculate.
Disadvantages
 It assumes that assets depreciate at the same rate throughout their life span which
is unrealistic.
 Rapid changes in technology might make assets become more obsolete much more
quickly than anticipated.
 Its accuracy depends on the estimates made about the useful life and residual value
of an asset.

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Reducing balance Method
It calculates depreciation as a fixed percentage of the written down value of the asset each
year.
A machine cost $20000. It is expected to have a useful life span of 5years. Depreciation is
to be calculated at the rate of 25% pa on the reducing balance.

Cost 20000
year 1 (25% x 20000) (5000)
15000
year 2 (25% x 15000) (3750)
11250
year 3 (25 % x11250) (2813)
8437
Year4(25%x8437) (2109)
6328
year 5 (25% 6328) (1582)
4746
Advantages

 calculation of varying amounts of depreciation

 Amount of depreciation is lower in the later years.
 Is useful for assets which provide more benefit in earlier years.

Disadvantages

 Depreciation charge is higher in earlier years of an asset’s life span.

STOCK VALUATION

Where at the end of the end of a trading period a firm has stocks of raw materials, work in
progress and finished goods, then they must be valued for accounting purposes.
Stock Valuation Methods
 FIFO
 LIFO
 AVCO
First In First Out
Assumes that goods bought first are sold first
Purchases Sales
2 Jan 10 at $5 each 7 Jan 5 at $9 each
6 Jan 5 at $ 6 each 11 Jan 12 at $15 each
9 Jan 15 at $7 each
13 Jan 20 at $10 each

Required
(a)Calculate the value of purchases, closing stock and cost of goods sold using FIFO, LIFO
and AVCO as stock valuation method.
(b)Prepare a trading account basing on each method of stock valuation.

Using FIFO

Date Receipts Sales Balance Value $

2 Jan 10 @ $5 10 @ $5 50

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6 Jan 5 @ $6 10 @ $5 50
5 @ $6 30
7 Jan 5 @ $5 5@$5 25
5@$6 30
9 Jan 15 @ $7 5 @ $5 25
5 @ $6 30
15 @ $7 105
11 Jan 5 @ $5
5 @ $6 13 @ $7 91
2 @ $7
13 Jan 20 @$10 13 @ $7 91
20 @ $10 200

Purchases: add receipts

$50+$30+$105+$200 =$385
Closing stock: add balances
$91 + $200 = $ 291
Cost of goods sold: add sales/issues
$25+$25+$30+$14 = $94

Advantages
 Simple and easy to calculate
 Closing stock is valued at current prices.
 Is realistic because goods received first are sold first.
 Is acceptable according to companies Act.
Disadvantages
 This method understates the cost of goods sold as it charges outdated costs to the
trading and profit and loss account thereby reporting high profits.
 During inflation it results in high reported profits.
 During falling prices it results in understated reported profits.

Last In First Out

Assumes that the most recent purchases are sold first.

Using LIFO
Date Purchases Sales/ Issues Balance Value$
2 Jan 10 at $5 10 at $5 50
6 Jan 5 at $6 10 at $5 50
5 at $6 30
7 Jan 5 at $6 10 at $5 50
9 Jan 15 at $7 10 at $5 50
15 at $7 105
11 Jan 12 at $7 10 at$5 50
3 at $7 21
13 Jan 20 at $10 10 at $5 50
3 at $7 21
20 at $10 200

Purchases $385
Closing Stock $271
Cost of Goods sold $114

Advantages
 Value of closing stock is easy to calculate.
 Stock is issued at the most recent price.
 Based on price paid.
Disadvantages
 Is unrealistic because it assumes that recent stock is sold first.
 closing stock is not valued at most recent prices.
 Not acceptable for tax purposes

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  It results in high costs of goods sold since it charges the latest costs of goods thus
understating reported profits.
 During falling prices, LIFO overstates reported profits
 During inflation it results in low reported profits.

AVERAGE COST(AVCO)
Assumes that the price of stock is based on the average of the items of stock at hand. In
other words the price is found by dividing the total value of stocks at hand by the quantity
of items.
Date Purchases Sales Balance Value$
2Jan 10 at $5 10 at $5 50
6 Jan 5 at $6 15 at $5.33 80
7 Jan 5 at $5.33 10 at $5.33 53.3
9 Jan 15 at $7 25 at $6.33 158.3
11 Jan 12 at $6.33 13 at $6.33 82.3
!3 Jan 20 at $10 33 at $8.50 282.29

Purchases $385
Closing stock $282.29
Cost of goods sold $102.61

Advantages
 It smoothens out price fluctuations.
 Is acceptable by Companies Act.
 Is logical since all identical units of inventory are given an equal value.
 Variations in prices are minimised.
 Profits of different periods can be realistically compared.
 Has the effect of smoothing out the costs of production and cost of sales.
Disadvantages
 The average does not represent prices actually paid.
 A new average must be calculated with every purchase of stock.

Ratio Analysis

Is a measure of the relationship between two different figures .Is used to analyse and
interpret the financial statements of a company.

a. Profitability Ratios
Gross profit Sale ratio
Gross profit * 100
Sales

Net profit * 100

Sales

Return on total assets (return on capital)

NP before INT & tax
Total assets

ROCE = NP BI & T
Capital employed

ROE = NP AT Preference Div

Equity

b. LIQUIDITY RATIOS

Current ratio: Current assets

Current liabilities

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 1,5:1 and 2:1 are considered reasonable. Excess of 2:1 indicates poor management
of resources with capital tied up in stock, debtors or lying idle instead of being
ploughed back.

Acid Test ratio: Current assets – stock

Current liabilities
Acid test standard ratio is 1:1 but can fall to 0,9:1 due to prompt payment by
debtors. 0,5 or less indicates that a firm enjoys credit terms whilst selling for cash.

Efficiency use of asset ratios

Fixed assets turnover

Stock turnover
Debtors’ turnover
Creditors’ turnover
R.O.I

Fixed assets turnover = Sales

Fixed assets

It seeks to measure how effectively managers use their assets. Low ratio implies
underutilisation of assets .High ratio implies that fixed assets are effectively used

Stock turnover

Measures the number of times stock have been run down and they have had to be
replenished
High stock turnover means that stocks have had to be finished many times and
replenished

Debtors = Credit sales

Debtors

A high figure implies that debtors are meeting their accounts early or vice versa.

Comments
Profitability ratio
Low profits may mean little or no dividends at all
Liquidity ratios
If creditors press for payment the company can be forced into liquidation

Efficiency ratios
Better efficiency normally translates into better profits. a company that under
utilises fixed assets maybe unable to replace such assets

Solvency Ratios
A firm can be compulsorily closed after failing to meet its long term debts

Debtors Collection Period

Measures how long it takes to collect money from debtors

Creditors Turnover = Credit purchases

Creditors
A high ratio implies that creditors are being paid promptly

Solvency Ratio
Debt Ratio
Gearing Ratio
Debt/equity ratio
Interest coverage

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 3 Efficiency Ratios

ROI = NP AT Tax = 50 (0,63)

Total assets 550

The company’s profits have worsened in 1992. ROI continues to fail .The company
showed re examine its operations

GP = 50 = 4.55%
Net sales 1100
6.67 (1991)
The margin has grown worse perhaps due to lack of to customers
stock loses or change in sales mix or an attempt to increase market
share by keeping down prices

NP AT Tax = 50(0.63) =2,89

Net sales 1100
4.2 (1991)
For every dollar of sale the company earns 2,86 cents . The operation
is more than that of 1991

Fixed assets turnover = Sales * 100

Fixed assets

1100 = 200%
550
Ownership is shared among all shareholders through the number of shares issued.
Shareholders have the might to select when they seem most appropriate to sit on
the board of directors .The later will control the way the company is run by
employing managers.

USES OF RATIOS
Managers
 analysing past data to determine progress or deterioration of performance.
 planning for future.
 controlling for business.
 assess performance
 identify problems before they become acute
Investors
 compare their investment with alternative forms of investment.
 inter-firm comparison can inform shareholders whether they have invested their
money in the most profitable and stable business.
 Trends may signal to investors whether they should stay in business or not.
bankers
 assess credit worthiness of a business
Government
 assess the profitability for the sake of taxation or investment/buying shares to be a
shareholder.
Financial analysts
 compiling for the financial press, trade unions etc
Employees
 assess the profitability of the business as a basis for salary claims.

LIMITATIONS
 Do not reveal causes of poor performance.
 The required statistical data is not disclosed in accounting statements.
 Window dressing

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  Ignore time factor in business.
 Can be misleading if accounts are not adjusted for inflation.
 Inter-firm comparisons are only valid if the firms use the same practice in relation to
depreciation and stock valuation.
 Published accounts are by nature historic in that they relate to previous time
periods and may be not valid today.

MARK UP /MARGIN
Mark Up
Is gross profit expressed as a fraction or percentage of cost of sales.
Margin
Is gross profit expressed as a percentage of fraction or percentage of sales.

A company sells its goods at a mark up 25%. In the year 2000 the company’s sales
amounted to $100000.
Required
Calculate the profit made by the company.

Converting mark up to margin

25 = 1 = 1 = 1
100 4 4+1 5

1 x 100000
5 1
= $20000

CASHFLOW FORECAST
Contains estimates of cash receipts and payment. A cash flow forecast enables management
to plan ahead to prevent future cash flow problems.

Receipts March April May

Opening bal 27000 29000 38340
Debtors 77700 81840 90100
Cash sales 20000 22000 25000
Total 124700 132840 153440
Payments
Salaries 9500 9500 10000
Rent 25000 25000 27000
Purchases 61200 60000 69000
Total 95700 94500 106000
Balance b/f 29000 38340 47440

Solving Cash Flow problems

 Obtaining cheap supplies of raw materials.
 Reducing expenditure
 Leasing
 Delay payment of bills
 Debt factoring
 Deduce debtor period
 Sale and lease back

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BUDGETS
Are plans for future expressed in quantitative terms

BUDGETARY PLANNING
Is concerned with the preparation of coordinated quantitative plans of an entity to ensure
that its objectives are met.

BUDGETARY CONTROL
Is a control technique whereby budgeted and actual data are compared one with the other
and the managers accountable for any differences known as variances and take necessary
control action or revise the budgets.

TYPES OF BUDGETS
 Sales budget
 Cash budgets
 Production budget
 Raw material purchases budget
 Debtors budget
 Creditors’ budget
 Master budget
Advantages of budgetary planning and control
 Involves planning of what must be achieved.
 It ensures that both underlying activities and budgets are synchronised.
 It forces managers to establish goals and objectives
 It compels management to forecast the future, anticipate changes and predict their
impact and plan to take appropriate action in time.
 It motivates managers and employees to work towards defined goals and objectives.
 It improves communication and coordination in an organisation.
 It facilitates clear delineation of responsibility for cost and revenue to the
organisation unit manager.
 Budgets may indicate possible future shortages of resources.
 Used to control and measure performance ie the budgeted figure and the actual
 Is useful for controlling current business activity- keeping to targets.
 Is a basis for communication
 Serves as a benchmark in performance evaluation.
 Aid in motivation as members are involved in budget preparation.
 Give focus and a sense of direction to managers.

LIMITATIONS OF BUDGETS
 Waste of resources
 Value depends upon the quality of information.
 Demotivating if participating was not part of the process.
 Demotivating if pre set targets are too high to achieve or not met.
 Management becomes over dependent on budgets.
 The existence of well documented plans may cause inertia and lack of flexibility in
adapting to change.
 Time consuming
 Encourages rigid planning
 Only lowest targets are met
 It fosters departmental conflicts over scarce resources.
 It involves additional administrative work and costs
 Its success depends on the willingness and cooperation of all managers.

STAGES IN THE BUDGETING PROCESS

 communicating details of budget policy to people involved in preparation.
 determining limiting factors.
 Preparation of sales budget
 Initial preparation of various budgets

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  Negotiation of budgets with superiors
 Co ordination and review of budgets
 Final acceptance of budgets
 Ongoing review of budgets.

FACTORS TO BE CONSIDERED IN BUDGETING

 Limiting factors
 Financial factors
 External factors – PEST analysis

FLEXIBLE BUDGET
Budgets can be flexed/adjusted if the management anticipated the actual level of activity
being greater or less than budgeted. A budget is flexed under inflationary environment. In
times of fluctuating prices budgeting present complications. When high rates of inflation
prevail budgets become outdated and inapplicable. The remedy for this situation is the
review of the budgeted figures and the installation of a flexible budget which accommodates
price changes./fluctuations.

FIXED BUDGET
Is designed to remain unchanged irrespective of the volume of output or turnover attained.

ZERO BASED BUDGET

Is a method of budgeting from a zero base and identifying every item of expenditure in the
budget. Assumes that projected expenditure for existing programmes should start from
base zero with each year’s budgets being compiled as if the programmes were being
launched for the first time.

Advantages
 Is best suited to discretionary costs and support activities such as advertising.
 ZBB has been mostly applied in local and government institutions where the
predominant costs are of discretionary nature.
 It focuses attention on output in relation to value for money.
 Encourages a culture of generating new ideas.
 Is more rational in allocation of resources.
 Facilitates the identification and elimination of obsolete operations and wastage.

Disadvantages
 Is time consuming and involves large extra paperwork.
 Tends to stress on short term benefits.
 The ranking of decision packages and the resultant allocation of resources is
subjective thereby causing conflicts.
 It is difficult to quantify the benefits of the activities in an organisation.

STANDARD COSTING
Is a technique which establishes predetermined estimates of costs of products and services
and then compares these predetermined costs with actual costs as they are incurred.
Compares actual costs with predetermined costs and analyses the differences known as
variances.
Standard costs – are predetermined costs.

Types of Standards
Basic standards
Represent constant standards that are left unchanged over a long period.
Ideal standards
Represent the minimum costs that are possible under the most efficient operating
conditions or perfect conditions ie no breakdowns, no wastage and idle time.
Attainable standards
Provide realistic and achievable targets and normally recommended for standard costing..

Advantages

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  Providing a prediction of future costs that can be used for decision making process.
 Providing a challenging target which individuals are motivated to achieve.
 Assisting in setting budgets and evaluating managerial performance.
 Acting as a control device by highlighting those activities which do not conform to
the plan and in need of corrective action.
 Activities that give rise to variances are identified.
 The process of setting, revising and monitoring standards encourages reappraisals
of methods, materials and techniques so leading to cost reduction.
 A properly developed standard costing system with universal participation creates a
positive and cost effective attitude through all levels of management and right down
to the shop floor.
Disadvantages
 It may be time consuming to install and to keep up to date.
 In volatile conditions with rapid changing methods, rates and prices standards
quickly become outdated.
 Concentrates only on a narrow range of financial factors ignoring quality, lead times
and customer service.
 Standard costing will be less useful if JIT principle is to be adopted and the idea of
normal level of waste and efficiency is not accepted.
Variances
Are the differences between the standard costs and the actual costs. Variances may be
adverse that is whereby actual costs are greater than standard costs or favourable whereby
actual costs are less than standard costs.

