Dec 5, 2010

Quantitative, Contemporary and Emerging views of Management

Quantitative Approach:-
It involves the use of quantitative techniques to improve decision making.
Branches in the Quantitative Management Viewpoint:
1.    Management science / operations research:-
It is an approach aimed at increasing decision effectiveness through the use of complicated mathematical models and statistical methods.

2.    Operations Management:-
It is the function or field of expertise that is primarily responsible for the production and delivery of an organization’s products and services.

3.    Management information systems (MIS):-
It is the name often given to the field of management that
focuses on designing and implementing computer-based information systems for use by management
Contemporary viewpoints:
This school of thought or view point about management includes those major ideas about managing and organizations that have emerged since the 1950s.

The systems theory approach:-
It is based on the idea that organizations can be visualized as systems of interrelated parts or subsystems that operate as a whole in search of common goals.

Contingency Theory:-
It is the view that appropriate managerial action depends on the particular parameters of each situation.

Emerging views:
A. Globalization.:-
Managers in all types and sizes of organizations are faced with the opportunities and challenges of globalization.

B. Entrepreneurship:-
It refers to the process whereby an individual or a group of individuals uses organized efforts and means to pursue opportunities to create value and grow by fulfilling wants and needs through innovation and uniqueness.

C. Managing in an E-Business World:-
1. E-business (electronic business)
2. E-commerce (electronic commerce)

D. Need for Innovation and Flexibility.

E. Quality Management Systems.
1. Total quality management:-
It is a philosophy of management that is driven by customer needs and expectations and focuses on continual improvement in work processes

F. Learning Organizations and Knowledge Management.
1. A learning organization is one that has developed the capacity to continuously adapt and change.
2. Knowledge management involves cultivating a learning culture where organizational members systematically gather knowledge and share it with others to achieve better performance.

G. Theory Z : William Ouchi’s:-
Theory Z combines positive aspects of American and Japanese management into a modified approach aimed at increasing managerial effectiveness.

Dec 3, 2010

Trade Discounts-Markup-Markdown- Trade Values- Trade Terms

Discount is a reduction in price which the seller offers to the buyer.

Amount of discount =    d × L
Where, d = Percentage of Discount
L = List Price
Net Price = L – Ld = L(1 – d)
Net Price = List Price – Amount of Discount 

Markup is an amount added to a cost price while calculating a selling price.

Markup as Percentage of Cost (MUC):
Here markup is some percentage of cost price. For simplicity, it is also named as %Markup on cost. The relation between %markup on cost, cost price and selling price is:
Selling Price = Cost price + (Cost price × %Markup on cost)
                    = Cost price (1 + %Markup on cost)

Markup as Percentage of Sale price (MUS):
Here markup is some percentage of selling price. For simplicity, it is also named as %Markup on sale. The relation between %markup on sale, cost price and selling price is:
Selling Price = Cost price + (Selling price × %Markup on sale)
Cost price = Selling price – (Selling price × %Markup on sale)
                 = Selling price (1 – %Markup on sale)

Rs Markup:
Markup in terms of rupees is called Rs markup. The relations between Rs markup, cost price and selling price are:

    1.   Selling Price = Cost price + Rs Markup
    2.   Rs Markup = %Markup on cost × Cost price
    3.   Rs Markup = %Markup on sale × Selling price

For example:
The cost price of certain item is 80Rs and its selling price is 100Rs. Then
Rs Markup = Selling price – Cost price
                  = 100 – 80
                  = 20 Rs

Markdown is a reduction from the list/cost price.

This refers to the giving of further discounts as incentives for more sales. Usually such discount is offered for selling product in bulk.

L = List price = 100
D = discounts

    Net price = L(1-D1)(1-D2)(1-D3)   
Single equivalent discount rate = L – Netprice =? %
Rs. Discount = (0.2787)(20000)
                             = 5,574 Rs

Find the single discount rate that is equivalent to the series
15%, 10% and 5%.
Apply the multiple discounts to a list price of Rs. 100.
Net price = (1-d1)(1-d2)(1-d3)
               = 100(1 -15%) (1 - 10%) (1 - 5%)
               =100(0.85) (0.9) (0.95)
               = 100(0.7268)
               = 72.68
% Discount = 100 - 72.68
                   = 27.62%

Cash Discount is allowed on Invoices, Returned Goods, Freight, Sales Tax and A common business phrase for a cash discount is "3/10, net/30," meaning that a 3% discount is offered if the amount due is paid within 10 days; otherwise 100% of the amount due is payable in 30 days

Invoice was dated May 1st. The terms 2/10 mean that 2% discount is offered if invoice is paid up to 10thMay.
What is the net payment for invoice value of Rs. 50,000 if paid up to 10th May?
Cash Discount
N = L(1 – d)
= 50,000(1-0.02)
= 50,000(0.98)
= 49,000 Rs.

Discount Periods are periods for the buyer to take advantage of Discount Terms.

Credit Periods are periods for the buyers to pay invoices within specified times.

When you buy on credit and have cash discount terms, part of the invoice may be paid within the specified time. These part payments are called Partial Payments.
You owe Rs. 40,000.
Your terms were 3/10 (3% discount by 10th day).
Within 10 days you sent in a payment of Rs. 10,000.
Rs. 10,000 was a part payment.
How much is your new balance?
First we will find the amount that if 3% discount is given on it, the net amount is 10000Rs.
Let that amount is t. Then
10000 = t (1 – 0.03)
This implies,    t =      10000    
                                (1 – 0.03)
Thus, t = 10309Rs
This means that although you pay 10,000Rs, due to 3% cash discount 10309Rs among 40,000Rs is paid.
Hence the new balance = 40000 – 10309 = 29691Rs.

Nov 4, 2010

What is Depreciation-Method to calculate Depreciation

Fixed Assets:-Fixed Assets are those assets which are:
• Of  long life
• To be used in the business to generate revenue
• Not bought with the main purpose of resale.

Fixed assets are also called “Depreciable Assets”

Accumulated Depreciation:-
It is the depreciation that has been charged on a particular asset from
the time of purchase of the asset to the present time.

No depreciation is charged for ‘Land’. In case of ‘Leased Asset/Lease Hold Land’ the amount paid for it is charged over the life of the lease and is called Amortization.