Causes of Variances
Material price variance
 Favourable- An unexpected fall in the price of materials.
-Purchase of material at cheaper prices
Unforeseen discount received
 Adverse - -Increase in price of materials
- Inflation
- More expensive suppliers
- Emergency purchases
Material usage variance
 Favourable- Use of better quality of materials
-Improvement on production methods
 Adverse - Poor quality of material
- Abnormal loss in production
- Defective material
- Theft
- Excessive usage
- Reworking

Labour rate Variance

 Favourable -Employment of lower grade worker/unskilled staff.

-Workers being paid less.
 Adverse -Increase in wage rate
- Use of high grade worker
- Use of overtime labour

Labour efficiency variance

 Favourable-Employment of skilled labour

-High motivation/morale
-Employees working with better quality of materials.
 Adverse -Use of defective materials

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 -Poor morale
-Use of untrained labour
-Poor working conditions.

Price Variance

 Favourable –Increase in the selling price

- Reduction in discount allowed to customers
 Adverse - Price reduction due to seasonal sales.
- Price reduction due to competition
- Price reduction to promote sales.

INFORMATION FOR DECISION MAKING

Decision Making Tools

 Critical Path Analysis

 Decision Tree Diagram
 Investment Appraisal
 Cost Benefit Analysis
 linear programming
 Time Series analysis
 Measures of Central Tendency and Dispersion

Network Analysis

Is a rational and systematic way of planning a series of activities that combines into a large project
eg construction of a bridge.

Is a generic term that covers a group of related analytical techniques one of which is known as a
Critical Path Analysis.

Critical Path

Is the sequence of activities that determine the minimum time needed to complete a project.

Is the shortest time in which a project can be completed which is determined by the longest path in
the network.

Rules of Drawing
 There is starting point and finishing point
 Networks are drawn from left to right
 Activities that consume time are shown by a straight line or an arrow.
 Circle node indicates the end of each activity and the commencement of the other.
 Events are indicated by letters.
 Numbers denote duration of activity.
 Tail – preceding event
 Head – succeeding event.
 Every activity must have a preceding and succeeding event.

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  No event can start until its tail event has been reached.
 An event is not complete until all activities leading to it have been reached.
 All activities must be tied into the network.
 There may be no loops- the essence of a network is a progression of activities moving
onwards in time.

A simple Network diagram

Activity Duration (weeks) Order

A I ----------------
B 2 has to follow A
C 1 has to follow A
D 3 has to follow B
E 1 has to follow C
F 1 has to follow E
G 2 has to follow D and F

Simple Network

D 3 G2

B1

A 1 F 1

C 1

E 1

Critical Path
A B D G= 8 weeks
C, E, F can be done concurrently with B and D
B, D and G are critical activities, any delay means the project will not be completed in 8 weeks.
C,E and F are non critical for there is a scope for delay(float) without delaying the overall completion
of the project.
Features
Circle Node- denotes where an activity ends and another one begins.
Straight line or an arrow indicates an activity or event.
-------------- dotted lines – dummy activity
Numbers - duration of an activity
Letters------ activity
Basic Network features
A B
Activity A has to be completed before B can be started.

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 A B
C Neither B nor C can be started until A has been completed.
B and C can be done concurrently.

C A and B are independent of each other but both must be

B completed before C can be started.

A C A and B are independent of each other but both

must be completed before C or D is started.

B D C and D can be carried out concurrently

A C D can not start until both A and B have

*                             been completed.

* - The dotted line represents a dummy
*
*
B D

EST of activity B EST of C

1 2
A B C
2 1 3 9

Node Number LFT of activity A LFT of activity B

Upper Quadrant –EST

Lower Quadrant- LFT

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 EST 10 15

LST 15 20

From the above an activity can not start until day 10 but could be delayed beyond day 15. If
delayed beyond day 15 then it will not be completed until after day 20 in which case it will
delay the start of the next activity and the overall activity.

Terminology

Non critical path – delays occur with non critical path without delaying the overall
completion of the project. Non critical activities are completed in a shorter time.

Dummy activity – An activity that neither consumes time nor resources.

Float – Is the amount of time an activity can be delayed without delaying the overall
project.

Types of Floats

Total Float
Is the amount of time a path of activities can be delayed without affecting overall project
completion
Total Float = LFT –EST –duration
Example: Activity B has an EST of 17 days and a duration of 4 days. To avoid delay the
activity has to be completed by day 23.
Total Float = 23 -17 -4 =2 days
This means the project can be delayed up to 2 days without affecting the overall project
completion.

Free Float
Is the amount of time an activity can be delayed without affecting the commencement of the
next activity at its EST.
Free Float = EFT –EST –duration

Independent Float
Is the amount of time an activity can be delayed when all preceding activities have been
completed as late as possible and all succeeding activities are started as early as possible. It
is independent because it does not affect the float on preceding or subsequent events.

Calculating EST and LFT

Earliest Starting Time

Is calculated by cumulatively adding up activity times from left to the right.
If there is more than one arrow leading to an event take the longest possible early time.

Calculating LFT
Is calculating by moving from the right to the left – subtracting the duration of preceding
events.
If there are more than one tail leading from one event take the smallest
The smallest number at each node is what is required for the LFT.

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 F10 G3 I 3 J4
3 5 6 7 8
E 14 22 38 42
32 35

2
8
A8 D6

B6 4 H 14
20

Critical Path A, E, F, G, I, J

Project duration 42 days

EST of D is 20 days

LFT of D is 32 days

Duration of activity D is 6 days

Total float = 32 -20 -6 = 6days

This means that the activity can be delayed up to 6 days without affecting the overall
project completion.

Free Float for activity B = EST of next activity after B – EST of B – duration

=20 – 6 – 0 = 14 days

Critical activities have no spare time and are shown those nodes where EST and LFT are
equal therefore no delay is possible.

Activity E cannot start before day 8 because A will not be finished before then. D cannot
start before day 20 because A and C have to be completed first.

LFT is calculated from right to left. LFT at node 8 is 42

The lowest number at each node is required for LFT therefore for node 4 is 21 instead of 26
days.

Significance/application
 Facilitate planning and coordination of large projects.
 Identify critical activities which determine the overall duration of the project.
 Identify activities which are likely to cause bottlenecks and delays.
 Determine when resources and components are needed.

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  Plan the use of resources to reduce and eliminate idleness.
 Identify important linkages and sequential dependent relationship.
 Reducing costs by eliminating costs
 Using the diagram to calculate the total project duration allows businesses to give
accurate delivery dates.
 Completion time can be calculated.
 Resources can be prioritised.
 Shows logical dependence of activities.
Facilitate the taking of corrective action when performance falls below that specified
in the plan.
Limitations
 The construction of CPA diagram is time consuming.
 The estimates of duration may be inaccurate.
 It does not guarantee a successful project, there is need for skilled and motivated
staff.
 It cannot solve production problems by itself but it requires experts /experienced
managers.
 Not ideal for new projects since there may be considerable guesswork involved in
estimating duration.
 Managers may not keep in control of the project so activities may overrun.
 There are so many activities which may not be easily drawn in a network diagram.

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DECISION TREE DIAGRAMS

A decision tree diagram is a diagramatic way of showing a decision making scenario as a

sequence.

$100 000

success 0,6

A failure 0,4
$30000

$800000

B success 0,7

failure 0,3 -$10000

Decision node
A decision node shows points where decisions are made. All branches leaving
the decision node are alternatives which is the best.

Circle/Random node
A circle/random node shows points where events occur. All branches leaving
the random nodes have known probabilities.

Terminal node
                   A terminal node shows the end of the all sequences of decisions and events or
finishing point.

STEPS TO BE FOLLOWED
 The problem is defined and various decisions to be made are identified and the
events that result from each decision are determined.
 Set out alternative courses of action in the form of a tree diagram.
 Estimate the possible outcomes of the various actions.
 Determine the probability for each outcome.
 Calculate the expected values from each outcome for each alternative.
 Select the course of action with the highest expected value.

ADVANTAGES
 It clarifies the decision making process.
 It shows clearly and logically the alternative courses of action.
 The decision tree diagram encourages managers to quantify alternative outcomes.
 The decision tree fosters logical thinking and planning.
 New ideas are thrown up by careful analysis.
DISADVANTAGES

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  The construction of a decision tree is time consuming.
 Information is not always available.
 Estimate of probabilities is subjective.
 Information is not complete.
 It can neglect non quantifiable variables

DECISION CRITERIA
Select the project or course of action which has the highest expected value.

EXPECTED VALUE
Is the average return attached to a project when the project has a number of uncertain
outcomes each with a monetary value.
EPV = ∑ ( probabilities x outcomes)

Scenario
A firm is faced with a choice of buying a small machine or a large one. The return or pay off
will vary depending on the choice of machine and state of demand. The relevant data is
shown below.
State of Demand Probabilities Small firm Large firm
Payoff $000 Payoff $000
High 0,2 40 80
Medium 0,6 36 24
Low 0,2 16 -10

$40

High 0,2
Medium 0,6 $36

small machine Low 0,2

$16

Large machine $80

High 0,2

Medium 0,6 $24

low 0,2 $-10

EPV(small machine)= (0.2 X40) + (0.6 X36) +(0.2 X16) =32800

EPV(large machine) =(0.2 X80) + (0.6 X24) + (0.2 X10) =32400

Decision criteria
The management should buy the small machine which has the highest expected value.

A firm has a choice between two projects, A and B.

The initial investments are as follows:
Project A: $40000
B: $60000
The probability of success for project A is 0.5 with a cash inflow of $80000. If it fails the
inflow will be $40000
The probability of success for project B is 0.6 with a cash inflow of $100000. If it fails the
inflow will be $40000
Required

168
 (a) Represent the information on a probability tree diagram.               [2]
(b) Which project should be more acceptable? Give reasons for
your recommendations. [4 ]

            $80000

success 0.5

failure 0.5 $40000

A($40000)

B($60000) $100000

success 0,6

failure 0.4 $40000

EPV (A) = (0.5 x 80000) + (0.5 x 40000) - $40000 = $20000

EPV (B) = (0.6 x 100000) + (0.4 x 40000 ) -$60000 =$16000
Decision criteria
Project A is more acceptable because it has the highest expected value.

COMPLEX DECISION TREE DIAGRAM

The owner of a small firm has been advised by a financial analyst that he has three basic
strategies for the factory to choose from.
No change to current operations
A series of minor redevelopments involving modifications to existing equipment.
A major capital investment to replace outdated equipment

If no change option is taken net profits of $3m are projected. If the minor redevelopments
option is followed there is uncertainty about net profit levels
Net profit ($m) Probability
2 0.4
3 0.3
6 0.3
If the major capital investment is taken there is a 50% chance of net profits of $5m. There is
also a 50% chance that a further decision will have to be taken in the future that either to
scale down operations leading to a net profit of $2m or make further capital investment. In
the latter case the values of profits are uncertain
Net profit Probability
  5 0.6
-2 0.4
Required
Draw a decision tree diagram
.

169
 $3m

$2
No change
Minor redevelopments 0.4

Major capital 0.3 $3m

   investment 0.3
$6m

0.5 $5m

0.5 $2m

scale down $5m

further capitalise 0.6

0.4 $-2m

TYPES OF DECISIONS

 Whether or not to introduce a new product

 Whether or not to continue with advertising campaign
 175Whether or not to sell off assets for a known price.
 Establish a large firm or not.
 Establish a small machine or not.

QUESTIONS

1 a. Explain what you understand by expected value.

  b. Evaluate decision tree as an analytical tool.

2a. Explain four types of decisions that could be subject to decision tree analysis.

b. Evaluate the proposition that decision tree analysis is based on sure foundations.

CAPITAL BUDGETING/INVESTMENT APPRAISAL

Is the analysis and evaluation of investment projects that normally produce benefits over a
number of years. It is the evaluation of the profitability and viability of a project.

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TYPES OF INVESTMENT PROJECTS

A Replacement or expansion

Replacement is the acquisition of an asset to maintain existing production and increase

efficiency. Expansion refers to the expansion of existing lines to new markets or
introduction of new product lines.

B Independent and mutually exclusive projects

With independent projects the acceptance one does not affect the acceptance of the other
project. The firm can accept project A or reject it irrespective of whether project B was
accepted or not. Both projects can be accepted. Mutually exclusive projects are
alternatives either one or the other maybe accepted but not both.

C Divisible and indivisible projects

A divisible project may be split into a number of separate parts, each capable of being
undertaken on its own. If the project is indivisible then the entire project must be
undertaken for example building a toll gate.

TERMINOLOGY

Sunk cost

A cost that has already been incurred and cannot be removed and therefore should not be
considered in an investment decision.

Opportunity cost

The most valuable alternative that is given up if a particular investment is undertaken.

Cost of capital

Is the minimum return required from a project investment or it is the cost of obtaining
similar funding today for future use.

Time value of money

Refers on the principle that money loses value over time and money has an opportunity cost
in terms of interest. This means $100 today must earn interest to compensate the owner for
not having the money for productive use. This concept is used in stock valuation, cost of
capital decisions and capital investment decisions.

INVESTMENT APPRAISAL TECHNIQUES

Quantitative techniques

Payback
Accounting Rate of Return (ARR)

Discounted cash flow techniques

Net present value (NPV)

Internal Rate of Return (IRR)

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Payback
Is the number of years it takes the firm to recoup the money it invest in the project. it is the
time it takes the project to recover the capital investment.
Example 1
Initial investment $200000
Year          Net cash flow
1 60000
2 70000
3 100000
4 150000
5 160000
Calculate payback

Years Cash flow Cumulative cash flow

0 (200000) (200000)
1 60000 (140000)
2 70000 (70000)
3 100000 30000
4 150000 180000
5 160000 340000

In the above table it can be seen that two complete years have passed and there is still an
outstanding amount. the remaining $70000 will be recovered at the same time during the
third year.
Therefore payback = 2years + 70000 x 12
100000
= 2yrs 8 ,4 months
Example 2
a company is considering investing $180000 and the residual value of the project is
$20000. Expected cash flows are as follows:
Year Net cash flow
1 90000
2 110000
3 500000
4 250000
payback period = 2yrs
In the above situation the residual value is added back to the initial cost of the project.

Example 3
Initial investment $2000
Expected net profits:
Year1 300
2 800
3 700
4 900
5 1000
Depreciation is calculated using straight line method for 5 years.
Calculate payback period
Year Profits Depreciation Cash flow
0 ---- ----- (2000)
1 300 400 700
2 800 400 1200
3 700 400 1100
4 900 400 1300
5 1000 400 1400

Payback period = 2yrs + 100 x 12

1100

= 2yrs 1 month

172
Note that payback is based on cash flows not profits.

USES

can be used as a measure of risk in terms of recoupment. The longer the time the riskier
the project. Firms with liquidity problems need quick backs. Considering risk of
obsolescence would prefer to recoup funds rapidly.

Decision criteria

Simple rule is to accept the project with the shortest payback period. However if both
projects have the same payback period choose the one with the highest initial cash flow.

Advantages
.Simple to understand and calculate
.favours quick return projects
.Choosing quick return projects reduces time related risks
.Liquidity indicator, the lower the payback the greater the liquidity.
Indicator of cataclysmic risk.
Calculation of cash flows is more objective than calculation of profitability.

Disadvantages
.It ignores the time value of money
.It ignores the performance of the investment after payback.
.Provides a crude measure of the timing of project cash flows.
.Does not measures the profitability of the project.
.Does not consider cash flows after recoupment.

ACCOUNTONG RATE OF RETURN (ARR)

Is the ratio of average profits, after depreciation to the capital invested.
Measure the annual profitability of an investment as a percentage of the initial investment.

ASSUMPTIONS
 Profits may be before or after tax
 Capital invested may be the initial capital invested or the average capital invested.
 Capital may or may not include working capital.

Methods of calculating ARR

Calculating basing on 1 Initial capital invested
2 Average capital invested

ARR = Average profits x 100

Initial investment 1 OR
ARR = Average profits x 100
Average investment 1

Example 1

A firm is considering three projects each with an initial investment of $2500 and a life span
of 5years.
Year Project A Project B Project C

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1 250 500 100
2 250 450 100
3 250 100 100
4 250 100 450
5 250 100 500
1250 1250 1250

Calculating ARR based on initial capital

ARR = average profit x 100
initial capital 1

Project A : 250 x 100 = 10% Project B: 250 x 100 = 10% Project C: 250 x 100=10%
2500 1 2500 1 2500

Calculating ARR based on average capital

ARR = average profits x 100
average capital

Project A : 250 x 100 = 20% Project B: 250 x 100 = 20% Project C: 250 x 100=20%
1250 1 1250 1 1250 1

Decision criteria
All projects are feasible and viable since they provide the same rate of return. However
management must choose any one of these. In the event that we have different rates of
return the decision criteria takes the project with the highest rate of return.

 Accept projects with ARR greater than the acceptable ARR.

 Reject projects with ARR lower than the acceptable ARR.
 Indifferent to projects with ARR equal to the acceptable ARR.
 If investments are mutually exclusive accept the project with the highest ARR.
Example 2
The purchase price of the restaurant is $180000 although decoration and investment in
fixtures and fittings will add another $20000 to this. The net cash flows for the first 5years
for the proposed restaurant are expected to be:

Year Net cash flow

1 60000
2 70000
3 100000
4 150000
5 160000
Calculate ARR.

Average profits = Total cash flows – Cost

No of years
= 540000 - 200000
5

= 340000
5
= $68000

174
Therefore ARR = 68000 x 100
200000 1

= 34%

Example 3

The following data is given for a project.

Initial investment $2500

Expected net profits $
Year1 300
2 800
3 700
4 900
5 1000
Depreciation is calculated using straight line method over 5 years.

Required
(a) Payback period
(b) ARR
Solution
Year Profits Depreciation Cash flow
0 ----- ------- (2500)
1 300 500 800
2 800 500 1300
3 700 500 1200
4 900 500 1400
5 1000 500 1500

Payback =2 yrs 4 months

ARR = 740 x 100

2500

= 29.6%

Example 5

A company is planning to introduce a new product that is expected to realise the following
profits over a period of 5 years.

Year Profits
1 24000
2 30000
3 36000
4 38000
5 22000
The project will require the use of an existing machine that was purchased some years ago
at $20000 and the use of another machine that will have to be purchased for $144000. It is
estimated that inventory held will increase by $12000 and trade receivables will increase by
$18000.
Required: ARR
Solution to example 5

Average profit $30000

Average investment = Cost of asset acquired + working capital
2

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 =( 144000) + 30000
2
= 102000
ARR = 30000 x 100
102000
= 29.41%
NB The existing machine worth $20000 is a sunk cost and should be ignored.

Advantages
 Simple to calculate and understand
 It uses yields in all years.
 Results can be assessed against predetermined criteria.
 It focuses on profitability
Disadvantages
 Ignores the time value of money.
 Ignores inflows and outflows that is three projects may be ranked equally despite
different cash flows.
 Ignores the timing of cash flows.
 No account is taken of the life expectance of a project.
 There is no universal method of calculating ARR. Other names are ROCE and ROI.

NB Cash flow is the movement of cash into and out of a firm’s bank account and profit is
when revenue is greater than total costs.

DISCOUNTED CASH FLOW TECHNIQUES

Net Present Value (NPV)

Is the sum of the discounted cash inflows minus the cash outflows.
Is the sum of the present values of all the cash flows

NPV recognises the time value of money that is $1 received now is more useful than $1
received sometime in the future because it can be used now for example $100 invested now
at 10% compound interest will be worth $110 in a year’s time.

Example 1
Jetpack Ltd is undertaking a project which involves an initial outlay of $2000. The net
receipts from the project for the next five years are estimated to be as follows:

Year $
1 400
2 600
3 700
4 600
5 500

Calculate the project NPV and state whether the project is acceptable assuming that the
cost of capital is either 10% or 20%.

Calculating discount factor

PV = 1
( 1+r )n

NPV when cost of capital is 10%

Year Cash flow Discount factor NPV

0 (2000) 1 (2000)
1 400 0.909 363.6

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2 600 0.826 495.5
3 700 0.751 525.7
4 600 0.683 409.8
5 500 0.621 310.5
NPV 105.2

NPV when cost of capital is 20%

Year Cash flow Discount factor NPV

0 (2000) 1 (2000)
1 400 0.833 333.3
2 600 0.694 416.6
3 700 0.578 404.6
4 600 0.482 289.2
5 500 0.402 201
NPV (355.3)

Decision criteria

Accept the project with a positive NPV and reject a project with a negative NPV. If there are
all positive choose the one with the highest NPV.

NB The higher the discounting rate the lower the NPV. In the case above 20% rate makes
the project unacceptable.

Advantages

 Considers time value of money

 It considers timing of all cash flows
 Discount rate can be varied to allow for dynamic economic situation.

Disadvantages

 It is difficult to calculate.
 The result depends on the discounting rate.
 Does not provide a percentage rate on return.
 Cost of capital is difficult to ascertain.

INTERNAL RATE OF RETURN (IRR)

Is the discount rate which gives zero NPV.

Is the discount rate that equates the cost of an investment with the Present Value of
expected inflows.
Is the percentage required to discount cash flows to give nil NPV.

IRR can be calculated using

(a) Linear interpolation
(b) Graphs

177
Formula : IRR = a + b x c
d
Where : a –the rate giving positive NPV
  b- the difference between the two rates to give the NPV
  c-  is the value of the positive NPV
d- is the difference between the two NPVs
Calculating IRR using previous NPVs

Discount rate 10% ?% 20%

NPV 105 0 ( 355)

Therefore IRR = 10 + 10 105 %

460

= 12.28 %

Therefore discounted at 12.28% the investment would have nil NPV

Graphical solution

+NPV

100

50 IRR

0 5 10 15 20 Discount rate %

- 50

-100

- 150

- 200

- 250

- 300

    - 350

-NPV

Decision criteria

If the IRR exceeds the market rate of interest which has to be paid to secure the funds then
the project should be accepted. For two projects choose with the highest IRR.

Advantages

 Provides different rates of return.

 Considers time value of money
 Is easily compared to the criteria rate.
 It avoids the need to choose the actual rate of discount.

Disadvantages

178
  It is difficult to compute.
 Cost of capital is difficult to ascertain.
 Mathematically complicated.

DICOUNTED PAYBACK

Is the rate it takes for the present value of the project’s cash flows to be equal to the cost of
investment.

Assuming the cost of capital 15%

The project cost $12000 and have the following cash flow streams.

Year Cash flows

1 4000
2 6000
3 6000
4 1000

Year Cash flows Discount factor NPV

0 (12000) 1 (12000)
1 4000 0.8496 3478
2 6000 0.7561 4537
3 6000 0.6575 3945
-40

Decision criteria
Taking into account the time value of money it will take 3 years for the project to breakeven
that is to reach the position where NPV is equal to zero.

MEASURES OF CENTRAL TENDENCY AND DISPERSION

Measures of central tendency

Observations of a random variable tend to group about some central value, therefore the
statistical measures which quantify where the majority of observations are concentrated are
referred to as measures of central location.

There are 3 measures of central location

 Arithmetic mean
 Median
 Mode

Arithmetic mean
Refers to the sum of all values in a data set divided by number of values.

Advantages
 Easy to compute and understand
 Only mean for any given data set.
 Useful for comparing data.
 Is determined when the total value and the number of items are known.

179
  It makes use of all the data and is precise.
Disadvantages
 Affected by extreme values.
 Makes the values unrealistic.
Mastering Symbols
∑ = summation sign
X = Arithmetic mean
X = Value of items
n = Sample size/ number of items.
xa = Assumed mean
d = Deviation
UNGROUPED DATA
Arithmetic mean = ∑ x
n

Example

Five people have the following salaries $15, $17, $18, $20 and $30
Arithmetic mean = 100
5
=$20

MEDIAN
Is the value of a random variable which divides an orderly data set into two equal parts.
For ungrouped data arrange the data in an ascending order.
If n is odd identify the median by the formula
n + 1 = the position of the median
2
Example
27, 38,12,34,42,40,24,40,23
Orderd:12,23,24,27,34,38,40,40,42

Median position: n + 1 = 9+1 =5th position

2
=34
If n is even average the two middle values.
12,18,23,24,27,34,38,40,40.42
Median = 27 + 34
2

=30.5

Advantages

 Easy to calculate.
 Gives the actual value.
 High and low values do not distort it as a representative average.

Disadvantages

 Gives the value of one item only

 Cannot be used to determine the value of all items
 Not suitable for further calculations.

MODE

Is the most frequently occurring value in a data set.

180
Example 4, 4, 5, 6, 11
Mode = 4

In a frequency distribution the mode is the item with the highest frequency.
Example:
Component size (cm) Frequency
20 4
21 10
22 15
23 20
24 1
23 cm is the mode because 20 is the highest frequency.

Advantages
 The mode is realistic
 Is easy to calculate.
 It has practical uses that is employees adopt modal rates of pay.
Disadvantages
 May not be well defined.
 Does not include all variables
 Is unsuitable for further calculations

MEASURES OF DISPERSION
Dispersion refers to the extent by which observations of a random variable are scattered
about the central value. Widely spread observations indicate low reliability and less
representativeness of the central value. High concentration of observations about the
central value increases confidence and reliability about the central value

Measures of dispersion include:

 Range
 Inter -quartile range
 Quartile deviation
 Variance
 Standard deviation

RANGE
Is the difference between the highest value and the lowest value in a data set.
eg 3,4,7,16,20,30,38,53,61,88
Range 88 -3 = 85

Advantages
 Is to calculate and understand.
 It provides a very quick indication of the variability of data
Disadvantages
 It can be distorted by extreme values.
 It ignores other values and therefore is not particularly accurate indicator of
dispersion
Inter-quartile range
Is the difference between upper quartile and lower quartile. Q 3 –Q1
Example:
Employees Wages ($) Employees Wages ($)
1 40 11 89
2 42 12 93
3 43 13 97
4 48 14 100
5 50 15 110
6 60 16 140
7 62 17 200
8 65 18 210

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9 61 19 212
10 80 20 220

Position of Q1 = n
4

Position of Q3 = 3n
4
Inter-quartile Q3 – Q1
= 110 – 50
  =$60
Inter-quartile range covers employees earning the middle range of wages which is 50% of
the employees. It avoids the effects of extreme values since it measures the spread of the
middle 50% of the observations.

Quartile deviation
Q3 – Q1
2

110 – 50
2
=$30

Mean Deviation
How far are the values from the mean
Example: $10, 5, 4, 10, 15, 10, 16, 10
Mean = 10
Deviation: 5
6
5
6
22
Therefore 22 ÷8 = 2,75

COST BENEFIT ANALYSIS

Is an analytical tool used to measure external costs and benefits to arrive

at a price that would reflect social costs and benefits.

External costs are incurred by individuals for example costs resulting from consumption of
alcohol that is medical facilities, alcohol by drivers result in injuries and deaths of
passengers. Pollution also results in external costs. Costs refers to risk to life and health.

The correct way to make a decision is to compare the present value of the costs and the
present value of the benefits. The action should be taken if the present value of the benefits
exceeds the present value of the costs.

Benefits
Is used in investment decisions be it profit or non profit making for example construction of
railway line would increase total welfare which is a social benefit..
It is also applied to alternative investment projects for instance dam construction or high
way construction.

Drawbacks
It is difficult to determine the value of external costs.

Question

182
A government is considering building a highway. Explain why the government might use
CBA to assist this decision.
Benefits
Reduction in congestion which will
 reduce transportation time and costs to business.
 reduce travelling time
 reduce population density in particular areas.
 improve accessibility to some areas.
Social costs
 Disfigurement of the landscape.
 noise and pollution it will bring to the surrounding area during construction.

LINEAR PROGRAMMING/BLENDING TECHNIQUE

Is a mathematical tool that is used to allocate scarce resources in such a way that the
optimum benefits can be derived from their utilisation.
It seeks to find a feasible combination of output that will maximise or minimise the
objective function. The objective function is the quantification of an objective.

Example
A shop owner intends to procure bed sets and wardrobes. Each bed costs $25 and each
wardrobe costs$20. The man has a space for 40 both bed sets and wardrobes. He has
orders for 15 bed sets and 10 wardrobes and the maximum he can spend is $900.
Ascertain the number of bed sets and wardrobe he should buy to optimise contribution if
his expected profit is $6 on each bed and $8 on each wardrobe.

Suppose he buys x beds and y wardrobes.

Step 1. Objective: To maximise contribution

2. Objective function: 6x + 8y
3. Constraints/Limitations
x + y ≤ 40
x ≥ 15
y ≥ 10
25x + 20y ≤ 900

Y
50 X=15
5x+4y=18
0
40

30 X+y=40

20

10 Y = 10

0 10 20 30 40 x

To maximise contribution the furniture shop owner should buy 16 beds and 24
wardrobes. (16 x $6 ) + ( 24 x $8 ) = $288

Choose the best possible combination from the feasible region that maximises contribution.

183
USES

 Allocation of scarce resources

 Allocate resources between different products so that costs are minimised.
 Product mix-producing two product versions.
 Calculation of relevant costs eg labour costs
 Selling different products- restricting other products to maximise profits.
 Capital budgeting –used to determine the optimal investment program when capital
rationing exists.
 Inventory control- assists producers to pay attention to control scarce factors of
production.

LIMITATIONS

 Ignores qualitative factors

 Requires a manager who is mathematically strong.
 Allows only for two products to be considered
 Assumes linear relationship between variables.
 Ignores the market demand for the product assuming output will be sold at a profit.
 Is not ideal for more than two products instead the Simplex method is used which
does not involve graphical solution but cumbersome calculations.