Methods of calculating Depreciation:-

1: Straight line method/Original cost method/Fixed installment method:-

Depreciation = (cost – Residual value) / Expected useful life of the asset

Residual value:
It is the cost of the asset after the expiry of its useful life.

2: Write Down value/Reducing method/diminishing method:-

WDV = Original cost of fixed asset – Accumulated Depreciation

Entries for Recording Disposal:-
Debit: Fixed Asset Disposal A/c
Credit: Fixed Asset Cost A/c
(With the cost of asset)

Debit: Accumulated Dep. A/c
Credit: Fixed Asset Disposal A/c
(With the depreciation accumulated to date)

Debit: Cash / Bank / Receivable A/c
Credit: Fixed Asset Disposal A/c
(With the price at which asset is sold)


Capital Work in Progress Account:-
If an asset is not completed at that time when balance sheet is prepared, all costs incurred on that asset
up to the balance sheet date are transferred to an account called Capital Work in Progress Account.
Debit: Relevant asset account
Credit: Capital work in progress account

Cost of Goods Sold Statment & valuation of Stock

Cost of goods sold statement:-
The statement shows the value of raw material consumed, amount spent on labor and other factory expenses, finished goods produced and goods unsold (in stock).

Standard format of cost of goods sold statement is given below:

Raw Material:
O/S Raw Material
+ Purchases
+ Cost Incurred to Purchase RM
- C/S Raw Material
Cost of Material Consumed

Conversion Cost:  
+ Direct Labor Cost
+ Factory Overheads
Total Factory Cost

Work in Process: 
+ O/S of WIP
- C/S of WIP
Cost of Goods Manufactured
Finished Goods:
+ O/S of Finished Goods
- C/S of Finished Goods
Cost of Good Sold

Cost of material consumed:-
It is the cost of material used for consumption that has been put in the production process.

Over Heads:-
Over Heads are the other costs incurred in relation of manufacturing of goods. Examples are factory utilities, supervisor salaries, equipment repairs etc.

Total factory cost:-
It is the cost of material consumed plus labor and over heads. In other words it is the total cost incurred in the factory.

Cost of goods manufactured:-
It is total factory cost plus opening stock of work in process less closing stock of work in process.

Cost of goods sold:-
It is the cost of goods manufactured plus opening stock of finished goods less closing stock of finished goods.

Prime/Basic Cost = Cost of Direct Material Consumed + Direct Labor cost

Conversion cost:-
It is the cost incurred to convert raw material to finished goods.
Conversion cost = Labor cost + factory overhead

Valuation of Stock:-
Any manufacturing organization purchases different material through out the year. The prices of purchases may be different due to inflationary conditions of the economy. The question is, what item should be issued first & what item should be issued later for manufacturing. For this purpose, the organization has to make a policy for issue of stock. All the issues for manufacturing and valuation of stock are recorded according to the policy of the organization.

Mostly these three methods are used for the valuation of stock:
• First in first out (FIFO)
• Last in first out (LIFO)
• Weighted average

First in first out (FIFO)
The FIFO method is based on the assumption that the first merchandise purchased is the first merchandised issued. The FIFO uses actual purchase cost.

Last in first out (LIFO)
The LIFO method is based on the assumption that the recently purchased
merchandise is issued first. The LIFO uses actual purchase cost.

Weighted average method
This average cost is computed by dividing the total cost of goods available for sale by the number of units in inventory.

Oct 1, 2010

Henri Fayol’s 14 Principles of Management

Henri Fayol’s 14 Principles of Management:

1. Division of work
Specialization increases output by making employees more efficient.

2. Authority.
Managers must be able to give order. Authority gives them this right. Along with authority, however, goes responsibility.

3. Discipline.
Employees must obey and respect the rules that govern the organization.

4. Unity of Command
An employee should receive orders from one superior only.

5. Unity of direction.
The organization should have a single plan of action to guide managers and workers.

6. Subordination of individual interests to the general interest.
The interests of any one employee or group of employees should not take precedence over the interests of the organization as a whole.

7. Remuneration.
Workers must be paid a fair wage for their services.

8. Centralization.
This term refers to the degree to which subordinates are involved in decision making.

9. Scalar Chain.
The line term refers to the degree to which subordinates are involved In decision making.

10. Order.
People and materials should be in the right place at the right time.

11. Equity.
Managers should be kind and fair to their subordinates.

12. Stability of tenure of personnel
Management should provide orderly personnel planning and ensure that replacements are available to fill vacancies.

13. Initiative.
Employees who are allowed to originate and carry out plans will exert high levels of effort.

14. Esprit de corps
Promoting team spirit will build harmony and unity within the organization.

Bureauctatic Management-General Adminstrative Theorists

Bureaucratic management:


Max Weber :-

The major characteristics of Weber’s ideal bureaucracy include:

a. Specialization of a labor

b. Formalization of rules and procedures

c. Impersonality in application of rules and sanctions

d. Formalization of lines of authority into a hierarchical structure

e. Formalization of the career advancement process to be based on merit

Sep 17, 2010

Management Levels and Management Skills

Levels of Managers in an Organization:-

First-Line Managers:
They are those managers having the least authority and are at the lowest level in the hierarchy of an organization.

Middle Mangers:
Those managers who beneath the top-levels of the hierarchy and directly supervise other managers below them.

Top Managers:-
They are those managers at the very top levels of the hierarchy who have the most authority and who are ultimately responsible for the entire organizational matters.

Management Skills:
Managers need three types of key skills to perform the duties and activities:

1. Technical skills:-
Technical skills include knowledge of and proficiency in a certain specialized field, such as computers,engineering, accounting, or manufacturing. These skills are more important at lower levels of management since these managers are dealing directly with employees doing the organization’s work.

2. Human skills:-
Human skills are associated with a manager’s ability to work well with others both as a member of a group and as a leader who gets things done through others. Because managers deal directly with people, They know how to communicate, motivate, lead, and inspire enthusiasm and trust. These skills are equally important at all levels of management.