Task
A firm makes two types of building bricks type A and Type B. Both have two
manufacturing processes that is moulding and firing.
Moulding(hrs) Firing (hrs)
Type A 3 2
Type B 4 6
Each process has 4800 hrs available. Maximum demand for brick A is 1200.Contribution to
profit and fixed costs is $40 for type A and $60 for type B.

Required

Derive an objective, objective function and limitations.

184
EXAMINATION QUESTIONS

 Essays
 Structured questions
 Case study
 Data Response

Paper 1 (3hrs) Candidates are expected to answer All questions from Section A and B. This
paper constitutes structured short questions and Case study.

Paper 2 (3 Hrs) Candidates are required to answer All questions from Section A and any 3
from Section B.

Paper Type Duration No of Max marks Weighting

Questions
1 Section A Structured 2 hrs 12 70 50%
Questions
B Case study 1 hr 3 30
2 Section A Data response 45 min 1 25 50%
B Essays 2 9 75

EESAY WRITING

Essays are used to test higher order skills of analysis and evaluation. It is a skill which
needs to be practised and learnt. It requires synthesising a number of ideas to form a
complete answer.

The following aspects must be considered.

 Identifying key terms

 Good linkage of concepts
 Concise delivery of ideas
 Illustration through good examples
 Conclusive view points of the writer

Points To Note
 Many essays are bogged down by imprecise, vague delivery of ideas, lack of economy
of expression.
 Brilliant essays must communicate key ideas in the most convincing manner.
 Avoid repetitive wording.

185
  Never squeeze too many ideas in a paragraph. Express a single idea in a paragraph.
Too many ideas in a paragraph reflect poor execution of thoughts

An essay must have:

 Introduction
 Body
 Conclusion

Components of a paragraph
 Topic sentence
 Developer
 Example

IMPORTANT WORDS IN ESSAY WRITING

Here are some of the directives/command words that provide the critical instructions for
answering essay questions. Observe which directive is used and do only what is required of
you. Low marks/grades are caused by ignoring these directives/command words. The
following are some of the command words that you are likely to come across.
Analyse To examine critically/in detail the essential elements.
Account To give the reasons for something/to describe it
Assess To make a judgement as to the worth/value of something.
Apply To show how an idea, theory or findings can be used in a particular
situation.
Comment To express one’s personal insight in relation to the subject matter.
Consider Describe and give your own thoughts on.
Compare Point out both similarities and differences.
Contrast Point out differences.
Criticise Point out the strengths and weaknesses of an idea presented and
express own judgement.
Define To give the precise /exact meaning.
Differentiate To show the difference/to distinguish
Describe Mention the chief characteristics of something
Devise Work out a plan or solution to a problem.
Discuss To make and analytical examination using various arguments for and
against with a personal judgement at the end.
Evaluate Give the good and bad points, appraise, judge the worth of something.
Presenting a balanced argument resulting in a conclusion.
Examine To go through carefully or in detail
Explain To express clearly the reasons /causes of something.
Identify To give the essential characteristics of the subject in question/listing
Illustrate To clarify/explain by use of examples or analogy etc
List/name Write down the main points/ideas without explaining them.
Outline To present the main points concisely.
Show To prove/demonstrate something in a reasonable manner.
State/give To present information in brief- no discussion or explanation
Summarise Present the main points in an condensed form.
Relate Show the connection between the things mentioned and how one
influences the other.
Prove Provide factual evidence or where appropriate, a logical or
mathematical proof.
Suggest Put forward and idea for consideration
Specify This normally involves being precise and accurate
Justify Show good reasons for, give your evidence, present facts to support
your answer.
Indicate Point out usually without much detail.
Demonstrate Show by example

186
Example:
Evaluate the role of branding in the marketing of a product.
Evaluate is a directive or an instruction and branding becomes a key word that needs
explanation in the write up.

STRUCTURED QUESTIONS
Short answer questions do not require continuous prose. Neither do answers need any
background information unless that is specified. Candidates must give concise and precise
answers. It is also imperative to take note of the directive /command words for maximum
marks.

DATA RESPONSE QUESTION

Data response question covers both qualitative and quantitative type questions. Qualitative
questions are designed to test the comprehension of the passage and quantitative questions
require the candidates to analyse figures and come up with a solution. In a data response
question answers are usually contained in the passage and the candidate is being asked to
demonstrate understanding by extracting evidence from the passage. A candidate is
confined to the material contained in the passage and there is no reward for additional
materiel.
There are also stimulus questions. Their answers are not found in the passage but require
candidates to call on the knowledge acquired during the course.
When approaching quantitative questions the candidate has to take note of the
methodology leading to the required answer and show all necessary units of measurement.

CASE STUDY
A case study is a description of a business scenario. It may be comprehension passage or a
fusion of qualitative or quantitative information. This also requires candidates to analyse
the passage and draw up conclusions and implications from the facts. Candidates should
identify challenges facing the business in context as well problem solving. In this regard
candidates should read and understand the passage before tackling subsequent questions.
Candidates are expected to answer in context for maximum marks.
Contextual approach entails product, labour, competitor and country
Product context- identifying products in the context.
Labour context – examining the calibre of employees involved in the business, how they
affect or are affected by business.
Competitor context –Taking note of other competing firms. How are they a challenge?.
Country context –specify the actual location of a business that you would have referred to
for example Bowline Furniture , Adeberne Harare.

BUSINESS AND ITS ENVIRONMENT

Short structured questions

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1(a) State any three objectives of a business in your country. [2]
Survival, growth, profit maximisation, market penetration
(b)Giving examples distinguish stakeholders and shareholders in an organisation [4]
Stakeholders-Individuals with interest in the company e.g. customers,       
      competitors, suppliers.
Shareholders- Investors of the company e.g. ordinary shareholders, preference    
shareholders

2(a)Many businesses use integration as a method of growth. Explain any other two
methods of growth. [4]
takeover, acquisition

3Explain the term corporate culture [4]

-norms, beliefs and values of an organisation

4(a)State any three ways of measuring business size [3]

-number of employees, sales turnover, market share, capital employed
(b)Show the main interest of the following stakeholders of a business [4]
workforce- fair wage, job security
customers-receive high level of customer service, quality products

5(a)What do you understand by the term de-merger? [2]

Creation of two quoted companies out of an existing one, shareholders receive
      shares in the new company in proportion to shares in the old company.
(b)How does a franchisee benefit from a franchise contract? [3]
use of recognised name, advice, financial assistance, lower start up costs and
     bulk purchases on preferential terms.

6(a)Why are most governments keen to promote exports? [4]

reduce unemployment, stimulate economic growth, improve BOP
(b)Evaluate the use of import tariffs by the government of your country [6]
Benefits: protect home industry, protect employment, avoid dumping
Drawbacks :dampen the economy, imports become more expensive, retaliation
by other governments

7 Comment on the role played by primary sector in the economy of your country. [5]
employment creation, extraction and supply of raw material, stimulate economic
growth
8(a) State three reasons why small firms are of great importance in an economy. [3]
employment creation, promote entrepreneurial flair, can be subcontracted by
large firms, promote economic growth
(b)Discuss the difficulties which are common to most small firms. [5]
Lack adequate capital for expansion, face stiff competition, lack of economies
of scale
9(a) What is inflation? [2]
Is the general rise in the price levels of goods and services.
(b)Discuss the problems that are associated with a rise in inflation in an economy [5]
Stifles economic growth, shut down of firms, rise in unemployment etc
10 what do you understand by the following terms:
i. demerger [2]
ii. divestment   [2]

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 I. Is the creation of two quoted companies out of the existing one, shareholders
receiving shares in the new company in proportion to their shares in the old
company.
II. Is the selling of subsidiary companies, normally to get rid of parts of the group that
no longer fit the corporate strategy.
11 How are businesses affected by an increase in taxation? [2]
- raises the prices of goods thereby causing a contraction in demand
- reduces disposable incomes
- reduces profits available for re-investment and distribution to shareholders
- reduces willingness and ability to expand

12(a)Outline any three drawbacks of import controls [3]

-limited access to foreign goods

- reduced living standard
-protect monopolies
- reduce the volume of world trade
-triggers retaliation from others countries
-cause job losses in export industries
(b)Why are most governments keen to promote exports?   [4]
-improve the BOP
-reduce unemployment
-stimulate economic growth
-promote economic ties with other countries
-promote peace between countries
13 The free market enterprise is one of the basic economic systems. State any
two others [2]
Command economy and mixed economy
14 (a)What is a Multinational company? [2]
A company with its head office in one country and subsidiaries or branches
in more than one country
(b)Why may the government of your country limit the entry of multinational
        companies in your country. [4]
-depletion of resources
-exploitation of local labour
-distortion of local culture
-repatriation of profits to mother country
-create stiff competition to local firms
- create monopolies etc
15 Explain the influence of any two elements of macro-environment of the business
of your choice. [4]
-economic environment- inflation, level of employment, consumer income
-legal- consumer laws, labour laws etc
16How may macro-economic policies of government affect business objectives and
strategies. [4]
- taxation
- interest rates
- exchange rates
- import controls etc
17 What is de-industrialisation?
It is the decline in the importance of the secondary sector due to the growing
importance of the tertiary sector.
18(a) List three stakeholders that might wish to compare the size of one business
to another [3]
shareholders, government, customers, employees etc

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 (b) State and explain any two factors that are taken into consideration when measuring
the size of a business. [4]
-capital employed
-number of employees
-sales turnover etc
19(a)What is the importance of small business operations in your country? [4]
-contribute to GDP
-employment creation
-provide specialist services
-serve niche markets
-widen tax base for the government etc
(b) Explain difficulties faced by small firms in their operations [4]
-lack of capital
-lack of good premises
-lack of managerial expertise
-they do not enjoy economies of scale etc
20(a)State any three forms of de-integration [3]
-divestment
-de-merger
-contracting out etc
(b) Distinguish between the public sector and private sector of an economy [4]
Private sector
-owned and controlled by individuals or organisations
-profit is the main motive
-performance is evaluated through profit earned/market share etc
Public sector
-owned and controlled by the state on behalf of the public
-main aim is to provide an affordable service to the public
-performance is evaluated through achievement of a better quality life etc

21(a) What are the main causes of business failure? [3]

-lack of managerial skills
-lack of financial discipline
- stiff completion from large firms
- poor and inappropriate decisions
(b) Explain any two features of MBO programme [4]
- total commitment from top management down to the worker
-clearly defined goals
-goal compatibility
-employee participation in setting goals
-regular progress review

22 State any legal constraints that affect businesses [2]

-employment laws, consumer laws, planning laws, environmental laws, health and
safety laws
23 Identify two methods of privatisation [2]
-denationalisation
-contracting out
-sale of government assets
- deregulation
24 List any three types of businesses found in the private sector [3]
sole trader, partnership, multinational company etc
25 Explain why the government may be interested in controlling an organisation which
supplies electricity in your country. [4]
26 Identify any two factors which may influence the location of a business [2]
-management preference, infrastructure, environmental consideration, site costs etc
27 Why might some goods and services be provided by the public sector in your
country? [2]
- to avoid exploitative monopolies

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 - for political/strategic reasons eg provision of merit goods such as education and
health. and public goods such as roads .
- to enable some essential goods and services to be accessed at affordable prices
28 Identify any two factors that can cause a firm to relocate [2]
- lack of land for expansion
- dying market
- exhausted raw materials
- state or political influence
- stringent local government regulation
29(a) Outline any three problems associated with joint ventures [3]
- failure to blend cultural differences
- failure to blend different management styles
- business failure of one of the partners puts the whole project at risk
- finger pointing for errors and mistakes made
(b)Explain any two reasons for divestment [4]
- to refocus on core activities
- to avoid acquisition by a predator company.
- to raise finance to prevent it from collapsing
- to improve liquidity by selling off underperforming parts of the business
- to maintain corporate image
30[a]Give three reasons why the owner of a small business might decide to remain small in
size. [3]
- freedom and flexibility
- personal satisfaction
- secrecy –no need to disclose financial statements
- personal contact with staff and customers
- to retain control of the business
- to enjoy all profits etc
  [b]Explain how the government can intervene to assist business. [4]
- through training programmes
- through tax exemptions
- through tax relief
- subsidies
- offering loans at concessionary rates
- through development area grants etc
31 Analyse the possible impact of a rise in interest rates on firm manufacturing
technical equipment. [4]
- increases costs and reduces profits
- reduces customer borrowing hence reduces demand for goods bought on credit.
- encourages savings thereby reducing demand for technical equipment
- may lead to an appreciation of the country’s exchange rate thus imported raw
materials become cheaper and exports become expensive
32(a) Define the following terms:
(i) management buyout [2]
(ii) contracting out [2]
(i) Buying of shares by the managers of a company from the company’s shareholders
and become owner managers or buying of shares by managers from the company.
(ii) This is when an organisation cedes some of its non core activities to another
company so that it can concentrate on core competences.
(b)Distinguish between a public limited and a public corporation [2]
Public limited company
-belongs to the public sector
-profit oriented
-owned and controlled by individuals
-a large business with legal rights to sell shares to the general public
-eg OK Zimbabwe Ltd
Public corporation
-belongs to the public sector
-welfare oriented

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 -owned and controlled by the state
-financed by state
-eg ZBC
33What is meant by corporate culture? [2]
It refers to values, beliefs, traditions and attitudes of managers and workers in an
organisation that make them behave in a certain characteristic way.
34Discuss the role played by the primary sector in the economy of your country [4]
 Importance
- employment creation
- primary products can be exported and bring foreign currency into the country
- promote infrastructural development
- provision of a wide variety of a product etc
However
- can cause land degradation
- low value output
- overexploitation of non renewable resources
- some primary sector activities are life threatening eg underground mining

35(a)Distinguish between economic and political constraints [4]

Economic constraints
- restrictions that emanate from economic environment
- eg hyperinflation, high interest rates etc
Political constraints
- restrictions that emanate from political environment
- civil wars, political sanctions etc
(b)To what extent should the government be concerned about the activities of
multinational companies. [5]
Arguments for
- they outcompete the country’s infant industries
- they can meddle with the country’s internal politics
- they can exploit natural resources
- they can remit most of their profits to their mother countries etc
Arguments against
- they create employment opportunities
- they promote infrastructural development
- they increase government revenue through tax payment
- they increase the country’s GDP etc
36Analyse the conflict between business owners’ objectives and government’s objectives[4]
- business owners’ objectives is profit whilst government’s object is provision of
affordable goods and services to the public.
- business owners’ objectives is to increase output whilst government regulates
working hours for employees.
- business owners seek to establish businesses in areas that are most profitable but
the government designates areas for business operations.