3. Conceptual skills:-
Conceptual skills are the skills managers must have to think and to conceptualize about abstract and complex situations. Using these skills, managers must be able to see the organization as a whole, understand the relationships among various submits, and visualize how the organization fits into its broader environment.

Four trends are likely to impact managerial work in the future:-

  • Changes & innovation
  • Managing diversity
  • Global perspective
  • Continuous improvement

Aug 24, 2010

Management-Managers & Managerial role in Organizaion


Who are Manager?
A manager is someone who works with and through other people by coordinating their work activities in order to accomplish organizational goals.

What do managers do?
Planning (making things happen and meeting the competition and tends to be more important
for top-level managers.)
Organizing (how the work gets done and tends to be more important for both top and middle-level managers.)
Leading (inspiring Motivating and inspiring workers and it is more important for first-line managers.)
Controlling (monitoring progress towards goal achievement and taking corrective action when needed and it is important among all levels of the hierarchy.)

Management process:-
It is the set of ongoing decisions and work activities in which managers engage as they plan, organize, lead, and control.

It is the process of coordinating and integrating work activities.


It is an organized set of behaviors that is associated with a particular office or position.

  1. Interpersonal roles are roles that involve people (subordinates and persons outside the organization) and other duties that are ceremonial and symbolic in nature. The three interpersonal roles include being a figurehead, leader, and liaison.
  2. Informational roles involve receiving, collecting, and disseminating information. The three informational roles include a monitor, disseminator, and spokesperson.
  3. Decisional roles revolved around making choices. The four decisional roles include entrepreneur, disturbance handler, resource allocator, and negotiator.

Aug 6, 2010

Marketing Tips For The Holidays as marketer

Most people think it's because the holidays are a slow time for business and that people don't want to get involved in a new business venture at this time. But really the main reason for this slow-down in business is because most people just stop doing business during the holidays. But survey networks know that the holidays are really a perfect time to do business, and that they just need to adjust their marketing strategies a bit to fit the season.

Here's some ideas to keep business warm and perking throughout the busy holiday season . . .

Tip #1: Holiday Time is Great for Prospecting! -- Holiday Time usually means parties and lots of socializing -- why not use this to your advantage and do a little informal prospecting.

"The kids are home from school, family is in town, or people are traveling. The trick is not to look at these things as reasons to stop doing business, but rather, as opportunities to expand business. When the kids are home from school, they're usually doing activities. These normally include other children, and therefore, other parents. Instead of talking about the kids and "things," expand your conversation a little. Talk about Family, Occupation, Recreation, and Money. FORM for short.

People usually open up if you're a good listener. At some point, they'll ask about you and yours. Don't go into a heavy sales pitch."

"Remember, you're just having a nice conversation. If you feel like you've made a new friend and sparked their curiosity, you've done your job. And remember, new people can be found anywhere - standing in a long line at a theme park or at a social event or family gathering. If you are constantly talking and planting seeds during the holidays, your business never has to slow down."

Tip #2: Cash in on the Gift Giving Season -- Tis the season for gifts, so get creative! Here's a few ideas to try:

• Put together some gift baskets of your company's products that are ready to go and that appeal to a variety of customers.

• Everyone gets stressed out trying to find just the right presents, so offer them a stress free shopping solution that's hard to refuse -set up personal appointments with your customers at their convenience -- visit them at the office take them to lunch, or come to their home on the weekend or evenings. Make it easy for them to do business with you.

• Sell gift certificates! Call your customers or drop them a holiday postcard and tell them that you have gift certificates on sale.

Tip #3 - Get a Jump on January: Do some business planning in December to get ready for business in January. January is the single best month for doing business. Get a special mailing together for your prospects and customers and have it ready to go in the mail in early January.

Tip #4 - Keep On Doing What You've Been Doing: Don't abandon your business during the holidays. Try to stick as closely as you can to your regular schedule -- and if you just can't keep up the pace -- at least decide to accomplish something every week that keeps your business humming. It'll be a lot easier to gear up in the new year if you do!

Tip #5 - Send A Thank You Note! Be sure to send a holiday greeting letting your customers and team know that you appreciate them. It takes some time to do this but the results are well worth it! Thank You notes build trust - the most important element in any relationship including business.

by: David Batchelor

Jul 7, 2010

McClelland's Theory of Needs

In his acquired-needs theory, David McClelland proposed that an individual's specific needs are acquired over time and are shaped by one's life experiences. Most of these needs can be classed as either achievement, affiliation, or power. A person's motivation and effectiveness in certain job functions are influenced by these three needs. McClelland's theory sometimes is referred to as the three need theory or as the learned needs theory.


People with a high need for achievement (nAch) seek to excel and thus tend to avoid both low-risk and high-risk situations. Achievers avoid low-risk situations because the easily attained success is not a genuine achievement. In high-risk projects, achievers see the outcome as one of chance rather than one's own effort. High nAch individuals prefer work that has a moderate probability of success, ideally a 50% chance. Achievers need regular feedback in order to monitor the progress of their acheivements. They prefer either to work alone or with other high achievers.


Those with a high need for affiliation (nAff) need harmonious relationships with other people and need to feel accepted by other people. They tend to conform to the norms of their work group. High nAff individuals prefer work that provides significant personal interaction. They perform well in customer service and client interaction situations.


A person's need for power (nPow) can be one of two types - personal and institutional. Those who need personal power want to direct others, and this need often is perceived as undesirable. Persons who need institutional power (also known as social power) want to organize the efforts of others to further the goals of the organization. Managers with a high need for institutional power tend to be more effective than those with a high need for personal power.

Thematic Apperception Test

McClelland used the Thematic Apperception Test (TAT) as a tool to measure the individual needs of different people. The TAT is a test of imagination that presents the subject with a series of ambiguous pictures, and the subject is asked to develop a spontaneous story for each picture. The assumption is that the subject will project his or her own needs into the story.

Psychologists have developed fairly reliable scoring techniques for the Thematic Apperception Test. The test determines the individual's score for each of the needs of achievement, affiliation, and power. This score can be used to suggest the types of jobs for which the person might be well suited.
Implications for Management
People with different needs are motivated differently.

* High need for achievement - High achievers should be given challenging projects with reachable goals. They should be provided frequent feedback. While money is not an important motivator, it is an effective form of feedback.
* High need for affiliation - Employees with a high affiliation need perform best in a cooperative environment.
* High need for power - Management should provide power seekers the opportunity to manage others.

Note that McClelland's theory allows for the shaping of a person's needs; training programs can be used to modify one's need profile.


Two Factor Theory-Herzberg's Motivation-Hygiene Theory

To better understand employee attitudes and motivation, Frederick Herzberg performed studies to determine which factors in an employee's work environment caused satisfaction or dissatisfaction. He published his findings in the 1959 book The Motivation to Work.

The studies included interviews in which employees where asked what pleased and displeased them about their work. Herzberg found that the factors causing job satisfaction (and presumably motivation) were different from those causing job dissatisfaction. He developed the motivation-hygiene theory to explain these results. He called the satisfiers motivators and the dissatisfiers hygiene factors, using the term "hygiene" in the sense that they are considered maintenance factors that are necessary to avoid dissatisfaction but that by themselves do not provide satisfaction.

The following table presents the top six factors causing dissatisfaction and the top six factors causing satisfaction, listed in the order of higher to lower importance.

Factors Affecting Job Attitudes

Leading to


Leading to


  • Company policy

  • Supervision

  • Relationship w/Boss

  • Work conditions

  • Salary

  • Relationship w/Peers

  • Achievement

  • Recognition

  • Work itself

  • Responsibility

  • Advancement

  • Growth

Herzberg reasoned that because the factors causing satisfaction are different from those causing dissatisfaction, the two feelings cannot simply be treated as opposites of one another. The opposite of satisfaction is not dissatisfaction, but rather, no satisfaction. Similarly, the opposite of dissatisfaction is no dissatisfaction.

While at first glance this distinction between the two opposites may sound like a play on words, Herzberg argued that there are two distinct human needs portrayed. First, there are physiological needs that can be fulfilled by money, for example, to purchase food and shelter. Second, there is the psychological need to achieve and grow, and this need is fulfilled by activities that cause one to grow.

From the above table of results, one observes that the factors that determine whether there is dissatisfaction or no dissatisfaction are not part of the work itself, but rather, are external factors. Herzberg often referred to these hygiene factors as "KITA" factors, where KITA is an acronym for Kick In The A..., the process of providing incentives or a threat of punishment to cause someone to do something. Herzberg argues that these provide only short-run success because the motivator factors that determine whether there is satisfaction or no satisfaction are intrinsic to the job itself, and do not result from carrot and stick incentives.

Implications for Management
If the motivation-hygiene theory holds, management not only must provide hygiene factors to avoid employee dissatisfaction, but also must provide factors intrinsic to the work itself in order for employees to be satisfied with their jobs.

Herzberg argued that job enrichment is required for intrinsic motivation, and that it is a continuous management process. According to Herzberg:

*The job should have sufficient challenge to utilize the full ability of the employee.
* Employees who demonstrate increasing levels of ability should be given increasing levels of responsibility.
*If a job cannot be designed to use an employee's full abilities, then the firm should consider automating the task or replacing the employee with one who has a lower level of skill. If a person cannot be fully utilized, then there will be a motivation problem.

Critics of Herzberg's theory argue that the two-factor result is observed because it is natural for people to take credit for satisfaction and to blame dissatisfaction on external factors. Furthermore, job satisfaction does not necessarily imply a high level of motivation or productivity.

Herzberg's theory has been broadly read and despite its weaknesses its enduring value is that it recognizes that true motivation comes from within a person and not from KITA factors.

ERG Theory

To address some of the limitations of Maslow's hierarchy as a theory of motivation, Clayton Alderfer proposed the ERG theory, which like Maslow's theory, describes needs as a hierarchy. The letters ERG stand for three levels of needs: Existence, Relatedness, and Growth. The ERG theory is based on the work of Maslow, so it has much in common with it but also differs in some important aspects.
Similarities to Maslow's Hierarchy
Studies had shown that the middle levels of Maslow's hierarchy have some overlap; Alderfer addressed this issue by reducing the number of levels to three. The ERG needs can be mapped to those of Maslow's theory as follows:

* Existence: Physiological and safety needs
* Relatedness: Social and external esteem needs
* Growth: Self-actualization and internal esteem needs

Like Maslow's model, the ERG theory is hierarchical - existence needs have priority over relatedness needs, which have priority over growth.

Differences from Maslow's Hierarchy

In addition to the reduction in the number of levels, the ERG theory differs from Maslow's in the following three ways:

*Unlike Maslow's hierarchy, the ERG theory allows for different levels of needs to be pursued simultaneously.
*The ERG theory allows the order of the needs be different for different people.
*The ERG theory acknowledges that if a higher level need remains unfulfilled, the person may regress to lower level needs that appear easier to satisfy. This is known as the frustration-regression principle.

Thus, while the ERG theory presents a model of progressive needs, the hierarchical aspect is not rigid. This flexibility allows the ERG theory to account for a wider range of observed behaviors. For example, it can explain the "starving artist" who may place growth needs above existence ones.

Implications for Management
If the ERG theory holds, then unlike with Maslow's theory, managers must recognize that an employee has multiple needs to satisfy simultaneously. Furthermore, if growth opportunities are not provided to employees, they may regress to relatedness needs. If the manager is able to recognize this situation, then steps can be taken to concentrate on relatedness needs until the subordinate is able to pursue growth again.

Taylor's 4 Principles of Scientific Management

Taylor's 4 Principles of Scientific Management
After years of various experiments to determine optimal work methods, Taylor proposed the following four principles of scientific management:

1. Replace rule-of-thumb work methods with methods based on a scientific study of the tasks.

2. Scientifically select, train, and develop each worker rather than passively leaving them to train themselves.

3. Cooperate with the workers to ensure that the scientifically developed methods are being followed.

4. Divide work nearly equally between managers and workers, so that the managers apply scientific management principles to planning the work and the workers actually perform the tasks.

These principles were implemented in many factories, often increasing productivity by a factor of three or more. Henry Ford applied Taylor's principles in his automobile factories, and families even began to perform their household tasks based on the results of time and motion studies.
Drawbacks of Scientific Management
While scientific management principles improved productivity and had a substantial impact on industry, they also increased the monotony of work. The core job dimensions of skill variety, task identity, task significance, autonomy, and feedback all were missing from the picture of scientific management.