PEOPLE IN THE ORGANIASTION

1 Why are some managers reluctant to delegate? [3]

-lack of delegatory skills
-fear of the unknown
  -fear of loss of control
  -lack of resources
2 Explain what Maslow meant by self actualisation and why it is placed at the top? [3]
  Reaching one’s full potential. It is only achieved after all needs have been met
3(a) State and explain any three barriers to communication [6]
   -noise

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   -attitude
   -different perception etc
(b)Explain how these barriers affect a business organisation [6]
-lack of coordination
-leads to conflicts
-loss of staff morale
-goal incompatibility etc
(c) Why is effective communication important in a firm? [3]
-staff motivation, quality ideas, quick decisions, effective coordination etc
4(a) What is a decentralised organisational structure?
Is the one in which delegation, autonomy, authority or decision making powers
      are dispersed to lower levels
(b)Explain any two disadvantages of a decentralised organisational structure. [4]
-delay in decision making
-lack of uniformity
-lack of control
5(a)Why does the government of your country intervene in the relationship between
employees and employers? [4]
-provision of safety clothing
-settling disputes
-observation of workers’ rights
(b)How is the employer expected to protect the lives of employees at work place? [4]
-ensure health and safety measures
-maintenance of equipment
-protective clothing
-training employees in safety issues
6(a) what do you understand by a wide span of control? [2]
When many subordinates report to one immediate superior
(b)Under what circumstances would management adopt a wide span of control? [3]
-when subordinates are highly skilled
-when work is relatively easy
-when work is repetitive
-when mistakes are less costly
-where there is less risk of danger
7(a)State any two indicators of poor motivation [2]
-absenteeism, accidents, grievances, poor response rate, labour turnover, poor
performance
(b)Explain any two benefits of autonomous work groups to members of the group [4]
social satisfaction, autonomy in decision making, sharing responsibility/ideas, increase
motivation etc
8(a)How might workers actively resist change? [3]
-strike, sabotage, go slow, sit in, stay away, absenteeism, intentional mistakes etc
(b)Explain any two consequences of poor organisational structure [4]
-poor communication
-lack of coordination and control
-ineffective decision making
-low motivation and morale
-poor adherence to organisational goals
-duplication of activities etc
9(a)Give any three reasons why informal communication channels are important in an
organisation. [3]
-provide a source of job related information that is not provided by formal channels.
-counter monotony at work place
-satisfy personal needs
-grapevine forces management to plan
-serves as safety valve
-senior managers can use grapevine to selectively leak information either to test reaction
or to allow an idea to develop.
(b)Explain what you understand by the ‘exploitative-authoritative system in leadership [3]
10why may fear lead to resistance to change in an organisation? [4]

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 - fear of losing power or status
fear of the unknown
- fear of losing job
- fear of being laid down
- fear of failing to cope with new challenges
11Explain any three communication problems that lie with the receiver [6]
- poor listening skills
- perception
- mental state of the receiver
- source evaluation/attitude etc
12(a)Distinguish between authority and responsibility [4]
  Authority is the right to exercise power/to give orders and responsibility is the
obligation/commitment to carry out a task in accordance with instructions received.
(b)Explain any two kinds of power which a manager may possess [4]
- legitimate power
- reward power
- coercive power
- referent power
13 What is meant by labour turnover? [2]
A number of workers moving into and out of an organisation over a period of time
14(a) What are the disadvantages of a narrow span of control? [2]
- de motivates subordinates due to excessive management involvement
- subordinates have no freedom to exercise their initiatives
- few employees make it difficult to delegate
- coordination becomes difficulty due to many managerial levels
- administration costs etc
(b)Explain any two possible sources of conflict in an organisation [4]
- different objectives
- different perception
- different views
- organisational ambiguities
- workflow interdependence
- sharing of scarce resources etc
15Expalin the benefits to an organisation of having a motivated staff. [4]
- lower absenteeism
- high productivity levels
- improved quality with less waste
- greater willingness to cooperate and execute duties
- greater willingness to accept rather than resist change
- greater willingness to contribute ideas and take on responsibility
- lower labour turnover etc
16 Show the purpose of the following forms of communication [6]
(a) downward communication
-to give orders, instruction, assign task, communicate goals
(b) upward communication
-report back, express views, seek clarification etc
(c) horizontal communication
-to coordinate, solve problems, offer advice, share ideas etc
17(a) What is a training programme? [2]
Is a process designed to maintain or improve current job performance.
(b)State and explain any two possible reasons for high labour turnover in an
       organisation. [4]
- lack of job security
- poor management style
- poor working conditions etc
18Explain any two features of effective Management By Objectives programme [4]
- total commitment form top management down to the worker
- clearly defined goals
- employee participation in setting goals

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 - regular review to appraise progress towards the objectives
- objectives set by individual managers and their staff are related to the organisation’s
goals
19Explain any three benefits of formal meetings in an organisation. [6]
- provides immediate feedback
- exchange new ideas
- motivates individuals
- clarification of objectives
- promote and maintain sustainability
20(a)What is an organisational chart? [2]
- it is a pictorial or diagrammatical representation of the organisational structure.
(b)Outline any three essential organisational elements that can be identified on the
organisation chart . [3]
- departmentation
- span of control
- lines of communication
- chain of command
- delegation of authority
- hierarchical levels etc
21 Comment on the importance of training to an organisation [5]
Benefits
- greater worker flexibility, reduced labour turnover, increased productivity, greater
output, improved motivation, more promotional prospects, reduced waste etc
drawbacks
- can be very expensive to train, costly mistakes by trainees, loss of production
during training periods etc
22Outline the ways in which the government might provide employee protection in your    
country. [4]
- minimum wage, health and safety at work, no discrimination etc
23How do the following non financial factors motivate employees?
(a)teamwork [2]
- counters monotony, sharing ideas, social networks, etc
(b)training [2]
- self development, improved efficiency, job security, increased output etc
24Explain the importance of effective communication in an organisation [4]
- attainment of goals, less conflicts, increased motivation etc
25(a)What are the main causes of labour turnover? [4]
- poor working conditions, inadequate salary, lack of security, lack of promotional
prospects, unclear company policies, hostile relationship with superiors etc
(b)How might management reduce high labour turnover? [4]
- improve working conditions, overhaul the pay structure, effective
communication, promote group morale and cohesiveness etc
26(a)How useful is oral communication in an organisation? [4]
  Advantages
- direct, easy to understand, allows immediate feedback, can be varied to suit the
needs of the receiver, allows questions, emphasis by use of gestures
Disadvantages
- need to listen carefully, affected by noise, can be quickly forgotten, affected by
distance, affected by perception, no written record etc
(b)Comment on the importance of trade unions in employer/employee relationship. [4]
Positive
- collective bargaining, legal representation, facilitating communication, enforcing
agreed policies, etc
Negative
- may make unrealistic demands, may cause strikes etc
27(a)Distinguish between Douglas McGregor’s Theory X and Y. [4]
  Theory X assumes that an average human being:
- inherently dislikes work
- is not ambitious

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 - needs coercion
- avoids responsibility whenever possible
- is lazy
Theory Y assumes that:
- workers view work as natural as play/rest
- workers are ambitious
- workers can exercise self direction and control in the attainment of organisational
goals
- accepts responsibility
- is hardworking
(b)How might the difference in the two theories be reflected in the leadership styles of
managers [4]
Theory X is normally revealed through:
- autocratic leadership style
- no delegation
- one way communication
- centralisation
- coercion and punishment
Theory Y is normally revealed through:
- democratic leadership style
- delegation
- two way communication
- decentralisation
- consultation and participation etc
28(a)Define line relationship       [2]
- vertical relationship between a superior and a subordinate
- a relationship between a subordinate and a superior in a scalar chain.
(b)Evaluate the relationship between line mangers and staff managers       [4]
Positive
- staff can offer specialist advice
- staff can offer a supportive role that frees up line managers
- cross pollination of ideas etc
Negative
- friction may result
- confusion over authority
- resentment and frustration etc
29 Does job rotation really motivate workers? [4]
     Benefits
- reduces monotony
- increases experience
- increases flexibility of workforce
- increases variety of work by switching form one job to another
Limitations
- does not increase empowerment and responsibility
- does not satisfy a worker with a complete unit of work etc
30 What are the effects of poor communication on industrial relations? [4]
- low morale, conflict, lack of control, low cooperation etc
31 Explain any two communication problems that are beyond the receivers control [4]
- use of technical jargon, environmental noise, technological failure, network
problems, inconsistent symbols etc
32(a) State and explain any two non financial methods of motivation [4]
- job security, Quality Circles, job enlargement, job rotation, job enrichment,
delegation, MBO, promotional prospects etc
 (b)Comment on Herzberg’s ideas on motivation. [5]

 Hygiene factors
 Motivating factors
Comment
- One man’s hygiene factor can be another man’s motivator

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 - If managers fail to provide motivators at least they must keep on providing hygiene
factors e.g. bonuses, increase in salaries and allowances etc
- If motivators are lacking productivity will fall e.g. promotional prospects, delegation,
recognition, team working etc
33 Is democratic leadership style necessarily a good management style? [4]
Advantages
- motivates workers non financially
- improves effective communication that is two way
- encourages worker initiatives
- improves the quality of decision making
- improves rapport between managers and workers
Drawbacks
- consultation with staff can be time consuming
- managers might risking losing control.
- some issues might be too sensitive to require involvement.
- cannot work when job is unpleasant e.g.45 maintaining burst sewer pipes etc
34How might a saw milling firm benefit from training? [4]
- skill shortage would be the thing of the past
- quality planks would be produced
- increase in productivity
- ability to use chain saws skilfully
- reduction in work related accidents
35(a)What is the difference between leadership and management? [2]
- leadership is the process of influencing subordinates’ behaviour to achieve
organisational objectives.
- Management is a process of planning, organising, leading and controlling to achieve
organisational goals.
(b)Evaluate the effectiveness of autocratic leadership. [4]
  Advantages
- quick and orderly performance.
- managers have no risk of losing control
- applicable in uniformed forces like defence.
- useful when task is unpleasant
- works well when subordinates are lazy
- works well where urgency is required etc
(b)Disadvantages
- it de motivates subordinates
- it stifles worker imitativeness
- decisions do not benefit from staff input etc
36(a)State any two communication barriers that lie with the sender [2]
- use of technical jargon
- distrust
- use of ambiguous words
- mismatch between verbal and non verbal communication etc
(b)Explain the limitations of vertical communication in a tall organisational structure[4]
- information can be filtered
- information can be halted
- information can be modified
- information can be delayed
37(a)Outline any two advantages of internal recruitment. [2]
- applicants are already familiar with the organisations there is minimum induction
training.
- cheaper than using external advertising and recruitment agencies.
- is quicker than external recruitment.
- applicants may be already known to the selection team.
- motivates staff etc
(b)Identify any two human problems that may arise by using computers for business
communication
- may cause health problems e.g. eye sight, headache etc

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 - staff end up using company time on social networks
- results in redundancy e.g. messengers
- diminishes personal contact etc
(c)Give any two factors which influence the extent of decentralisation [2]
- organisational culture
- size of the organisation
- calibre of employees
- complexity of the job/task
- managerial philosophy etc
38(a)Explain any two ways of minimising conflict between the management and the
workforce of a cement manufacturing firm. [4]
- management should set clear objectives
- improving working conditions and remuneration
- involving workers in decision making
- enhancing communication etc
(b)Mr Tom is a large a large scale tobacco farmer. Advise Mr Tom on the importance of
workforce planning. [5]
  Importance
- helps in setting out employee requirements to prevent unforeseen difficulties.
- helps in the preparation of future plans
- reduces production stoppages when in season.
- reduces costs of holding on to idle labour in off seasons
- enables him time to recruit the rightful people.
(b)Limitations
- farming seasons are dynamic in nature and hence planning becomes ineffective.
- increased competition in the market may make the business vulnerable to the
poaching of key staff.
- salaries may not remain static making budgets to be ineffective.
- Planning is time consuming and rigid.

MARKETING
1(a)Define the term market share. [2]
A proportion of the total market supplied by the firm.
(b)Explain any two factors that influence pricing decisions. [4]
demand, cost of production, market conditions, level of competition etc
2(a)What is the difference between money market and capital market. [2]
Money market-is used for short term loan/assets usually for up to one year.
Capital market-is used for long term loan/assets e.g. debentures, issue of shares
(b)State any three functions of the Stock Exchange of your country. [3]
monitoring performance of companies, listing companies, delisting companies etc
3(a)What is forecasting?   [2]
    Is an attempt to predict the future behaviour of a variable.
Refers to projection/prediction of future events.
(b)State any three situations in which forecasting can be useful.   [3]
budgeting, cost projection, stock control, manpower planning, investment appraisal,
planning production schedules etc
4How might branding help in the successful marketing of a product?      [3]
differentiates the product from rivals, aids identification, creates consumer loyalty etc

5 Pardon Electronics Ltd is a multinational company planning to introduce a new brand of

mobile phones in Zimbabwe. Advise the firm on any two possible pricing strategies to
adopt. [6]
  Skimming-high introductory price to cover R&D costs.
Penetration – low introductory price to gain market share
6Describe any three different types of non probability sampling techniques. [6]

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 quota sampling, multi-stage sampling, cluster sampling, convenience sampling
7(a)What is the difference between desk and field research? [2]
Desk research
- research based on secondary sources
- collection and analysis of data from existing information within the organisation.
Field research
- research based on primary sources
- collection of original data by means of surveys, observations ,interviews etc
(b)What can a firm do to extend the life cycle of a product? [6]
Modifying the product, repositioning, rebranding, repackaging etc
8(a)Distinguish between marketing and selling. [4]
Marketing
- market oriented
- profit oriented
- focuses on tomorrow’s products and future growth.
Selling
- product oriented
- sales volume oriented
- focuses on today’s products and markets
(b)Explain any two factors that influence demand for a demand. [4]
price of the product, level of income, advertising, price of substitutes etc
9(a)What are the physical attributes of a product ?. [3]
shape, weight, colour, height, packaging, texture, size, brand name, label etc

9(b)Evaluate the usefulness of desk research? [4]

Advantages
- inexpensive
- avoids repeating effort
- quick to obtain
- easier to establish trends
- cost effective and preserves complete confidentiality
Drawbacks
- often out of date
- might not be available
- coverage may be inappropriate
- problems of interpretation
10How might a marketing manager segment a market for shoes? [4]
lifestyle, age, sex, income, occupation, location, level of education
11Explain the benefits of competition to consumers. [4]
low prices , variety, quality products, improved customer service etc
12 State two reasons why the market for a product might decline in size. [2]
     technological changes, cultural influences, stiff competition, demographic changes and
changes in tastes and preference etc
13(a)Other than price, what other factors could cause an increase in the demand for
mobile phones? [2]
- image of mobile phones as fashion items.
- technological product development
- response to successful marketing etc
(b)A business sells a product whose demand is relatively price inelastic.
Explain the effects on sales and revenue of a price increase [3]
- revenue will rise .
- fall in sales
- fall in demand resulting in an increase in sales revenue.
14(a)Define the term product portfolio [2]
Refers to a range of different products which a company offers in a given market as
opposed to a single product firm.
(b)Explain the importance of the product life cycle in planning a product portfolio. [4]
- to enhance continuity/survival
- when to introduce new product

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 - avoid having too many products in decline stage
- avoid problems of funding too many new products
- avoid funding expensive extension strategies.
15(a)Identify the strategies that a firm can adopt given the following situations according to
the Ansoff Matrix:
(i) selling the present product in the present market
(ii) selling the existing product in a new market
(iii) selling a new product to the existing market
(iv) selling a new product to a new market [4]
(i)market penetration
ii market development/extension
iii product development
iv diversification
(b)Distinguish between marginal pricing and perceived value pricing [4]
Marginal pricing
- cost based pricing system
- considers variable costs only and ignores fixed costs
Perceived pricing
- customer value based pricing system
- a price is charged based on the consumer’s perception about the product
16(a)What is niche marketing? [2]
Is identifying and exploiting a small segment of a large market by developing products
     to suit it.