While in many cases the new ways of working were accepted by the workers, in some cases they were not. The use of stopwatches often was a protested issue and led to a strike at one factory where "Taylorism" was being tested. Complaints that Taylorism was dehumanizing led to an investigation by the United States Congress. Despite its controversy, scientific management changed the way that work was done, and forms of it continue to be used today.

Frederick Taylor and Scientific Management

In 1911, Frederick Winslow Taylor published his work, The Principles of Scientific Management, in which he described how the application of the scientific method to the management of workers greatly could improve productivity. Scientific management methods called for optimizing the way that tasks were performed and simplifying the jobs enough so that workers could be trained to perform their specialized sequence of motions in the one "best" way.

Prior to scientific management, work was performed by skilled craftsmen who had learned their jobs in lengthy apprenticeships. They made their own decisions about how their job was to be performed. Scientific management took away much of this autonomy and converted skilled crafts into a series of simplified jobs that could be performed by unskilled workers who easily could be trained for the tasks.

Taylor became interested in improving worker productivity early in his career when he observed gross inefficiencies during his contact with steel workers.

Working in the steel industry, Taylor had observed the phenomenon of workers' purposely operating well below their capacity, that is, soldiering. He attributed soldiering to three causes:

1. The almost universally held belief among workers that if they became more productive, fewer of them would be needed and jobs would be eliminated.

2. Non-incentive wage systems encourage low productivity if the employee will receive the same pay regardless of how much is produced, assuming the employee can convince the employer that the slow pace really is a good pace for the job. Employees take great care never to work at a good pace for fear that this faster pace would become the new standard. If employees are paid by the quantity they produce, they fear that management will decrease their per-unit pay if the quantity increases.

3. Workers waste much of their effort by relying on rule-of-thumb methods rather than on optimal work methods that can be determined by scientific study of the task.

To counter soldiering and to improve efficiency, Taylor began to conduct experiments to determine the best level of performance for certain jobs, and what was necessary to achieve this performance.

Time Studies
Taylor argued that even the most basic, mindless tasks could be planned in a way that dramatically would increase productivity, and that scientific management of the work was more effective than the "initiative and incentive" method of motivating workers. The initiative and incentive method offered an incentive to increase productivity but placed the responsibility on the worker to figure out how to do it.

To scientifically determine the optimal way to perform a job, Taylor performed experiments that he called time studies, (also known as time and motion studies). These studies were characterized by the use of a stopwatch to time a worker's sequence of motions, with the goal of determining the one best way to perform a job.

The following are examples of some of the time-and-motion studies that were performed by Taylor and others in the era of scientific management.

Pig Iron
If workers were moving 12 1/2 tons of pig iron per day and they could be incentivized to try to move 47 1/2 tons per day, left to their own wits they probably would become exhausted after a few hours and fail to reach their goal. However, by first conducting experiments to determine the amount of resting that was necessary, the worker's manager could determine the optimal timing of lifting and resting so that the worker could move the 47 1/2 tons per day without tiring.

Not all workers were physically capable of moving 47 1/2 tons per day; perhaps only 1/8 of the pig iron handlers were capable of doing so. While these 1/8 were not extraordinary people who were highly prized by society, their physical capabilities were well-suited to moving pig iron. This example suggests that workers should be selected according to how well they are suited for a particular job.

The Science of Shoveling
In another study of the "science of shoveling", Taylor ran time studies to determine that the optimal weight that a worker should lift in a shovel was 21 pounds. Since there is a wide range of densities of materials, the shovel should be sized so that it would hold 21 pounds of the substance being shoveled. The firm provided the workers with optimal shovels. The result was a three to four fold increase in productivity and workers were rewarded with pay increases. Prior to scientific management, workers used their own shovels and rarely had the optimal one for the job.


Jun 16, 2010

What is Opportunity Cost

Scarcity of resources is one of the more basic concepts of economics. Scarcity necessitates trade-offs, and trade-offs result in an opportunity cost. While the cost of a good or service often is thought of in monetary terms, the opportunity cost of a decision is based on what must be given up (the next best alternative) as a result of the decision. Any decision that involves a choice between two or more options has an opportunity cost.

Opportunity cost contrasts to accounting cost in that accounting costs do not consider forgone opportunities. Consider the case of an MBA student who pays $30,000 per year in tuition and fees at a private university. For a two-year MBA program, the cost of tuition and fees would be $60,000. This is the monetary cost of the education. However, when making the decision to go back to school, one should consider the opportunity cost, which includes the income that the student would have earned if the alternative decision of remaining in his or her job had been made. If the student had been earning $50,000 per year and was expecting a 10% salary increase in one year, $105,000 in salary would be foregone as a result of the decision to return to school. Adding this amount to the educational expenses results in a cost of $165,000 for the degree.
Opportunity cost is useful when evaluating the cost and benefit of choices. It often is expressed in non-monetary terms. For example, if one has time for only one elective course, taking a course in microeconomics might have the opportunity cost of a course in management. By expressing the cost of one option in terms of the foregone benefits of another, the marginal costs and marginal benefits of the options can be compared.

As another example, if a shipwrecked sailor on a desert island is capable of catching 10 fish or harvesting 5 coconuts in one day, then the opportunity cost of producing one coconut is two fish (10 fish / 5 coconuts). Note that this simple example assumes that the production possibility frontier between fish and coconuts is linear.

Relative Price

Opportunity cost is expressed in relative price, that is, the price of one choice relative to the price of another.

For example, if milk costs $4 per gallon and bread costs $2 per loaf, then the relative price of milk is 2 loaves of bread. If a consumer goes to the grocery store with only $4 and buys a gallon of milk with it, then one can say that the opportunity cost of that gallon of milk was 2 loaves of bread (assuming that bread was the next best alternative).

In many cases, the relative price provides better insight into the real cost of a good than does the monetary price.