(b)Evaluate the usefulness of market skimming. [4]

Advantages
- quickly covers R&D costs
- maximises profits in the short run before new rivals
- attracts those customers who associate price with quality.
- works well when demand is inelastic.
Disadvantages
- discriminates low income earners.
- attracts stiff competition due to initial high profits
- does not work when demand is elastic.
17(a) Explain how a manufacturer of soft drinks might find price elasticity of demand     
useful. [3]
- assists him in pricing decisions i.e. a lower price when demand is elastic and
increase the price when demand is inelastic.
- helps him know the nature of his soft drinks i.e. whether necessity or luxury
- assist in making more accurate sales forecast.
- market segmentation
- price discrimination
- production planning and inventory control
(b)The following information shows the effect of a price change, from $10 to $15 to a
product produced by Nyakunika Ltd:

Price $ Expenditure on advertising $ Sales $

10 5000 20000
15 6000 22000

Calculate the promotional elasticity of demand for this product. [2]

Prom Ed = % change in Demand
%Change in promotional spending
=10%
20%
=0,5
18(a)Explain the two classes under which products are grouped. [4]
Consumer goods-goods that satisfy the end user directly e.g. bath soap

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 Capital goods- goods that are used to produce other goods e.g. grinding mill
(b)Why might a clothes manufacturer firm be prepared to sell its product at a price
below the total cost of producing it?
- when the good is now a dog
- when the good is used as loss leader
- when demand is elastic
- when the manufacturer wants to fight competition
- the goods might be out of fashion/obsolete or out of season
19(a)Identify any two forms of promotion. [2]
advertising, personal selling etc
(b)What is
(i) a unique selling point? [2]
(ii) a consumer profile? [2]
(i) a unique selling point refers to the special feature of a product that
differentiates it from competitors’ product
ii a consumer profile refers to a quantified picture of consumers of a
firm’s products, showing proportions of age groups, income
levels, location, gender and social class.
20Distinguish between competitive pricing and marginal cost pricing. [4]
Competitive pricing
- competitor based pricing
- tackling the price leader by setting the slightly higher .
- only essential for price takers
Marginal cost pricing
- cost based pricing
- price based on variable costs only and ignores fixed costs.
21 How useful is the internet in the distribution of the firm’s products.? [4]
- provides cheap and efficient long distance communication.
- access to a much larger potential market
- online ordering is cheaper than paper work based.
- quicker communication between suppliers and buyers
- better customer service
Disadvantages
- information is given away free of charge.
- it can be slow both to connect to and use
- it can produce information overload
- employees can waste valuable time surfing the “net”
22Explain any two factors that influence the level of Research and Development [4]
Nature of the product, risk profile, corporate culture, business expectation, budget etc
23 A business has decided to increase the price of a product from $1 to $1,20. As a result
sales fell from 1200 to 900 per week.
Calculate the price elasticity of demand for a product. [3]
PED = % in Qty D
% in price
= 300 x 100
1200 1
0,2 x 100
1 1
PED =1,25 elastic

PRODUCTION

1(a)State any three factors a firm has to consider when choosing a supplier [3]
    quality, price, flexibility, delivery speed, reliability, availability of supplies etc
(b)Outline any two qualitative and two quantitative benefits derived from Quality Circles.
Qualitative benefits
- improved working conditions.
- improved attitudes

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 - reduction in interpersonal conflicts.
- increased personal growth
- increased motivation and morale etc
Quantitative benefits
- reduction in rework costs
- increased productivity
- increased output
- decline in the number of accidents
- reduction in customer complaints
- improved quality etc
2(a)Distinguish between fixed and variable costs [4]
Fixed costs do not vary with the level of output. They remain constant whatever level of
output e.g. insurance, rent etc
Variable costs change with the level output, eg costs of raw material, fuel, electricity etc
(b)Graphically illustrate the following
(i) breakeven point
(ii) margin of safety [6]

cost/revenue
TR

BEP TC

FC

MOS

O BEP output current/expected output

3(a)Stock normally takes three forms. Which are they? [3]

Raw material, W.I.P and Finished goods
(b)Explain the role of stock. [4]
- to ensure that goods are available for dispatch.
- to minimise cost of holding stock while maintain adequate stock levels
- to control cash tied up in stock
- for valuation purposes etc
4Explain two ways in which a football club might reduce its breakeven level. [4]
- raising the price-if price is increased more revenue will be generated and total costs
remain the same.
- cutting costs by reducing variable costs e.g. players’ wages. etc
5(a)What is quality control? [2]
Refers to techniques, processes or policies practised by a firm to maintain a desirable
level of quality of operations or products and is based on inspection of inputs,
processing and the final product
(b)Explain two benefits of quality control [4]
- reduction in rework costs
- prevention of further waste
- customer satisfaction
- increase demand etc
6(a)Define the term lean production [2]
Refers to range of practices meant to reduce waste, costs and maximise quality. These
include JIT philosophy, Kaizen, Quality Circles, TQM etc
(b)Explain any two practices used in lean production. [4]

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 JIT, Kanban,Kaizen,Quality circles, TQM,Cell production, simultaneous engineering etc
7(a)Define batch production [2]
Production of goods in groups/separate lots, each item in the group of products passes
through each stage of production together.
(b)Explain one advantage and one disadvantage of batch production. [4]
Advantages
- economies of scale
- faster and lower unit costs than job production
- each batch can be matched with demand.
Drawbacks
- high stock holding costs
- change over between batches implies idle time, resources, equipment.
- work maybe boring and de motivating for workers
8(a)What is meant by the term quality? [2]
Is fitness for the purpose. Is the standard of a product or service when compared to
other products or service.
(b)Distinguish between quality control and quality assurance. [3]
Quality control is the practice of checking the quality of a product by checking samples
and quality assurance involves preventive measures to overcome quality problems by
training employees about quality and good investment in machines.
9Explain the circumstances in which large scale production might lead to increasing unit
costs. [4]
Increasing unit costs may arise when it expands beyond size and it faces management
problems, slow decision making, communication problems, complexity in coordination etc
10 (a)State any two methods of stock control [2]
J I T, stock control chart, two bin system, EOQ, Just In Case system ,computerised    
stock control system.
(b)How might the production manager of a detergent company find
        benchmarking useful. [4]
- It is a faster and cheaper way of solving problems
- Can assist the firm to increase international competitiveness.
- It gives room for worker participation leading to better ideas and increased
motivation.
- Areas of improvement on detergents are identified etc
11How might a saw milling benefit from training. [4]
- skill shortage will be thing of the past.
- quality planks will be produced
- ability to use chain saws skilfully
- reduction in work related accidents
- increase in productivity
12(a)List any two factors which might influence the relocation of a shoe manufacturer. [2]
- exhaustion of raw materials/hides
- stiff competition
- dwindling market, political and economic instability etc
(b)Evaluate the usefulness of the flow production method. [4]
Advantages
- exploitation of economies of scale e.g. bulk buying
- ability to satisfy growing demand
- no production bottlenecks caused by shortages.
- machines and workers would not lie idle
Disadvantages
- high set up costs
- more capital is needed since it is capital intensive
- high stock holding costs
- method is inflexible
13(a)Define work study. [2]
Is a series of techniques used to determine the most efficient way of labour in relation to
other inputs in the productive process.

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 (b)Comment upon the appropriateness of using a work study programme by a timber
manufacturing firm which is facing a high labour turnover problem. [4]
Advantages
- establishes basis for incentive payments
- establishes time that can be spent on each job to avoid work load
- improves utilisation and safety of equipment and materials
- establishes easier methods of doing work
- improves flow of work
- work is spread evenly among the employees
Limitations
- time consuming.
- requires participation by motivated staff
- mistrust by the employees thereby worsening the problem.
14 What are the advantages of line production to a company that manufactures soft        
drinks? [4]
- high productivity due to intensive use of machinery.
- low unit costs as a result of mass production
- less industrial disputes as a result of more work being done by machines
- ability to meet increase in demand
15(a)What is benchmarking? [2]
It is when management identifies the best firm in the industry and then compares the
performance standards for improvement purposes.
(b)Asses the significance of maintaining quality in a business organisation. [5]
Benefits
- reduction of liability claims
- good publicity e.g. from consumer pressure groups.
- attracts a large customer base
- improves the firm’s corporate image/reputation
- reduced promotional costs etc
Limitations
- high training costs
- inspection and checking costs
- material costs e.g. sourcing quality raw materials
- reworking defective products is costly and consumes time
16Explain the costs associated with:
(a) holding stocks [3]
(b) holding inadequate stocks
    (a)deterioration, obsolescence, warehousing costs, pilferage, capital tied up in stock.
   (b)lost sales, production bottlenecks, idle production resources, loss of customer good will
etc
17(a)Under what circumstances would Quality Circles be effective? [3]
  when members are volunteers, when members are committed, full support from
management, when members participate in implementing recommendations.
(b)Explain two qualitative factors influencing location decisions [4]
infrastructure, management preference, environmental and planning consideration .
18Explain any two methods used to monitor and ensure quality of products. [4]
statistical approach, zero defects, quality circles, TQM, benchmarking etc

19(a)A company manufactures product X and the following data is shown:

Direct costs per unit $70
Overheads $50000
Current output 120000units
Selling price $140
Full capacity output 150000units
From the above information, calculate the company’s capacity utilisation. [2]

Capacity utilisation= Actual/current output X 100

  Full capacity output
.

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                             = 120000 X 100
150000
=80%
(b)(i)State two ways in which a business may achieve added value. [2]
product design, packaging, branding, promoting a product, cost reduction etc
(ii)why is added value more important for a business? [4]
- improves corporate image
- encourages repeat purchases
- promotes customer loyalty
- contributes to higher profitability
- allows the firm to market its products more successfully. etc
20(a)Job production is one method of production. State two others. [2]
(b)Under what circumstances do you think job production would be best the best
method? [5]
(a)batch and flow
(b)Is used when the product is a single item to be made under specification eg tailoring of
a shirt. Clothes ,furniture are made on specific orders.

BUSINESS FINANCE AND ACCOUNTING

1((a)Define the term gearing. [3]

Is the extent to which a firm is financed by debt. It can be high or low gearing.
(b)What is the importance of gearing to any two stakeholders of a firm? [3]
Managers—determining choice of finance
Investors----making investment decisions
Bank ----- deciding whether to advance a loan
2(a)Define the term investment appraisal. [2]
Refers to evaluating the profitability and viability of a project and determine which
project to choose.

(b)What are the advantages of NPV over payback period as investment appraisal?. [4]
NPV----Takes into account time value of money.
considers both cash flows
Payback—Does not take into account the time value of money.
Does not consider profitability after payback
Only considers the costs
3State any two cost based pricing methods. [2]
absorption cost pricing, contribution cost pricing, mark up pricing.
4The purchase price of an asset is $600000 and annual depreciation using the straight line
method is $80000.

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 (a)Calculate the Net book value after 4 years. [2]
(b)The expected life of the asset using residual value of $200000 [2]
(a)NBV =Cost – total depreciation
= 600000 – (80000 x 4)
=$280000
(b)Annual depreciation =Cost – Residual value
Expected life
80000 = 600000 -200000
x
80000x = 400000
x  = 5 yrs
5(a)Explain any two factors which influence choice of finance [4]
relative cost, tax implications, terms and repayment period, purpose, effects on control
of business, availability of different sources, risk involved
(b)What might be the advantages and disadvantages of high gearing? [4]
Advantages
- capital is increased without diluting equity, control and ownership.
- interest on loan is an expense for tax purposes
- increased opportunities for equity shareholders.
Disadvantages
- assets will be pledged thus reducing control over them.
- reduces prospective creditors’ willingness to grant further loans.
- no or little funds are aside as retained profits.
- increased risk of company failure.
- increased risk for shareholders
6 A cinema hall has a capacity of 150 people and conducts one session per day. The daily
costs of maintaining the hall amount to $600 and an extra $30 in costs is required for
each cinema goer.
Given that the admission fee is $60, calculate:
(a) the break-even number of cinema goers per day, [3]
(b) the number of cinema goers required to make a 60% profit on cost. [5]
.
(a) BEP = Fixed Cost
Contribution/ unit
= 600
60 - 30

= 20 Cinema goers
(b) Let the number of cinema goers be x
x = FC + Target Profit
Contribution / unit
x = 600 + 0.6(600+30x)
30
30x = 600 + 360 + 18x
12x = 960
x =80

(7)Comment on the usefulness of any two long term sources of finance [6]

(7) Share capital

Advantages

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 - can raise large amounts of money
- no interest paid especially on ordinary shares
- preference shares can be redeemed if financial situation improves

Disadvantages

- dividends are paid after tax

- preference shareholder`s dividends are paid even if the firm made some losses

Debentures

Advantages

- does not dilute equity

- have no voting rights

Disadvantages

- debenture interest must be paid even when losses are made

- may cause liquidity problems at the time they are redeemed

Mortgage loans

Advantages

- used to acquire fixed assets

- has a fixed interest rate
- asset may be used earn revenue

Disadvantages

- interest has to be paid despite having made a profit/loss

- secured on fixed assets
- increases the gearing

(8)(a)Discuss the value and limitations of the payback method in investment appraisal [6]

Benefits

- quick screening device

- emphasise liquidity-calculations based exclusively on cash flows
- reduces risks-recovers outlay most quickly
- earlier cash flows can be predicted more accurately than later ones
- appropriate in environments of rapid technological change
- etc

Limitations

- ignores cash flows after pay back

- ignores overall profitability of the project
- ignores time value of money etc

(b)The following is an extract from the balance sheet of D & R Ltd

$ $ $

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 Intangible assets 3 200

Current Assets

Stock 28 000

Debtors 22 000

Cash 6 000

56 000

Less: current liabilities

Creditors 8 000

Dividends 22 000

30 000

(i) Using different ratios calculate the liquidity position of the firm [4]
(ii) comment on this liquidity position [4]
current asset ratio =current assets
current liabilities
= 56000
30000
= 1.9 :1
Acid test ratio = current assets – stock
current liabilities
=56000 – 28000
30000
= 0.9 :1
The firm is able to meet its short term obligations

(10)Explain each of the following terms:

(i) undercapitalisation [2]

Occurs when too much money is tied up in fixed assets or apparent profits are taken
out of the business before the cash has been received.
(ii) overtrading [2]
excessively rapid growth with insufficient working capital. Occurs when a business
attempts to expand rapidly from an inadequate financial base resulting in increased
borrowing and taking long to repay debts
(iii) working capital [2]
Is the difference between current assets and current liabilities.