Applications of Opportunity Cost

The concept of opportunity cost has a wide range of applications including:

* Consumer choice
* Production possibilities
* Cost of capital
* Time management
* Career choice
* Analysis of comparative advantage


MBA Notes-The Production Possibility Frontier

Consider the case of an island economy that produces only two goods: wine and grain. In a given period of time, the islanders may choose to produce only wine, only grain, or a combination of the two according to the following table:

Production Possibility Table

(thousands of bottles)
(thousands of bushels)
The production possibility frontier (PPF) is the curve resulting when the above data is graphed, as shown below:

Production Possibility Frontier

The PPF shows all efficient combinations of output for this island economy when the factors of production are used to their full potential. The economy could choose to operate at less than capacity somewhere inside the curve, for example at point a, but such a combination of goods would be less than what the economy is capable of producing. A combination outside the curve such as point b is not possible since the output level would exceed the capacity of the economy.
The shape of this production possibility frontier illustrates the principle of increasing cost. As more of one product is produced, increasingly larger amounts of the other product must be given up. In this example, some factors of production are suited to producing both wine and grain, but as the production of one of these commodities increases, resources better suited to production of the other must be diverted. Experienced wine producers are not necessarily efficient grain producers, and grain producers are not necessarily efficient wine producers, so the opportunity cost increases as one moves toward either extreme on the curve of production possibilities.
Suppose a new technique was discovered that allowed the wine producers to double their output for a given level of resources. Further suppose that this technique could not be applied to grain production. The impact on the production possibilities is shown in the following diagram:

Shifted Production Possibility Frontier

In the above diagram, the new technique results in wine production that is double its previous level for any level of grain production.
Finally, if the two products are very similar to one another, the production possibility frontier may be shaped more like a straight line. Consider the situation in which only wine is produced. Let's assume that two brands of wine are produced, Brand A and Brand B, and that these two brands use the same grapes and production process, differing only in the name on the label. The same factors of production can produce either product (brand) equally efficiently. The production possibility frontier then would appear as follows:

PPF for Very Similar Products

Note that to increase production of Brand A from 0 to 3000 bottles, the production of Brand B must be decreased by 3000 bottles. This opportunity cost remains the same even at the other extreme, where increasing the production of Brand A from 12,000 to 15,000 bottles still requires that of Brand B to be decreased by 3000 bottles. Because the two products are almost identical in this case and can be produced equally efficiently using the same resources, the opportunity cost of producing one over the other remains constant between the two extremes of production possibilities.


MBA Economics Topics-Supply and Demand

The market price of a good is determined by both the supply and demand for it. In 1890, English economist Alfred Marshall published his work, Principles of Economics, which was one of the earlier writings on how both supply and demand interacted to determine price. Today, the supply-demand model is one of the fundamental concepts of economics. The price level of a good essentially is determined by the point at which quantity supplied equals quantity demanded. To illustrate, consider the following case in which the supply and demand curves are plotted on the same graph.

Supply and Demand

On this graph, there is only one price level at which quantity demanded is in balance with the quantity supplied, and that price is the point at which the supply and demand curves cross.

The law of supply and demand predicts that the price level will move toward the point that equalizes quantities supplied and demanded. To understand why this must be the equilibrium point, consider the situation in which the price is higher than the price at which the curves cross. In such a case, the quantity supplied would be greater than the quantity demanded and there would be a surplus of the good on the market. Specifically, from the graph we see that if the unit price is $3 (assuming relative pricing in dollars), the quantities supplied and demanded would be:

Quantity Supplied = 42 units

Quantity Demanded = 26 units

Therefore there would be a surplus of 42 - 26 = 16 units. The sellers then would lower their price in order to sell the surplus.

Suppose the sellers lowered their prices below the equilibrium point. In this case, the quantity demanded would increase beyond what was supplied, and there would be a shortage. If the price is held at $2, the quantity supplied then would be:

Quantity Supplied = 28 units

Quantity Demanded = 38 units

Therefore, there would be a shortage of 38 - 28 = 10 units. The sellers then would increase their prices to earn more money.

The equilibrium point must be the point at which quantity supplied and quantity demanded are in balance, which is where the supply and demand curves cross. From the graph above, one sees that this is at a price of approximately $2.40 and a quantity of 34 units.

To understand how the law of supply and demand functions when there is a shift in demand, consider the case in which there is a shift in demand:

Shift in Demand
In this example, the positive shift in demand results in a new supply-demand equilibrium point that in higher in both quantity and price. For each possible shift in the supply or demand curve, a similar graph can be constructed showing the effect on equilibrium price and quantity. The following table summarizes the results that would occur from shifts in supply, demand, and combinations of the two.

Result of Shifts in Supply and Demand

































In the above table, "+" represents an increase, "-" represents a decrease, a blank represents no change, and a question mark indicates that the net change cannot be determined without knowing the magnitude of the shift in supply and demand. If these results are not immediately obvious, drawing a graph for each will facilitate the analysis.


Jun 15, 2010

MBA Economics Topics-The Supply Curve

Price usually is a major determinant in the quantity supplied. For a particular good with all other factors held constant, a table can be constructed of price and quantity supplied based on observed data. Such a table is called a supply schedule, as shown in the following example:

Supply Schedule













By graphing this data, one obtains the supply curve as shown below:

As with the demand curve, the convention of the supply curve is to display quantity supplied on the x-axis as the independent variable and price on the y-axis as the dependent variable.

The law of supply states that the higher the price, the larger the quantity supplied, all other things constant. The law of supply is demonstrated by the upward slope of the supply curve.

As with the demand curve, the supply curve often is approximated as a straight line to simplify analysis. A straight-line supply function would have the following structure:

Quantity = a + (b x Price)

where a and b are constant for each supply curve.

A change in price results in a change in quantity supplied and represents movement along the supply curve.

Shifts in the Supply Curve

While changes in price result in movement along the supply curve, changes in other relevant factors cause a shift in supply, that is, a shift of the supply curve to the left or right. Such a shift results in a change in quantity supplied for a given price level. If the change causes an increase in the quantity supplied at each price, the supply curve would shift to the right:

Supply Curve Shift

There are several factors that may cause a shift in a good's supply curve. Some supply-shifting factors include:

* Prices of other goods - the supply of one good may decrease if the price of another good increases, causing producers to reallocate resources to produce larger quantities of the more profitable good.
* Number of sellers - more sellers result in more supply, shifting the supply curve to the right.
* Prices of relevant inputs - if the cost of resources used to produce a good increases, sellers will be less inclined to supply the same quantity at a given price, and the supply curve will shift to the left.
* Technology - technological advances that increase production efficiency shift the supply curve to the right.
* Expectations - if sellers expect prices to increase, they may decrease the quantity currently supplied at a given price in order to be able to supply more when the price increases, resulting in a supply curve shift to the left.


MBA Economics Topics-Price Elasticity of Demand

An important aspect of a product's demand curve is how much the quantity demanded changes when the price changes. The economic measure of this response is the price elasticity of demand.

Price elasticity of demand is calculated by dividing the proportionate change in quantity demanded by the proportionate change in price. Proportionate (or percentage) changes are used so that the elasticity is a unit-less value and does not depend on the types of measures used (e.g. kilograms, pounds, etc).

As an example, if a 2% increase in price resulted in a 1% decrease in quantity demanded, the price elasticity of demand would be equal to approximately 0.5. It is not exactly 0.5 because of the specific definition for elasticity uses the average of the initial and final values when calculating percentage change. When the elasticity is calculated over a certain arc or section of the demand curve, it is referred to as the arc elasticity and is defined as the magnitude (absolute value) of the following:

Q2 - Q1

( Q1 + Q2 ) / 2
P2 - P1
( P1 + P2 ) / 2


Q1 = Initial quantity
Q2 = Final quantity
P1 = Initial price
P2 = Final price

The average values for quantity and price are used so that the elasticity will be the same whether calculated going from lower price to higher price or from higher price to lower price. For example, going from $8 to $10 is a 25% increase in price, but going from $10 to $8 is only a 20% decrease in price. This asymmetry is eliminated by using the average price as the basis for the percentage change in both cases.

For slightly easier calculations, the formula for arc elasticity can be rewritten as:

( Q2 - Q1 ) ( P2 + P1 )
( Q2 + Q1 ) ( P2 - P1 )

To better understand the price elasticity of demand, it is worthwhile to consider different ranges of values.

Elasticity > 1

In this case, the change in quantity demanded is proportionately larger than the change in price. This means that an increase in price would result in a decrease in revenue, and a decrease in price would result in an increase in revenue. In the extreme case of near infinite elasticity, the demand curve would be nearly horizontal, meaning than the quantity demanded is extremely sensitive to changes in price. The case of infinite elasticity is described as being perfectly elastic and is illustrated below:

Perfectly Elastic Demand Curve

Elasticity <>
Perfectly Inelastic Demand Curve
From this demand curve, it is easy to visualize how even a very large change in price would have no impact on quantity demanded.

Elasticity = 1

This case is referred to as unitary elasticity. The change in quantity demanded is in the same proportion as the change in price. A change in price in either direction therefore would result in no change in revenue.

Applications of Price Elasticity of Demand
The price elasticity of demand can be applied to a variety of problems in which one wants to know the expected change in quantity demanded or revenue given a contemplated change in price.

For example, a state automobile registration authority considers a price hike in personalized "vanity" license plates. The current annual price is $35 per year, and the registration office is considering increasing the price to $40 per year in an effort to increase revenue. Suppose that the registration office knows that the price elasticity of demand from $35 to $40 is 1.3.

Because the elasticity is greater than one over the price range of interest, we know that an increase in price actually would decrease the revenue collected by the automobile registration authority, so the price hike would be unwise.

Factors Influencing the Price Elasticity of Demand
The price elasticity of demand for a particular demand curve is influenced by the following factors:

* Availability of substitutes: the greater the number of substitute products, the greater the elasticity.
* Degree of necessity or luxury: luxury products tend to have greater elasticity than necessities. Some products that initially have a low degree of necessity are habit forming and can become "necessities" to some consumers.
* Proportion of income required by the item: products requiring a larger portion of the consumer's income tend to have greater elasticity.
* Time period considered: elasticity tends to be greater over the long run because consumers have more time to adjust their behavoir to price changes.
* Permanent or temporary price change: a one-day sale will result in a different response than a permanent price decrease of the same magnitude.
* Price points: decreasing the price from $2.00 to $1.99 may result in greater increase in quantity demanded than decreasing it from $1.99 to $1.98.

Point Elasticity
It sometimes is useful to calculate the price elasticity of demand at a specific point on the demand curve instead of over a range of it. This measure of elasticity is called the point elasticity. Because point elasticity is for an infinitesimally small change in price and quantity, it is defined using differentials, as follows:





and can be written as:





The point elasticity can be approximated by calculating the arc elasticity for a very short arc, for example, a 0.01% change in price.

MBA Economics Topics-The Demand Curve

The quantity demanded of a good usually is a strong function of its price. Suppose an experiment is run to determine the quantity demanded of a particular product at different price levels, holding everything else constant. Presenting the data in tabular form would result in a demand schedule, an example of which is shown below.

Demand Schedule













he demand curve for this example is obtained by plotting the data:

Demand Curve
By convention, the demand curve displays quantity demanded as the independent variable (the x axis) and price as the dependent variable (the y axis).

The law of demand states that quantity demanded moves in the opposite direction of price (all other things held constant), and this effect is observed in the downward slope of the demand curve.

For basic analysis, the demand curve often is approximated as a straight line. A demand function can be written to describe the demand curve. Demand functions for a straight-line demand curve take the following form:

Quantity = a - (b x Price)

where a and b are constants that must be determined for each particular demand curve.

When price changes, the result is a change in quantity demanded as one moves along the demand curve.

Shifts in the Demand Curve

When there is a change in an influencing factor other than price, there may be a shift in the demand curve to the left or to the right, as the quantity demanded increases or decreases at a given price. For example, if there is a positive news report about the product, the quantity demanded at each price may increase, as demonstrated by the demand curve shifting to the right:

Demand Curve Shift
A number of factors may influence the demand for a product, and changes in one or more of those factors may cause a shift in the demand curve. Some of these demand-shifting factors are:

* Customer preference
*Prices of related goods
o Complements - an increase in the price of a complement reduces demand, shifting the demand curve to the left.
o Substitutes - an increase in the price of a substitute product increases demand, shifting the demand curve to the right.
*Income - an increase in income shifts the demand curve of normal goods to the right.
*Number of potential buyers - an increase in population or market size shifts the demand curve to the right.
*Expectations of a price change - a news report predicting higher prices in the future can increase the current demand as customers increase the quantity they purchase in anticipation of the price change.