(11)State two sources of internal and two sources of external finance of a firm [4]

Internal sources

- rights issue, sale of surplus assets , profits, personal savings, etc

External sources

- ordinary share capital ,debt factoring, leasing, debenture ,trade credit, long term
loan, venture capital, hire purchases ,etc

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(b)Outline the factors considered by a firm when sourcing finance [4]

- the purpose, cost of acquiring funds, duration of payment, risk incurred ,present
structure of the firm, availability of sources, etc

(12)To what extent are published accounts of a firm useful to a potential investor [4]

Importance

-They enable the potential investor to;

- See how profitable the firm is

- see the value of the firm’s assets and liabilities
- decide whether to invest in it or not etc

Limitations

-They do not show the qualitative (non-qualitative) issues of the business e.g. workers` level
of motivation, economic effects (e.g. inflation) level of competition, skills of workers etc

-Information is historic (outdated), reflecting past performance and position etc

(13a)What application does, marginal (contribution) costing has on decision-making in an

organisation [3]

Management problems that are best analysed with marginal costing technique are :

- -Is a subsidiary profitable

- -Does the product have a positive contribution
- -Is a product profitable
- -how should we price the product
- -should we make or buy a component
- -Should we suspend or shut down the activities of a branch, factory or subsidiary
- -Can we give a discount on this product so that we have a loss leader

(b)Show the difference between debt and equity financing [4]

Debt financing Equity financing

- Debt funds are borrowed from
outside lenders
- Debts have fixed maturity dates
- Interest is paid for the use of funds
(interest rate is fixed)
- Lenders have no voting rights and
thus no voice in management
ORA e.g debentures
- Equity funds are obtained from the
present owners or from the
public(issue of shares), ordinary
shares
- Shares have no maturity dates
- Dividends are paid if profits are made
at the discretion of the B.O.D (Board
Of Directors)
- Ordinary shareholders have voting
rights and a voice in management e.g
rights issue

(14)Explain two advantages of debt financing [4]

- No shares are sold, hence ownership is not diluted

- loans will be repaid eventually, hence no permanent increase in liabilities of the
business
- lenders have no voting rights at the annual or general meetings or no control

209
 - interest is an expense which is tax deductible
- Possibility of raising additional future capital through issuing shares

(15)Comment on any three limitations of ratio analysis [6]

- Calculations are time consuming and require mathematically sound managers

- One ratio result is not very useful-unless a comparison is done(either year or inter-
firm)
- Inter-firm comparisons may be difficult due to differences in year ends or products
mixes
- different firms may use different methods e.g. depreciation/stock valuation
- trend analysis might be affected by changes in economic environment e.g. economic
recession
- ignore non-quantitative factors e.g. competition
- Historic in nature and may be outdated
- ratios may have been drawn from window-dressed figures

(16)Evaluate any two methods of improving cash flows in an organisation [6]

- Sale of idle of fixed assets

- Delay payment of suppliers
- Reduce or delay capital spending
- Reduce debtor period and/insist on cash payment from customers
- Rent or lease capital equipment rather than outright purchase
- Obtain overdraft or short-term loan
- Debt factoring ( invoice discounting)

(17)ABC Ltd accepts all investments which pay back the initial capital outlay within three
years

Project X $(000)

Initial investment 4000

Net return ; Year 1 800

Year 2 1000

Year 3 1 500

Year 4 1 400

Year 5 1 650

Year 6 1 700

Year 7 1750

(a)Using the payback method, should ABC Ltd accept the project [2]

210
 - 3 1/2 yrs
- should not be accepted because it does not meet the criterion set

(b)Explain why the payback method may not be a good way of deciding whether to invest in
this project. [4]

- Ignores the time value of money

- Ignores all cash flows after payback period
- Ignores the overall profitability of the project

(c)Recommend any other method ABC Ltd could use [2]

NPV (1)- to cater for time value of money (i)

OR

- ARR (1) to cater for overall profitability of the project(1)

- accounting profits familiar to most business people

IRR –time value of money

17[a]Distinguish between assets and liabilities of business [4]

- assets are what a company owns e.g. motor vehicle etc

- liabilities are what a company owes e.g. mortgage

[b]Explain why businesses depreciate their fixed assets [3]

- to spread the cost of the asset over its useful life rather than take full amount in
the year of purchase [ matching concept ]
- it is a fairer way treating fixed assets and it helps to avoid overstating profits or
fixed assets [prudence concept]

18[a]Name any two sources of short term external finance [2]

- bank overdraft, trade credits, debt factoring ,bill discounting

[b]Local bakery firm is planning to purchase the latest model of machinery which cost $48
000.Its gearing ratio stands at 60% .

[i] To what extent is the payback period useful as an investment appraisal technique? [4]

Benefits

- A quick screening method against :

[i] preset time allowed for payback
[ii] alternative machines that could be available
- an early return quickly improves liquidity
- less risk as early returns are more certain than in the long run

Limitations

- it ignores the timing returns prior to payback

- ignores earnings after payback
- discriminates against investments that involve a long payback period but profitable
in the long run

211
 [ii]Discuss the significance of the firm’s gearing ratio [4]

Advantages

- increased opportunities for equity shareholders

- company increases capital without diluting equity
- interests are paid before tax

Disadvantages

- increased risk of insolvency

- increased risk of company failure
- reduces prospective creditors’ willingness to grant further loans
- dividends can fluctuate

19[a] Identify any two stakeholders who are interested in the accounts of a firm [2]

- financial institutions , managers ,employees, creditors , shareholders ,government ,

competitors, potential investors / shareholders ,customers

[b] Define the following terms:

(i) zero budgeting

- it is a budgeting process in which activities are analysed as if they are being started
for the first time
[ii] cost centre
- is a section of a business such as a department /product / process to which cost
can be allocated or charged

20 Distinguish between money market and capital market [4]

MONEY MARKET

- is a financial market were short term funds are raised e.g. treasury bill
- funds can be used for day to day business activities e.g. buying stock
- e.g. overdraft

CAPITAL MARKET

- is financial market were long term funds are raised e.g. mortgage/ debentures
- funds can be used for capital expenditure
- e.g. debentures

21[a]What are the functions of stock exchange [3]

- listing companies
- delisting companies
- provides a secondary market for shares
- facilitates the raising of long term capital for listed companies
- provides a code of conduct for stock exchange players
- provides information to investors on daily indices
- provides information on other stock exchanges

(b)For what reasons might a business make provisions for

[i]bad debts [2]

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 - to avoid overstating profits-according to prudence concept
- to ascertain a fair value for debtors in the balance sheet

[ii] Depreciation [2]

- to avoid overstating profits according to the prudence concept

- to ascertain a fair value for fixed assets
- to set aside funds to replace fixed assets

(22(a)) Explain the importance of contribution costing in decision-making [4]

- pricing decisions
- make or buy decisions
[b] K .Flow Miners Ltd is bound to make an investment decision , choosing between two
projects: that is project A and project B

Under which circumstances would K Flow Miners Ltd choose to invest in project B whose
internal rate of return is 12% [4]
When IRR is greater than criteria 12%
23(a)Give any two examples of internal users of financial information. [2]
   managers, employees
  (b)A firm buys a machine worth $20000. Its expected useful life is 5 years and has a       
residual value of $1000.
Calculate the depreciation charge for the machine in year four using.
(i) the straight line method. [2]
(ii) the reducing balance method at 20% pa [3]

Using straight method: Dep = Cost –Residual value

Life span
=20000 -1000
5
= $ 3800 pa

Using reducing balance method:

  Year 1 Cost 20000
         Depreciation 20% of 20000 ( 4000)
16000

    Year 2 Depreciation 20% of 16000 ( 3200)

12800
Year 3 Depreciation 20% of 12800 ( 2560)
10240
Year 4 Depreciation 20% of 10240 ( 2048)
8192

24(a)Suggest any two appropriate sources of internal finance available to a business. [2]
sale of fixed assets, ploughed back profits
(b)How useful is the ARR method in appraising investments? [4]
Advantages
- It focuses on profitability ,which is the central objective of many businesses.
- The results can be assessed against predetermined criteria of the business.
Disadvantages
- It ignores the timing of cash flows. All money is treated as being equal irrespective of
when it is received.
- It uses profit as a measure of return and in accounting terms this is not the same as
cash flows into and out of the business.
25State and explain any three groups of accounting ratios [6]
Liquidity ratios—assess the ability of the firm to meet short term financial obligation eg

213
 current asset ratio.
Profitability ratios--assess how successful managers of a business have been at earning
profits from sales and from assets employed. eg gross profit margin
Efficiency ratio—assess how effective the resources or assets of a business are being
used. eg rate of stock turn.
26 A firm has four departments whose profits and losses are shown in the statement below.
Dept A($000) Dept B($000) Dept C($000) Dept D($000) Total
Sales 300 400 150 100 950
Total costs 250 450 110 80 890
Profit/loss 50 (50) 40 20 60
Fixed costs amounted to $300000 and these are equally shared by the four departments.
(a)Show the difference between profit and contribution. [2]
Profit is the difference between revenue and costs, belongs to owners and can be either
net or gross. Contribution is the difference between sales and variable costs eg for
Dept A 300000 – 175000 =125000
(b)Calculate the contribution of any two departments. [4]
Dept A 300000-(250000 – 75000) = 125000
Dept B 400000-(450000 – 75000) = 25000
27(a)Name any two types of ratios used in business. [2]
current asset and acid test
(b)An analysis of a small firm’s accounts discloses an acid test ratio of 0:4 and a current a
current ratio of 1:1
Comment on the financial position of this firm.
The firm has liquidity problems. It cannot meet its short term obligations.

INFORMATION FOR DECISION MAKING

1Outline the benefits and drawbacks of mode as a measure of central tendency. [4]
Advantages
- is not affected by extreme values
- it is very useful for business planning and in advertising eg segmenting potential
markets basing on mode eg type of occupation, gender etc
Disadvantages
- there may be no mode in a distribution eg every value is repeated the same number
of times.
- distribution with more than one mode are difficult to interpret and compare.
2To what extent are probability tree diagrams useful in decision making? [4]
Advantages
- permits the decision maker to look ahead of the implications of his initial decisions
- the quantification of outcomes helps to improve decision making.
- can be easily combined with other methods.
- new ideas or alternatives may be discovered.
- assists in careful analysis of multiple courses of action.
Drawbacks
- can be time consuming
- probabilities can be biased
- ignore non quantitative factors which are equally important in decision making.
3Shouild managers always use quantitative techniques only in decision making? [4]
Benefits
- new ideas or alternatives may be discovered.
- quantification of outcomes helps to improve decision making.
Drawbacks
- may be difficult to quantify outcomes
- qualitative factors like motivation must be taken into consideration.
4a (i)The following are marks obtained by Business Studies students in a given test.
60, 50, 70, 60, 80, 40, 30, 10, 60, 90, 20, 40, 60, 80, 90
From the given are of marks distinguish between the mode and the mean. [4]
- mode refers to the value or number with the highest frequency in a given set of data
e.g. 60 is the mode because it appearing the most i.e. four times

214
 - mean refers to the average of a distribution eg 840 = 56
15
(ii)How useful is the mode in making stockholding decisions?
[3]
Advantages
-is more realistic
-has more practical uses ie holding stocks with high turnover
Disadvantages
- may not be well defined
- does not include all variables
5The following are the monthly quantities of chairs manufactured by Chile Private Limited
in 2008.
Month Jan Feb Mar April May Jun July Aug Sep Oct Nov Dec
Number 200 150 100 200 160 110 100 300 200 134 240 350
Of chairs

Giving examples derived from the above information, identify and explain any two measures
of central tendency. [6]
Mode is the most frequent number in a data set e.g. 200 is the mode because it is the value
which occurs most frequently eg three times.
Mean is the sum of all individual values divided by the number of observations in a data set
eg 2244/12 = 187
6A firm has a choice between two projects, A and B
The initial investments are as follows:
Project A: $40 000
B: $60 000
The probability of success for project A is 0.5 with a cash inflow of $80000. If it fails, the
inflow will be $40000.
The probability of success for project B is 0.6 with a cash inflow of $100000. If it fails, the
inflow will be $40000.
(a)Represent the above information on a probability tree diagram. [2]
(b)which project would be more acceptable? Give reasons for your recommendations. [4]

$80000
success
0.5

A $40000 0.5 fail $40000

B$60000 0.6 success $100000

0.4 fail $40000

EPV = ∑(probabilities x outcomes)

EPV(A) = (0.5 x 80000) +(0.5 x 40000) – 40000 = 20000
EPV(B) = (0.6 x 100000) + (0.4 x 40000) -60000 = 16000

The management should choose project A which has the highest expected value of $20000.

7 A firm is faced with a choice of buying a small machine or a large one. The return or pay
off will vary depending on choice of machine and state of demand. The relevant data is
shown below:
State of demand Probability Small machine(pay Large machine(pay
off $) off $)
High 0,2 80000 160000
Medium 0,6 72000 48000
Low 0,2 32000 -20000

(a) Present the above information on a decision tree diagram.        [3]

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 (b) Which machine should be chosen and why?        [4]

high 0,2 80000

small machine medium 0,6 72000
low 0,2 32000

high 0,2 160000

medium 0,6 48000
large machine low 0,2 -20000

Expected Values
Small machine= (0,2 x 80000) + (0,6 x 72000) + (0,2 x 32000) =$65600
Large machine= (0,2 x 160000)+(0,6 x48000)+(0,2x -20000) = $56800
Decision criteria
The firm should choose a small machine because it has a higher expected value.

8 Comment on the usefulness of the blending technique as a decision making tool. [6]
uses
- allocation of scarce resources
- optimising contribution
- allocate resources between different products so that costs are minimised.
- product mix- producing various product versions
- selling different products –restricting other products to maximise products
- capital budgeting
- inventory control
Limitations
- ignores qualitative factors
- requires a manager who is mathematically strong
- assumes linear relationship between variables
- ignores the market demand for the product assuming output levels will be sold at a
profit.
- Linear programming allows only for two products to be considered
9What are the benefits of linear programming? [3]
- allows effective resource allocation
- improves the planning of production schedules
- it provides objectivity
10 The following information is provided for project Venus
Activity Proceeding activity Duration(days)
A - 5
B A 6
C A 3
D A 3
E B 2
F D 2
G B,C,F 9
H E 4
(a) Define the term critical path. [2]
(b) (i) Draw a network diagram for project Venus [3]
(ii)State the project total duration. [1]

(a) It is the sequence of activities within a project with the longest duration, which show
the shortest possible duration of the whole project.
It is the sequence of activities which shows the shortest possible duration of a
project.

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 11 E(2)
13
11

B 6 H (4)

0 A (5) 5 C (3) 11 G(9)

20
0 5 11

D(3)

F(2)

Correct routes
A, B, E, H
A,B,G
A,C,G
A,D,F,G

Total duration 20 days

11 Briefly explain ways in which a manufacturer of toys might find break even analysis
useful. [6]
- A toy manufacturer can estimate the number of toys it must produce and sell to
begin making profit.
- Can estimate the number of toys it needs to sell to earn a target profit.
- Can allow it to estimate the effects on profits of increases in fixed costs over time.
- helps to establish a margin of safety.
- Can see the effects of changes in selling price or variable costs.
12Explain two ways in which a football club might reduce its breakeven level. [4]
- raising the price- if the price is increased more revenue will be generated and total
costs remain the same.
- Cutting costs by reducing costs of variable costs e.g. players’ wages.

13(a)Using the information given in the table draw the network diagram [4]
(b)Identify the critical path and the total project duration. [2]

Activity Proceeded by Duration(wks)

A - 5
B - 4
C B 5
D A,C 6
E D 5
F B 8
G F 4

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 9 D6 15 E5

A5
0 20
C5
0 20
B4 G4
F8
12
4

Critical path :B- C- D- E

Total duration 20 weeks

14 Distinguish clearly between bar charts and histogram. [4]

Bar chart
- allow for quick understanding for numerical data.
- height of bars represent the relative sizes of the measuring unit.
Histogram
- present statistical data on a time continuum (measurable across time).
- allow for quick and meaningful comparison of information across time periods.
15 State any two advantages to a motor vehicle manufacturer for using sales forecasting[4]
- allows the manufacturer to predict sales based on the cycle of the firm’s product.
- adjust the production schedules to meet to meet demand during a cyclical
fluctuation.
16 A public Ltd company reported the following results in its publishes accounts.
1994 1995
Profit before tax and interest 15000 18000
Capital employed 120000 180000
Sales turnover 400000 550000

Using appropriate ratios, comment on the performance of a company in 1995 compared to

1994. [6]
Return on Capital = profit before tax and interest
Capital employed
Return on Sales = profit before tax and interest
Sales turnover
1994 1995
ROCE 12,5% 10%
ROS 3,75% 3,27%
The return ratios indicate a deterioration in the company’s profitability. A return to
shareholders has declined. The return on sales turnover indicated a decline in return per
unit of output sold.

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ESSAY QUESTIONS
BUSINESS AND ITS ENVIRONMENT
1 (a)Explain an economic system you would consider to be suitable in your country. [8]
Requires sound justification with appropriate examples for command, free market or
mixed economy.
(b)Does privatisation necessarily benefit stakeholders in the economy of your country?[17]
Requires a sound evaluation mentioning specific stakeholders.
Benefits
- competition leading to lower prices, quality goods and services, increased
government revenue, employment creation, distribution of wealth etc
Drawbacks
- creation of monopolies, some sectors maybe ignored, exorbitant prices.
2(a)Explain external influences on the activities of shoe manufacturing business in your
country. [10]
- This include government policies, political, economic, cultural, social, technological
influences
(b)Using appropriate examples discuss the ways in which a firm might react to changes in
the external environment. [15]
- merging to meet new government policies on minimum capitalisation. relocation due
to political instability, businesses may disband to respond to antimonopoly policies,
economic pressure may force businesses to rationalise, new product may be
produced to meet cultural changes etc
3(a)Explain how economic constraints might affect prospects of small firms. [10]
Inflation, high interest on borrowing, servicing on debt, cash flow, demand, market
share and profit margins etc
(b)Discuss measures that small firms might undertake to minimise effects of economic
constraints. [15]
adjusting marketing mix, product repositioning, rationalisation, staff reduction,
improved management of cash flow, analysis of competitor activities etc
4(a) Explain the benefits of privatising state enterprises. [10]
- increased efficiency, creates greater competition, reduction in government spending,
increased customer satisfaction, distribution of wealth etc
(b)Evaluate the effectiveness of centrally planned economic systems. [15]
Pros- equitable distribution of resources, employment guarantee, affordable goods and
services, etc
Cons-price controls lead to black markets, loss of consumer sovereignty, lack of
               efficiency etc
5a)Explain how ethical issues might influence business objectives. [10]
- environmental concerns, treatment of employees, gender equity, racial
discrimination, pollution etc
b)To what extent is MBO important as a means of ensuring and developing a more
effective management team? [15]
Strengths- improves morale and motivation, improved communication, suggestion by
subordinates, provides sense of direction etc
Weaknesses- time consuming, goal incompatibility, too much paper work is involved etc
6 Two giant supermarkets have proposed to merge .
(a)Discuss the factors the two Markets might have considered before making the decision
to merge.   [10]
-to gain economies of scale, to be more competitive, to gain market dominance, to share
expertise, to ensure continued existence, to improve the ability to raise finance,
(b)Critically discuss the likely impact of the merger to each of the following stakeholders;
i)   government-increased tax, increased employment
ii)  workers- promotional prospects, job security, prospects of increased wages
iii) customers -improved product quality, price reduction due to economies of scale [15]

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HUMAN RESOURCES MANAGEMENT

1 Evaluate the relevance of motivation theories to modern day management. [25]

Requires any evaluation of at least 3 motivational theories and relate to how modern
managers are applying theories on work study, quality circles, job redesigning,
remuneration, worker participation , trade unions etc
2(a)Should firms train their employees? [10]
Benefits
- equip employees with necessary skills, reduces mistakes and accidents, increase
motivation, increases productivity etc
Drawbacks
- leads to loss of production, it is costly, might not be always successful etc.
(b)Discuss the importance of financial reward systems in the motivation of part time staff.
- Need to build status hence the need for finance, need to acquire maximum funds as
part time staff to cater for the period out of employment.
Show also the importance non financial rewards.
3Evaluate methods a business might employ to promote cooperation between management
and workforce. [25]
- recognition of effort and performance, job designing and redesigning, MBO, quality
circles, TQM, financial incentives.
NB better answers will apply relevant theories e.g. Maslow, Taylor, Herzberg etc
4Discuss barriers to effective communication and suggest solutions to those barriers. [25]
      Barriers -lack of expertise on part of the sender/receiver, use of technical jargon,
inconsistent non verbal symbols, inappropriate media, perceptions, attitudes etc
Solutions- training of employees, use of appropriate jargon, avoiding distracting
environment.
5With reference to appropriate theories, evaluate the importance of strategies management
might use to improve the productivity of workers. [25
Strategies- MBO,TQM, work study, quality circles, team work, job evaluation, delegation
Theories -Maslow, Herzberg, Taylor etc

MARKETING
1To what extent does the knowledge of product life cycle assist in designing a marketing
strategy to a producer of cement? [25]
Advantages
- pricing decisions, product planning, promotional mix etc
Drawbacks
- PLC alone is not enough, there is need for market research

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 - Not all products pass through the same product life cycle.
- The PESTG constraints can affect the success of the product.
2(a) Explain the importance of forecasting to a firm producing clothes for teenage        
market .[10]
Significance
- manpower planning, planning future production levels, cash budgeting, planning
stock requirements, distribution planning, basis for investment appraisal.
(b)Explain the time series analysis technique and evaluate its significance in decision
making. [15]
Explanation should include key features e.g. seasonal, cyclical, random variation,
trend, moving averages, extrapolation.
significance of model
- quantitative and therefore objective.
- reliable for short term forecasting.
However
- not suitable for short term forecasting
- reliability depends on accuracy of data, costly etc
3’’ The probability of success for many new products is very low’’.
(a)Why then do many businesses decide to develop new products? [10]
- replace declining products, enter new markets, counter competition, achieve market
dominance, increase market share and profitability, diversify, spread the risk and
survive, utilise spare capacity , maintain competitive edge etc
(b)Discuss the importance of factors that might influence the success of a new
      product. [15]
- adjusting the marketing mixes, market research, brand image, test marketing,
government policy, pressure groups etc.
4 A clothing manufacturer is considering entering the fashion market.
a)Discuss the factors that might influence the manufacturer’s marketing strategy. [10]
- risk nature of the fashion industry, competition, lack of experience in the market,
- consumer characteristics, market research findings, availability of promotional
strategy, costs involved, distribution channels, etc
b)Evaluate the methods the manufacturer might use to collect the information from the
fashion market. [15]
- consumer panels, opinion polls, observation, interviews, retail audits, test marketing

PRODUCTION
1(a)Explain the main methods associated with work study. [10]
Requires explanation of all the stages involved in carrying out Method study and Time
study, S.R.E.I.D.I.M and S.D.M.O.E respectively.
(b)Evaluate the appropriateness of using the results of work study programme to motivate
workers. [15]
Significance
- increase productivity, reduce injuries, make work easier, basis for remuneration.
However
- workers hate change, fear losing jobs, limited errands may reduce rest in between
task.
2(a)Why might a manufacturer of computers be concerned about the quality of his
products. [10]
- reduction in rework costs, fighting competition, creates customer loyalty, high
pricing advantages, successful marketing of future products.
(b)Evaluate methods the computer manufacturer might use to ensure that his products
are of good quality. [15]
- TQM, Quality Circles ,benchmarking, Kaizen, JIT, Zero defects etc
3Evaluate the contribution the production department can make towards the achievement
of business objectives. [25]
- production planning g, stock control, work study programme, value engineering,
quality control, R&D etc
4a) Why might a manufacturer not be keen to use flow production techniques ? [10]

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 - demand of the product, nature of the product, customer built vs mass appeal,
- availability of resources etc
b)Evaluate how value analysis might affect the success of a business. [15]
Benefits
- allows products to be produced economically.
- the product produced will meet the legal requirements
- profits can increase whilst still giving value for money
Drawbacks
- when the product does not have competitors, appearance and costs will be less
important than reliability and performance.
- increases R&D costs
5a)Asses the importance of benchmarking as a method of ensuring quality. [10]
Benefits
- improves competitiveness, facilitates the achievement of goals, identifies ways of
improving performance, improves company image, a company gains competitive
edge, improves product sales.
Drawbacks
- it stifles innovation, information from other firms might not be easy to gather etc
b) Evaluate the contribution of product quality to the success of a product. [15]
Benefits
- reduction in waste, reduction in rejections, reduced customer complaints, improved
reputation, etc
Limitations
- involves high expenses, involves retraining costs, cost of acquiring machinery to
improve quality.

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BUSINESS FINANCE AND ACCOUNTING
1(a)Assess the role of money market and capital market in a developing economy. [12]
- addressing liquidity problems, raising finance for expansion and for import and
export trade. etc
(b)Explain why some developing countries may be slow in adopting the policy of currency
devaluation. [13]
- lack capacity to produce for export, lack quality output to penetrate international
markets , imports become expensive, fixed exchange rate etc
2 Evaluate the usefulness of a firm’s financial statements to its stakeholders. [25]
- Should discuss the usefulness of profit/loss account, balance sheet and cash flow
statement to the stakeholders including limitations
3 ’’ A firm that does no manage its working capital effectively is likely to face problems’’.
(a)Examine the problems are likely to be faced by a firm that does not manage its working
capital effectively. [10]
     Inability to buy in bulk thereby missing out trade discounts, loss of cash discounts,
     inability to offer credit facilities, possibility of overtrading, possibility of action by
creditors etc
(b)Evaluate the methods a firm night use to manage its working capital. [15]
Reduction of the credit and cash cycles, effective use of fixed assets, adoption of JIT,
employment of credit controller, improved use of budgeting. etc
4(a)Describe the following types of budgets:
(i) flexible budgets [4]
(ii) zero budgets [3]
Flexible budgets-adjusted in response to changes in the costs or level of activity, useful
during times of uncertainty/inflation etc
Zero budgets-are prepared in relation to the needs of the activity, all activities are
critically reviewed before they are budgeted for, are designed to produce better decisions
etc
(b)Evaluate the usefulness of budgets to a large manufacturing firm. [18]
Usefulness-assist the planning process, improves communication, coordinate activities,
motivate staff, control and measure performance, control expenditure, efficient
allocation of resources, clarify responsibilities, facilitate Management By Exception etc
Limitations-costly to implement, rigidity and over dependency on budgets, setting up
higher targets tends to demotivate.etc
5a)Discuss the contribution of ratio analysis to effective management of working capital.[10]
- Answers should explain how ratios are used to reflect the efficient management of
working capital e.g. current ratio, acid test ratio, debtors’ collection period, creditors’
payment period etc
- Limitations
window dressing, inadequate knowledge etc
(b)Evaluate methods a business might use to improve its liquidity. [15]
- debt factoring, better stock management, JIT, better credit control procedure,
discounts, increasing cash sales etc

6(a)Discuss the factors a firm might consider when choosing a source of finance. [10]
- purpose of finance
- legal structure of the firm
- cost of capital
- repayment period
- risk involved etc
(b)Evaluate the possible methods a firm might use to finance the purchase of a
     machinery.
[15]
-loans ,hire purchase, leasing, shares , debentures etc

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INFORMATION FOR DECISION MAKING
1How and to what extent is the technique of marginal costing useful to mangers as an aid
to decision making. [25]
Uses
- make or buy decision, pricing decisions, acceptance of a special order below normal
price, decisions where there is a limiting factor.
Limitations
- separation of costs into fixed and variable costs is not always easy.
2(a)Why might a firm present data in a misleading way? [8]
- for window dressing purposes to attract investors, to control vital information from
competitors, to reduce TU demands, to facilitate listing on the stock exchange, to
evade tax, inability by personnel to manipulate data etc
(b) To what extent is decision tree analysis an important decision making tool? [17]
Importance- show clearly and logically the alternative course of action, enables
managers to quantify planning, leads to rational decision, new ideas may be thrown up.
etc
Limitations-Time consuming, information is not always available, estimate of
probabilities is subjective, neglect qualitative factors.etc
3Discuss how changes in technology might affect businesses in your country,    [25]
Positive effects
- improved productivity through technology CAD, CAM, robotics etc
- J.I.T is facilitated through information technology links
- marketing effects ie internet selling etc
- reduction in labour costs doe to automation
Negative effects
- financial implication of acquiring new technology.
- workers will be laid off.
- incurring retraining costs
4(a) Explain the factors likely to influence the reliability of sales forecasts. [12]
- quality and expertise of the forecasting team.
- time period for the forecasts
- availability of data
- degree of changes in the market
- whether or not forecasts are frequently revised to cater for new data.
(b)Evaluate the significance of using moving averages to forecast sales.
- useful for identifying and applying seasonal variations to predictions
- can be reasonably accurate for short term forecast
- are quantitative and therefore objective
However
- Not ideal for long term forecast.
- ignores qualitative factors
- requires fairly complex calculations
- not suitable for a rapidly changing market environment
5 Critically examine the benefits of decision the diagrams to managers when appraising
investment projects. [25]
Benefits
- show clearly and logically the alternative course of action
- encourage quantification of alternative outcomes
- encourage logical thinking and planning
- lead to more rational decision making new ideas may be thrown up.
Drawbacks

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- construction of the diagram is time consuming.
- information is not always available and complete
- ignore non quantifiable factors
- estimate of probability is subjective.

225