Jun 12, 2010


Financial ratios are useful indicators of a firm's performance and financial situation. Most ratios can be calculated from information provided by the financial statements. Financial ratios can be used to analyze trends and to compare the firm's financials to those of other firms. In some cases, ratio analysis can predict future bankruptcy.
Financial ratios can be classified according to the information they provide. The following types of ratios frequently are used:

* Liquidity ratios
* Asset turnover ratios
* Financial leverage ratios
* Profitability ratios
* Dividend policy ratios

Liquidity Ratios

Liquidity ratios provide information about a firm's ability to meet its short-term financial obligations. They are of particular interest to those extending short-term credit to the firm. Two frequently-used liquidity ratios are the current ratio (or working capital ratio) and the quick ratio.

The current ratio is the ratio of current assets to current liabilities:

Current Assets
Current Liabilities
Short-term creditors prefer a high current ratio since it reduces their risk. Shareholders may prefer a lower current ratio so that more of the firm's assets are working to grow the business. Typical values for the current ratio vary by firm and industry. For example, firms in cyclical industries may maintain a higher current ratio in order to remain solvent during downturns.
One drawback of the current ratio is that inventory may include many items that are difficult to liquidate quickly and that have uncertain liquidation values. The quick ratio is an alternative measure of liquidity that does not include inventory in the current assets. The quick ratio is defined as follows:
Quick Ratio =
Current Assets - Inventory
Current Liabilities
The current assets used in the quick ratio are cash, accounts receivable, and notes receivable. These assets essentially are current assets less inventory. The quick ratio often is referred to as the acid test.
Finally, the cash ratio is the most conservative liquidity ratio. It excludes all current assets except the most liquid: cash and cash equivalents. The cash ratio is defined as follows:
Cash Ratio =
Cash + Marketable Securities
Current Liabilities
The cash ratio is an indication of the firm's ability to pay off its current liabilities if for some reason immediate payment were demanded.

Asset Turnover Ratios

Asset turnover ratios indicate of how efficiently the firm utilizes its assets. They sometimes are referred to as efficiency ratios, asset utilization ratios, or asset management ratios. Two commonly used asset turnover ratios are receivables turnover and inventory turnover.
Receivables turnover is an indication of how quickly the firm collects its accounts receivables and is defined as follows:
Receivables Turnover =
Annual Credit Sales
Accounts Receivable
The receivables turnover often is reported in terms of the number of days that credit sales remain in accounts receivable before they are collected. This number is known as the collection period. It is the accounts receivable balance divided by the average daily credit sales, calculated as follows:
Average Collection Period =
Accounts Receivable
Annual Credit Sales / 365
The collection period also can be written as:
Average Collection Period =
Receivables Turnover
Another major asset turnover ratio is inventory turnover. It is the cost of goods sold in a time period divided by the average inventory level during that period:
Inventory Turnover =
Cost of Goods Sold
Average Inventory
The inventory turnover often is reported as the inventory period, which is the number of days worth of inventory on hand, calculated by dividing the inventory by the average daily cost of goods sold:
Inventory Period =
Average Inventory
Annual Cost of Goods Sold / 365
The inventory period also can be written as:
Inventory Period =
Inventory Turnover
Other asset turnover ratios include fixed asset turnover and total asset turnover.

Financial Leverage Ratios

Financial leverage ratios provide an indication of the long-term solvency of the firm. Unlike liquidity ratios that are concerned with short-term assets and liabilities, financial leverage ratios measure the extent to which the firm is using long term debt.
The debt ratio is defined as total debt divided by total assets:
Debt Ratio =
Total Debt
Total Assets
The debt-to-equity ratio is total debt divided by total equity:
Debt-to-Equity Ratio =
Total Debt
Total Equity
Debt ratios depend on the classification of long-term leases and on the classification of some items as long-term debt or equity.
The times interest earned ratio indicates how well the firm's earnings can cover the interest payments on its debt. This ratio also is known as the interest coverage and is calculated as follows:
Interest Coverage =
Interest Charges
where EBIT = Earnings Before Interest and Taxes

Profitability Ratios

Profitability ratios offer several different measures of the success of the firm at generating profits.
The gross profit margin is a measure of the gross profit earned on sales. The gross profit margin considers the firm's cost of goods sold, but does not include other costs. It is defined as follows:
Gross Profit Margin =
Sales - Cost of Goods Sold
Return on assets is a measure of how effectively the firm's assets are being used to generate profits. It is defined as:
Return on Assets =
Net Income
Total Assets
Return on equity is the bottom line measure for the shareholders, measuring the profits earned for each dollar invested in the firm's stock. Return on equity is defined as follows:
Return on Equity =
Net Income
Shareholder Equity

Dividend Policy Ratios

Dividend policy ratios provide insight into the dividend policy of the firm and the prospects for future growth. Two commonly used ratios are the dividend yield and payout ratio.
The dividend yield is defined as follows:
Dividend Yield =
Dividends Per Share
Share Price
A high dividend yield does not necessarily translate into a high future rate of return. It is important to consider the prospects for continuing and increasing the dividend in the future. The dividend payout ratio is helpful in this regard, and is defined as follows:
Payout Ratio =
Dividends Per Share
Earnings Per Share

Use and Limitations of Financial Ratios

Attention should be given to the following issues when using financial ratios:
  • A reference point is needed. To to be meaningful, most ratios must be compared to historical values of the same firm, the firm's forecasts, or ratios of similar firms.
  • Most ratios by themselves are not highly meaningful. They should be viewed as indicators, with several of them combined to paint a picture of the firm's situation.
  • Year-end values may not be representative. Certain account balances that are used to calculate ratios may increase or decrease at the end of the accounting period because of seasonal factors. Such changes may distort the value of the ratio. Average values should be used when they are available.
  • Ratios are subject to the limitations of accounting methods. Different accounting choices may result in significantly different ratio values.



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